~~The DFA mandates an enhanced supervisory framework, which means that the Company is subject to annual stress tests by the Federal Reserve,~~BHC Activity 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.

Under the Durbin Amendment to the DFA in June 2011, the Federal Reserve issued the final rule implementing debit card interchange fee and routing regulation. The final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers including the Bank, are “reasonable and proportional” 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.

The DFA established the CFPB, which has broad powers to set the requirements for the terms and conditions of consumer financial products. This has resulted in and is expected to continue to result in increased compliance costs and reduced revenue.

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 exposure.

Provisions of the DFA relating to the applicability of state consumer protection laws to national banks, including the Bank, became effective in July 2011. Questions may arise as to whether certain state consumer financial laws that were previously preempted by federal law are no longer preempted as a result of these new provisions. Depending on how such questions are resolved, the Bank may experience an increase in state-level regulation of its retail banking business and additional compliance obligations, which may impact revenue and costs. SC already is subject to such state-level regulation.

The DFA and certain other legislation and regulations impose various restrictions on compensation of certain executive officers. The Company's ability to attract and/or retain talented personnel may be adversely affected by these restrictions.

Other requirements of the DFA include increases in the amount of deposit insurance assessments the Bank must pay; changes to the nature and levels of fees charged to consumers, which are negatively affecting the Bank's income; banning banking organizations from engaging in proprietary trading and restricting their sponsorship of, or investing in, hedge funds and private equity funds, subject to limited exceptions; and increasing regulation of the derivative markets through measures that broaden the derivative instruments subject to regulation and requiring clearing and exchange trading as well as imposing additional capital and margin requirements for derivative market participants, which will increase the cost of conducting this business.

~~Volcker Rule~~

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

Because the term “banking entity” includes an insured depository institution, a depository institution holding company and any affiliate of any of the foregoing, the Volcker Rule has sweeping worldwide application and covers entities such as Santander, the Company, SC, the Bank and numerous other Santander subsidiaries in the United States and abroad.

When the agencies responsible for administering the Volcker Rule approved the final regulations implementing the rule, the Federal Reserve extended the deadline for compliance with the rule until July 21, 2015. The Federal Reserve subsequently extended the deadline by which banking entities were to conform investments in and relationships with Covered Funds and foreign funds that may be subject to the Volcker Rule and that were in place prior to December 31, 2013 (“Legacy Covered Funds”) until July 21, 2016. Furthermore, the Federal Reserve expressed its intention to grant a final one-year extension until July 21, 2017 to conform ownership interests in and relationships with Legacy Covered Funds. The extension did not apply to non-Legacy Covered Funds or to proprietary trading activities which were required to conform to the Volcker Rule by July 21, 2015.

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In implementing the Volcker Rule, an examination was made of all activities and investments worldwide to determine which banking entities were involved in proprietary trading and/or Covered Fund activity. Based on this review, all proprietary trading that was not permitted under the Volcker Rule was terminated and all Covered Fund activity was addressed under the rule’s requirements. As a result, the Company and its banking entity subsidiaries satisfied all requirements of the Volcker Rule for non-Legacy Covered Funds by the July 21, 2015 deadline. In addition, many Legacy Covered Funds have already been conformed to the requirements of the Volcker Rule or will either be conformed to the Volcker Rule’s requirements or divested before any deadline for conformance.

Certain policies and procedures, training programs, recordkeeping, internal controls and other compliance requirements that are necessary to comply with the Volcker Rule were implemented before July 21, 2015. As required by the Volcker Rule, the compliance infrastructure has been tailored to each banking entity based on the size of the~~entity and its level of~~trading activities. The compliance program includes, among other things, processes for prior approval of new activities and investments that are permitted under the rule, testing and auditing for compliance and a process for attesting annually that the compliance program is reasonably designed to achieve compliance with the Volcker Rule.On March 31, 2016, the Chief Executive Officer of the Company, on behalf of Santander, provided an attestation to the federal agencies responsible for administering the rule that the compliance program requirements applicable to Santander’s U.S. operations under the Volcker Rule were met by July 21, 2015.

~~Federal Deposit Insurance Corporation Improvement Act~~

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.

~~Basel III~~

New and evolving capital standards, both as a result of the DFA and the implementation in the U.S. of Basel III, have and will continue to have a significant effect on banks and BHCs, including the Company and the Bank. 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. The final rules established a comprehensive capital framework that includes both the advanced approaches for the largest internationally active U.S. banks, formerly known as Basel II, and a standardized approach that applies to all banking organizations with over $500 million in assets. Subject to various transition periods, the rule became effective for the largest banks on January 1, 2014, and for all other banks on January 1, 2015.

The new rules narrow the definition of regulatory capital and establish higher minimum risk-based capital ratios that, when fully phased in, will require banking organizations, including the Company and the Bank, to maintain a minimum common equity tier 1 ("CET1") ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0% and a minimum leverage ratio of 4.0%, calculated as the ratio of Tier 1 capital to average consolidated assets for the quarter. These requirements for the Company and the Bank went into effect on January 1, 2015.

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

The final framework included new deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights ("MSRs"), deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities are deducted from CET1 to the extent any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 for the Company and the Bank began on January 1, 2015 and will be phased in over three years.

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As of December 31, 2015, the Bank's and the Company's CET1 ratio under Basel III, on a fully phased-in basis under the standardized approach, were 13.36% and 11.01%, respectively. Under the transitions provided under Basel III, the Bank's and the Company's CET1 ratio under the standardized approach, were 13.81% and 11.97%, respectively. The calculation of the CET1 ratio on both a fully phased-in and transition basis is based on management's interpretation of the final rules adopted by the Federal Reserve in July 2013. As part of the implementation of any regulations, management interprets the rules in order to implement the new regulations. If regulators would interpret the rules differently, there could be an impact on the results of the calculation which may have a negative impact to the calculation of CET1. As mentioned above, the minimum required CET1 ratio is comprised of the 4.5% minimum and the 2.5% conservation buffer. On that basis, the Company believes that, as of December 31, 2015, it would remain above regulatory minimums under the currently enacted capital adequacy requirements of Basel III, including when implemented on a fully phased-in basis.

See the Bank Regulatory Capital section of the MD&A for the Company's capital ratios under Basel III standards. The implementation of certain regulations and standards relating to regulatory capital could disproportionately affect the Company's regulatory capital position relative to that of its competitors, including those that may not be subject to the same regulatory requirements as the Company.

The Basel III liquidity framework will require banks and BHCs to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, will be required by regulation going forward. One test, referred to as the liquidity coverage ratio ("LCR"), is designed to ensure that a banking entity maintains an adequate level of unencumbered high-quality liquid assets ("HQLA") equal to its expected net cash outflow for a 30-day time horizon. The other, referred to as the net stable funding ratio ("NSFR"), is designed to promote more medium and long-term funding of the assets and activities of banking entities over a one-year time horizon.

On October 24, 2013, the Federal Reserve, the FDIC, and the OCC issued a proposal to implement the Basel III 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. On September 3, 2014, the agencies approved the final LCR rule. The agencies stressed that LCR is a key component in their effort to strengthen the liquidity soundness of the U.S. financial sector and is used to complement the broader liquidity regulatory framework and supervisory process that includes Enhanced Prudential Standards ("EPS") and Comprehensive Capital Analysis and Review ("CCAR"). The agencies have mandated 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 report their LCR calculation beginning January 1, 2015. Smaller covered companies (more than $50 billion in assets) such as SHUSA are required to report their LCR calculation monthly beginning January 1, 2016. On November 13, 2015, the Federal Reserve published a revised final LCR rule. Under this revision, the Company is required to calculate the 'Modified US LCR (the "US LCR") on a monthly basis beginning with data as of January 31, 2016 for the BHC. There is no requirement to submit the calculation to the Federal Reserve. The Company will be required to publicly disclose its US LCR results starting July 1, 2017. Based on management's interpretation of the final rule, effective on January 1, 2016, the Company's LCR was in excess of the regulatory minimum of 90% which will increase to 100% on January 1, 2017.

On October 31, 2014, the Basel Committee on Banking Supervision issued the final standard for the NSFR. The NSFR requires banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities, thus reducing the likelihood that disruptions to a bank's regular sources of funding will erode its liquidity position in a way that could increase the risk of its failure and potentially lead to broader systemic stress. NSFR will become a minimum standard by January 1, 2018.

~~The next step will be publication of a U.S. notice of proposed rule-making on implementation of NSFR.~~

~~Stress Tests and Capital Adequacy~~

Pursuant to the DFA, as part of the Federal Reserve's annual CCAR, certain banks and BHCs, including 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 those 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. As a consolidated subsidiary of the Company, SC is included in the Company's stress tests and capital plans. In March 2014 and 2015, the Federal Reserve, as part of its CCAR process, objected on qualitative grounds to the capital plans submitted by the Company. In its 2015 public report on CCAR, the Federal Reserve cited widespread and critical deficiencies in the Company's capital planning processes, including specific deficiencies in governance, internal controls, risk identification and risk management, management information systems, and supporting assumptions and analysis. As a result of the 2014 and 2015 CCAR objections, the Company is not permitted to make any capital distributions without the Federal Reserve's approval other than the continued payment of dividends on the Company's outstanding class of preferred stock, until a new capital plan is approved by the Federal Reserve. The Company submitted its updated capital plan on time on April 5, 2016.

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On May 1, 2014, the Board of Directors of SC declared a cash dividend of $0.15 per share of SC Common Stock (the "May SC dividend"). The Federal Reserve informed the Company on May 22, 2014 that it did not object to SC's payment of the May SC dividend, provided that Santander contribute at least $20.9 million of capital to the Company prior to such payment, so that the Company's consolidated capital position would be unaffected by the May SC dividend. The Federal Reserve also informed the Company that, until the Federal Reserve issues a non-objection to the Company's capital plan, any future SC dividend will require prior receipt of a written non-objection from the Federal Reserve. On May 28, 2014, the Company issued 84,000 shares of its common stock, no par value per share, to Santander in exchange for cash in the amount of $21.0 million.

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

On March 11, 2015, the Federal Reserve announced that the Company received an objection from the FRB of Boston to the 2015 capital plan the Company submitted on January 5, 2015. The FRB of Boston objected to the Company’s capital plan on qualitative grounds due to significant deficiencies in the Company’s capital planning process. Subject to the restrictions outlined above with respect to the written agreement, the FRB did not object to the Company’s payment of dividends on its outstanding class of preferred stock. The FRB of Boston did object to the requested payment of dividends on SC Common Stock.

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

~~Total Loss Absorbing Capacity~~

On October 30, 2015 the Federal Reserve released a notice of proposed rulemaking (NPR) on total loss absorbing capacity ("TLAC"), long-term debt ("LTD"), and clean holding company requirements for systemically important U.S. BHCs and intermediate holding companies ("IHCs") of systemically important foreign banking organizations ("FBOs"). SHUSA, as the IHC for Santander in the U.S., will be subject to these requirements.

TLAC represents the amount of equity and debt a company must hold to facilitate its orderly liquidation. Under the Federal Reserve’s proposal, the Company would be required to hold loss absorbing equity and unsecured debt of 18.5% of risk-weighted assets ("RWAs") by January 1, 2019 and then 20.5% of RWAs by January 1, 2022. These amounts represent the TLAC requirement (16% by January 1, 2019 and then 18% by January 1, 2022) plus a TLAC buffer of 2.5%. The Federal Reserve's proposal also establishes a requirement for the LTD component of the TLAC. The LTD requirement for the Company would be 7% of RWAs by January 1, 2019.

~~The comment period on the FRB's TLAC proposal ended on February 19, 2016.~~

~~Enhanced Prudential Standards ("EPS") for Liquidity~~

On February 18, 2014, the Federal Reserve approved the final rule implementing certain of the EPS mandated by Section 165 of the DFA (the "Final Rule"). The Final Rule applies the EPS to (i) U.S. BHCs with $50 billion (and in some cases $10 billion) or more in total consolidated assets and (ii) foreign banking organizations ("FBOs") with a U.S. banking presence exceeding $50 billion in consolidated U.S. non-branch assets. The Final Rule implements, as new requirements for U.S. BHCs, risk management requirements (including requirements, duties and qualifications for a risk management committee and chief risk officer), liquidity stress testing and buffer requirements. U.S. BHCs with total consolidated assets of $50 billion or more on June 30, 2014 were subject to the liquidity requirements as of January 1, 2015. The Company believes it has made significant progress in meeting the EPS requirements, including developing liquidity stress testing capabilities and reporting in 2015.

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~~FBOs~~

On February 18, 2014, the Federal Reserve issued the Final Rule to strengthen regulatory oversight of FBOs. Under the Final Rule, FBOs with over $50 billion of U.S. non-branch assets, including Santander, must consolidate U.S. subsidiary activities under a U.S. intermediate holding company ("IHC"). In addition, the Final Rule requires U.S. BHCs and FBOs with at least $50 billion in total U.S. consolidated non-branch assets to be subject to EPS and heightened capital, liquidity, risk management, and stress testing requirements. Due to both its global and U.S. non-branch total consolidated asset size, Santander is subject to both of the above provisions of the Final Rule. As a result of this rule, Santander will transfer its U.S. bank and non-bank subsidiaries currently outside of the Company to the Company, which will become an IHC. As required under the Final Rule, the Company submitted its IHC implementation plan to the Federal Reserve on December 31, 2014. A phased-in approach is being used for the standards and requirements at both the FBO and the IHC. As a U.S. BHC with more than $50 billion in total consolidated assets, the Company was subject to EPS as of January 1, 2015. As permitted by the Final Rule, the IHC will be formed, with all but 10% of non-BHC assets included, by July 1, 2016. Other standards of the Final Rule will be phased in through January 1, 2018.

~~Bank Regulations~~

As a national bank, the Bank is subject to the OCC's regulations under the National Bank Act. The various laws and regulations administered by the OCC for national banks affect corporate practices and impose certain restrictions on activities and investments to ensure that the Bank operates in a safe and sound manner. These laws and regulations also require the Bank to disclose substantial business and financial information to the OCC and the public.

~~Holding Company Regulations~~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 ~~may~~would be required to obtain approval from the Board of Governors of the Federal Reserve System (the "Federal Reserve") if the Company were to acquire shares of any depository institution or any holding company of a depository ~~institution. In addition, the Company may have to provide notice to the Federal Reserve if the Company acquires~~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~~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. ~~Ownership of more than 10% of SHUSA's capital stock may be deemed to constitute “control” if certain other control factors are present.~~

~~Regulatory Capital Requirements~~

Federal regulations require federal savings associations and national banks to maintain minimum capital ratios. Under the Federal Deposit Insurance Act ("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 Tier 1 leverage ratio of 5% or greater and (iv) is not subject to any order or written directive to meet and maintain a specific capital level. An institution’s capital category is determined by reference to its most recent financial report filed with the OCC. If an institution’s capital deteriorates to the undercapitalized category or below, the FDIA and OCC regulations prescribe an increasing amount of regulatory intervention, including the adoption by the institution of a capital restoration plan, a guarantee of the plan by its parent holding company and restricting increases in assets, numbers of branches and lines of business.

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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 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, 2015, the Bank met the criteria to be classified as “well-capitalized.”~~

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. 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. The FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and require reporting by, FDIC-insured institutions. 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 ~~$52.2~~$53.3 million for the year ended December 31, ~~2015.~~2018.

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 ~~2015,~~2018, the Bank paid Financing Corporation assessments of ~~$4.2~~$2.5 million, compared to ~~$4.1~~$4.0 million in ~~2014.~~2017. The annual rate for all insured institutions dropped to ~~$0.060~~$0.014 for every $1,000 in domestic deposits in ~~2015,~~2018, compared to ~~$0.062 for the same measure~~$0.046 in ~~2014.~~2017. The assessments are revised quarterly and ~~will~~ continue until the bonds mature ~~in 2017.~~

between 2017 and 2019.

~~Federal Restrictions on Transactions with Affiliates and Insiders~~

~~All national banks are subject~~In March 2016, the FDIC finalized the rule to ~~affiliate and insider transaction rules applicable to member banks~~implement Section 334 of the ~~Federal Reserve under~~Dodd-Frank Wall Street Reform and Consumer Protection Act (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 ~~Federal Reserve Act, as well as additional limitations~~FDIC insurance fund. The FDIC commenced this surcharge in the ~~institutions’ primary federal regulator may adopt. These provisions prohibit or limit~~third quarter of 2016, which the FDIC estimated would take approximately two years. Under the rule, if the reserve ratio did not reach 1.35% by December 31, 2018, the FDIC would impose a banking institution from extending credit to, or entering into certain transactions with, affiliates, principal shareholders, directors and executive officers (and these individuals' related interests) ofshortfall assessment on larger depository institutions, including SBNA. The FDIC announced on November 28, 2018 that the ~~banking institution and its affiliates. For these purposes,~~reserve ratio had reached 1.35%, which ended the ~~term “affiliate” includes a holding company such as the Company, Santander and any other company under common control with the Bank, such as SC.~~surcharge period.

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Restrictions on Subsidiary Banking Institution Capital Distributions

~~The Company~~Under the Federal Deposit Insurance Corporation Improvement Act (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 ~~the following major sources~~a total risk-based capital ratio of ~~funding~~10% or greater, (ii) has a Tier 1 risk-based capital ratio of 8% or greater, (iii) has a common equity Tier 1 ("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 ~~its liquidity requirements: dividends~~ and ~~returns~~maintain a specific capital level. As of December 31, 2018, the Bank met the criteria to be classified as “well capitalized.”

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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, ~~investment~~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 ~~its subsidiaries, short-term investments held by non-bank affiliates and access~~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 ~~markets.~~ 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.

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 ~~would be~~is required if the ~~Bank’s examination~~OCC deems it to be in troubled condition or ~~Community Reinvestment Act ("CRA") ratings fall below certain levels or the Bank is notified by the OCC that it is~~ a problem ~~institution or in troubled condition. Moreover, the Bank must obtain the OCC's prior written approval to make any capital distribution until it has positive retained earnings.~~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. ~~There~~The Company paid cash dividends on common stock of $410.0 million in 2018 while $10.0 million in dividends were ~~no dividends~~ declared or paid in ~~2015 or 2014. There were no returns of capital in 2015.~~2017. The ~~Bank~~Company returned capital of ~~$128.0~~$12.6 million in ~~2014.~~2017, while no capital was returned in 2018.

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 ~~amounts~~amount of total reserve ~~requirement~~requirements at December 31, ~~2015~~2018 and ~~2014~~2017 were ~~$492.7~~$429.0 million and ~~$446.5~~$294.2 million, respectively. At December 31, ~~2015~~2018 and ~~2014,~~2017, the Company complied with ~~the~~these reserve requirements.

Federal Home Loan Bank ~~(FHLB)~~("FHLB") System

The FHLB system was created in 1932 and consists of ~~eleven~~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 ~~$600.9~~$230.1 million as of December 31, ~~2015,~~2018, compared to ~~$425.0~~$116.1 million at December 31, ~~2014.~~2017. 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 ~~$18.9~~$17.7 billion at December 31, ~~2015~~2018, and had outstanding advances of ~~$13.9~~$4.85 billion or ~~73%~~27% 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 ~~$28.5~~$6.6 million and ~~$13.8~~$12.9 million in dividends on its stock in the FHLB of Pittsburgh in ~~2015~~2018 and ~~2014,~~2017, respectively.

~~Community Reinvestment Act (the "CRA")~~

The CRA requires financial institutions regulated by the federal financial supervisory agencies to ascertain and help meet the credit needs of their communities, including low- to moderate-income neighborhoods within those communities, while maintaining safe and sound banking practices. The regulatory agencies periodically assess the Bank’s record in meeting the credit needs of the communities it serves. A bank’s performance under the CRA is important in determining whether the bank may obtain approval for, or utilize streamlined procedures in, certain applications for acquisitions or engage in new activities.

The Bank’s lending activities are generally in compliance with applicable CRA requirements, and the Bank’s most recent public CRA report of the examination rated the Bank as “Outstanding,” the highest category. The OCC conducted a CRA examination that began in March 2014 covering the period from January 1, 2011 to December 31, 2013. This CRA examination is still open and the final results of the examination and rating have not been provided to the public.

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The Bank has developed a Community Reinvestment Plan for 2014-2016 that calls for a multi-billion dollar commitment to lending and investment to low- and moderate-income individuals and in communities in its principal banking markets. This commitment also continues the Bank's financial support and financial education services to many non-profit organizations within its market.

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. ~~The Company has complied with these regulations.~~

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Financial Privacy

Under the Gramm-Leach-Bliley Act (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. ~~The Company and the Bank have complied with these regulations.~~

Environmental Laws

~~Environmentally related~~Environmentally-related hazards ~~have become~~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 ~~preceding~~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.

~~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 Santander U.K. plc ("Santander U.K.") within the Santander group.~~

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~~During the period covered by this annual report:~~

Santander UK holds frozen savings and one current accounts for two customers resident in the U.K. who are currently designated by the U.S. for terrorism. The accounts held by each customer were blocked after the customer's designation and have remained blocked and dormant throughout 2015. Revenue generated by Santander UK on these accounts was negligible.

An Iranian national, resident in the U.K., who is currently designated by the U.S. under the Iranian Financial Sanctions Regulations and the Non-Proliferation Weapons of Mass Destruction ("NPWMD") designation, holds a mortgage with Santander U.K. that was issued prior to any such designation. No further draw-down has been made (or would be allowed) under this mortgage, although Santander U.K. continues to receive repayment installments. In 2015, total revenue in connection with this mortgage was approximately £3,876, while net profits were negligible relative to the overall profits of Santander U.K. Santander U.K. does not intend to enter into any new relationships with this customer, and any disbursements will only be made in accordance with applicable sanctions. The same Iranian national also holds two investment accounts with Santander ISA Managers Limited; with the funds split into the same investment portfolio fund. The accounts have remained frozen during 2015. The investment returns are being automatically reinvested, and no disbursements have been made to the customer. Total revenue for the Santander group in connection with the investment accounts was approximately £189 while net profits in 2015 were negligible relative to the overall profits of Santander.

During the third quarter of 2015, two additional Santander UK customers were designated. A UK national designated by the U.S under the Specially Designated Global Terrorist ("SDGT") sanctions program and is on the U.S Department of the Treasury's Office of Foreign Assets Control's Specially Designated Nationals and Blocked Persons ("SDN") List. This customer holds a bank account which generated revenue of £183 combined during the third and fourth quarters of 2015. A stop was placed on the account. Net profits combined in the third and fourth quarters of 2015 in connection with this account were negligible relative to the overall profits of Santander. A second UK national is designated by the U.S. under the SDGT sanctions program and on the U.S. SDGT List. No transactions were made in the third or fourth quarter of 2015 and this account is blocked and in arrears.

In addition, during the fourth quarter of 2015, Santander UK identified one additional customer. UK national designated by the U.S, under the SDGT sanctions program and on the U.S. SDN List. The customer holds a bank account which generated negligible revenue during the fourth quarter of 2015. The account was closed during the fourth quarter of 2015. Net profits in the fourth quarter of 2015 were negligible relative to the overall profits of Santander.

In addition, the Santander group has outstanding legacy export credit facilities with Bank Mellat, which was in the U.S. SDN List at December 31, 2015. In 2005, Santander participated in a syndicated credit facility for Bank Mellat of €15.5 million, which matured on July 6, 2015. As of December 31, 2015, Santander was owed €0.3 million under this credit facility and 95% covered by official export credit agencies.

Santander has not been receiving payments from Bank Mellat under any of this or other credit facilities in recent years. Santander has been and expects to continue to be repaid any amounts due by official export credit agencies. No funds have been extended by Santander under this facility since it was granted.

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. However, should any of the contractors default in their obligations under the public bids, the Santander group would need prior approval from the Spanish Government to pay any amounts due to Bank Sepah or Bank Mellat pursuant to Council Regulation ~~(EU) No. 2015/1861.~~

In the aggregate, all of the transactions described above resulted in approximately €15,000 in gross revenues and approximately €77,000 of net loss to the Santander group in 2015, all of which resulted from the performance of export credit agencies rather than any Iranian entity. The Santander group has undertaken significant steps to withdraw from the Iranian market such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. The Santander group is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount - which payment would be subject to prior approval (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). Accordingly, the Santander group intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.

The Company ~~does not have any~~conducts its securities activities ~~transactions, or dealings which would require disclosure under Section 13(r) to~~through its subsidiaries SIS and SSLLC. SIS and SSLLC are registered broker-dealers with the Securities and Exchange ~~Act~~Commission (the “SEC”) and members of ~~1934.~~the Financial Industry Regulatory Authority, Inc. (“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.

15Written Agreements and Regulatory Actions

See the “Regulatory Matters” section of the MD&A and Note 19 of the Consolidated Financial Statements in this Form 10-K for a description of current regulatory actions.

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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 ~~http:~~https://www.santanderus.com/us/~~investorhareholderrelations~~.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

The Company is subject to a number of risks ~~potentially impacting~~that if realized could materially affect its business, financial condition, results of operations, cash flows and ~~cash flows.~~access to liquidity. 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. Accordingly, the Company encounters risk as part of the normal course of its business, and risk management processes are designed to help manage these risks.

Risk management ~~is an~~and mitigation are important ~~part~~parts 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 ~~manage~~mitigate the risks presented by business activities ~~so that management can appropriately balance revenue generation~~in 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 ~~reputation~~reputational risk. We discuss our principal risk management processes in the Risk Management section included in Item 7 of this Report.

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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.

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.

In the past eight years, financial systems worldwide have experienced difficult credit and liquidity conditions and disruptions leading to less liquidity and greater volatility (such as volatility in spreads). Global economic conditions deteriorated significantly between 2007 and 2009, and the United States fell into recession. ~~Although the United States has begun to recover, this recovery may not be sustainable.~~ 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 ~~and some continue to experience,~~ significant difficulties. Numerous institutions have sought additional capital or have received government assistance, and many lenders and institutional investors have reduced providing funding to borrowers (including to other financial institutions).

~~In particular, we~~We face, among others, the following risks ~~related to~~in the event of an economic ~~downturn:~~downturn or another recession:

Increased regulation of our industry. Compliance with such regulation has increased ~~and will continue to increase~~ our costs and may affect the pricing ~~for~~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 ~~these~~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.

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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 certain segments~~the long-term expansion of the U.S. economy, some uncertainty remains ~~concerning~~regarding U.S. monetary policy and the future economic environment. There can be no assurance that economic conditions ~~in these segments~~ will continue to ~~improve or that the United States' economic condition as a whole will improve significantly.~~improve. Such economic uncertainty could have ~~a negative impact~~an adverse effect on our business and results of operations. ~~Investors remain cautious.~~ A ~~slowing~~downturn of the economic expansion or ~~failing of~~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, the global recession and disruption of the financial markets led to concerns over the solvency of certain European countries, affecting ~~these~~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, 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 ~~one or more~~ 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.

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 ~~increase~~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, itthey could have a material adverse effect on us.

~~We may suffer adverse effects as a result of economic and sovereign debt tensions.~~

~~Our results~~

Table of operations are materially affected by conditions in the capital markets and the economy, which, although improving recently, continue to show signs of fragility and volatility. We have direct and indirect exposure to financial and economic conditions throughout the United States. A deterioration of the economic and financial environment could have a material adverse impact on the whole financial sector, creating new challenges in corporate lending and resulting in significant disruptions in financial activities at both the market and retail levels. This could materially and adversely affect our operating results, financial position and prospects.Contents

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

~~The~~While the United States economy has performed well overall, it has experienced volatility ~~recently,~~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-rate~~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 United Kingdom’s (“UK’s”) referendum on whether to remain part of the European Union (“EU”) has had and may continue to have negative effects on global economic conditions and global financial markets. The UK's decision to withdraw from the EU, and the UK's implementation of that referendum, means that the UK's EU membership will cease. The long-term nature of the UK’s relationship with the EU is unclear (including with respect to the laws and regulations that will apply as the UK determines which EU laws to replicate or replace) and, as negotiations continue, there is considerable uncertainty as to when the framework for any such relationship governing both the access of the UK to European markets and the access of EU member states to the UK’s markets will be determined and implemented. The result of the referendum has created an uncertain political and economic environment in the UK, and may create such environments in other EU member states. While the Company does not maintain a presence in the UK, 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. In addition, the Company has been working with its UK affiliates to expand their business; if the UK were to leave the EU, the results of those efforts could be impacted adversely.

Uncertainty regarding the London interbank offered rate (“LIBOR”) may adversely affect our business

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

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. We could also incur further legal risks in the event of such changes, as changes to documentation for new and existing transactions may be required, as well as further operations risks due to the potential need to adapt information technology systems, trade reporting infrastructure, and operational processes and controls.

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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 ~~be changed~~change at any time. In addition, ~~the~~regulators' interpretation and application ~~by regulators~~ 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 ~~recently~~ 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 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, require 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 below,~~ 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 which significantly affect the Company, or which 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, and are discussed in further detail below.~~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 ~~Global Regulation~~

In December 2010, the Basel Committee reached an agreement on comprehensive changes to the capital adequacy framework, known as Basel III. A revised version of Basel III was published in June 2011. Basel III is intended to raise the resilience of the banking sector by increasing both the quality and quantity of the regulatory capital base and enhancing the risk coverage of the capital framework. The changes in Basel III are intended to be phased in gradually between January 2015 and January 2019.

There can be no assurance that the implementation of these new standards will not adversely affect the Company's or its subsidiaries' ability to pay dividends or require it to issue additional securities that qualify as regulatory capital, liquidate assets, curtail business or take any other actions, any of which may have adverse effects on the Company's business, financial condition, or results of operations. Furthermore, increased capital requirements may negatively affect the Company's return on equity and other financial performance indicators.

Effective management of our capital position is important to our ability to operate our business, continue to grow organically, and pursue our business strategy. However, in response to the global financial crisis, a number of changes to the regulatory capital framework have been adopted or continue to be considered. As these and other changes are implemented or future changes are considered or adopted that limit our ability to manage our balance sheet and capital resources effectively or access funding on commercially acceptable terms, we may experience a material adverse effect on our financial condition and regulatory capital position.

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In addition to the changes to the capital adequacy framework described above, the Basel Committee also published its global quantitative liquidity framework, comprising the LCR and NSFR metrics, with objectives to (1) promote the short-term resilience of banks’ liquidity risk profiles by ensuring they have sufficient high-quality liquid assets to survive a significant stress scenario; and (2) promote resilience over a longer time horizon by creating incentives for banks to fund their activities with more stable sources of funding on an ongoing basis. The LCR was subsequently revised by the Basel Committee in January 2013 and includes a revised timetable for phase-in of the standard from 2015 to 2019, as well as some technical changes to some of the stress scenario assumptions. In January 2014, the Basel Committee published amendments to the leverage ratio and technical revisions to the NSFR, confirming that it remains its intention that the latter ratio, including any future revisions, will become a minimum standard by January 1, 2018. In addition, in January 2014, the Basel Committee proposed uniform disclosure standards related to the LCR and issued a new modification to the ratio, which should be adopted by banks beginning at January 1, 2015.

~~Significant~~ United States Regulation

From time to time, we are or may become 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 Department of Justice (the "DOJ"), the SEC, FINRA the Federal Trade Commission and various state regulatory and enforcement agencies.

The DFA ~~which was adopted in 2010,~~ 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 ~~that~~ we offer, the creation of a structure to regulate systemically important financial companies, more comprehensive regulation of the over-the-counter 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.

~~With respect to over-the-counter ("OTC") derivatives, the~~The DFA provides for an extensive framework for the regulation of ~~OTC~~over-the-counter ("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"), 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. Although many significant regulations applicable to swap dealers are already in effect, some of the most important requirements, such as margin requirements for uncleared swaps, have not yet been implemented, and we continue to assess how compliance with these new rules will affect our business.

In July 2013, United States bank regulators issued the United States Basel III final rules implementing the Basel III capital framework for United States banks and BHCs. Certain aspects of the United States Basel III final rules, such as new minimum capital ratios and a revised methodology for calculating risk-weighted assets, became effective on January 1, 2015. Other aspects of the United States Basel III final rules, such as the capital conservation buffer and the new regulatory deductions from and adjustments to capital, will be phased in over several years beginning on January 1, 2015.

In addition, in October 2014, the Federal Reserve and other United States regulators issued a final rule introducing a quantitative LCR requirement on certain large banks and BHCs. The LCR is broadly consistent with the Basel Committee’s revised Basel III liquidity rules, but is more stringent in several important respects. The Federal Reserve has stated that it intends, through future rule-makings, to apply the Basel III LCR and NSFR to the United States operations of some or all large FBOs.

On February ~~18,~~ 2014, the Federal Reserve issued the Final Rule to enhance its supervision and regulation of certain FBOs. Among other things, this rule ~~requires~~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 ~~are~~were not required to be transferred to the IHC. As a result of this rule, Santander

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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. 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 IHC ~~will be~~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 ~~the~~those standards and requirements. Certain enhanced prudential standards were effective on January 1, 2015, with other standards and requirements to be phased in between July 1, 2016 and January 1, 2018. The Final Rule also required Santander,SHUSA's status as an ~~FBO with United States total consolidated assets of more than $50 billion as of June 30, 2014, to submit an~~ IHC implementation plan to the Federal Reserve by January 1, 2015. We submitted our IHC Implementation Plan on December 31, 2014. As of the date of this report, we are continuing to refine this plan. Implementation and compliance with this plan have caused and will continue to require the Companyrequires it to invest significant management attention and resources.

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Within the DFA, the Volcker Rule prohibits “banking entities” from engaging in certain forms of proprietary trading or 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 ~~Volcker Rule became effective on July 21, 2012 and, on December 10, 2013; United States regulators issued~~ final ~~rules~~regulations implementing the Volcker ~~Rule. The final rules~~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. On December 18, 2014, the Federal Reserve issued an order extending the period for all banking entities to conform to the Volcker Rule and implement a compliance program until July 21, 2016, and additional extensions are possible. Banking entities must bring their activities and investments into compliance with the requirements of the Volcker Rule by the end of the conformance period. We have assessed how the final rules implementing the Volcker Rule affect our business and have adopted the necessary measures to bring our activities into compliance with the rules.

~~Furthermore, Title I~~Our resolution in a bankruptcy proceeding could result in losses for holders of ~~the DFA~~our debt and ~~the implementing~~equity securities.

Under regulations issued by the Federal Reserve and the FDIC, ~~require~~and as required by Section 165(d) of the DFA, we must provide to the Federal Reserve and the FDIC a plan (a “Section 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. The purpose of this 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 31, 2018 (the “2018 Resolution Plan”), 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”). 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 ~~BHC~~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.

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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, ~~including Santander, to prepare and submit a plan annually for~~such as the Company, can be subjected. Under the orderly ~~resolution~~liquidation authority, the FDIC may be appointed as receiver to liquidate a financial company if, upon the recommendation of ~~our subsidiaries and operations domiciled in~~applicable regulators, the United States Secretary of the Treasury determines that the entity is in ~~the event of future material~~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 ~~failure. The plan must include information on~~mitigate those effects, among other things. Absent such determinations, the Company would remain subject to the U.S. Bankruptcy Code.

If the FDIC is 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 ~~major counterparties, and interdependencies,~~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 LTD) and ~~requires substantial effort, time,~~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 ~~cost~~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 ~~prepare. Santander submitted~~ its ~~United States resolution plan in December 2015. The United States resolution plan is subject~~subsidiaries was sufficient to ~~review~~enable the subsidiaries to remain solvent, losses at the subsidiary level could be transferred to the Company and ultimately borne by the ~~Federal Reserve~~Company’s securityholders (including holders of our LTD and other debt securities), with the ~~FDIC.~~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.

~~On October 30, 2015~~The orderly liquidation authority also requires that creditors and shareholders of the ~~Federal Reserve released~~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 ~~notice~~statutory payment priority over the claims of proposed rulemaking (NPR) on total loss absorbing capacity ("TLAC"), long-term debt ("LTD"), and clean holding company requirements for systemically important U.S. BHCs and intermediate holding companies ("IHCs")private creditors, including holders of systemically important foreign banking organizations ("FBOs"). SHUSA, as the IHC for Santander in the U.S., will be subject to these requirements. The TLAC requirement is expected to create material additional 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 instrumentsour LTD and other ~~eligible liabilities that~~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 ~~written down~~no assurance that the value of the securities of the bridge entity would be sufficient to repay all or ~~converted into equity during resolution to (ii)~~any part of the ~~Company's risk-weighted assets and~~creditor claims for which the ~~Basel III leverage ratio denominator.~~securities were exchanged.

~~Each of these~~Although the FDIC has issued regulations to implement the orderly liquidation authority, not all aspects of how the ~~DFA, as well as other changes in United States banking regulations, may directly~~FDIC might exercise this authority are known, and ~~indirectly impact various aspects of our business. The full spectrum of risks that the DFA, including the Volcker Rule, poses to us~~additional rulemaking is ~~not yet known. However, such risks could be material and could materially and adversely affect us.~~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 ~~Dodd-Frank Act or~~DFA and other banking laws orand policies. ~~In March 2014 and 2015,~~ Effective January 2017, the Federal Reserve ~~Board, as part~~finalized a rule adjusting its capital plan and stress testing rules, exempting from the qualitative portion of ~~its~~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 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 and 2018, 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 submitted by Santander Holdings USA. In its 2015 public report on CCAR, the Federal Reserve Board cited widespread and critical deficiencies in the Company’s capital planning processes, including specific deficiencies in governance, internal controls, risk identification and risk management, management information systems, and supporting assumptions and analysis. As a result of the 2014 and 2015 CCAR objections, the Company submitted. There is not permitted to make any capital distributions without the Federal Reserve Board’s approval, other than the continued payment of dividends on the Company’s outstanding class of preferred stock, until a new capital plan is approved by the Federal Reserve Board. The Company’s updated capital plan was filed on April 5, 2016, and there is the risk that the Federal Reserve ~~Board will~~could object to the Company’s ~~next~~future capital ~~plan.~~

~~In addition, we are subject~~plans, which would limit the Company's ability to supervisory actions in the United States related to the CCAR stress testing and capital planning processes. Specifically, on September 15, 2014, the Company entered into a written agreement with the FRB of Boston and the Federal Reserve. Under the terms of this written agreement, the Company must serve as a source of strength to the Bank; strengthen Board oversight of plannedmake capital distributions ~~by the Company and its subsidiaries; and not declare~~ or ~~pay, and not permit any non-bank subsidiary that is not wholly-owned by the Company to declare or pay, any dividends, and not make, or permit any such subsidiary to make, any~~take certain capital ~~distribution, in each case without the prior written approval of the FRB of Boston.~~

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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 ~~some~~many instances, we are subject to significant legal restrictions on our ability to publicly disclose these actions or the full details of these actions. In addition, as part of the regular examination process, certain U.S. subsidiaries’ regulators may advise certain U.S. subsidiaries 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 ~~U.S. Bank Holding Company~~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;~~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. In addition to such confidential actions and restrictions, on July 2, 2015, the Company entered into a written agreement with the FRB of Boston. Under the terms of that written agreement, the Company is required to make enhancements with respect to, among other matters, board oversight of the consolidated organization, risk management, capital planning and liquidity risk management.

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 ~~that are required~~relating to ~~conduct~~the banking and financial services business. These apply to business operations, affect financial returns, include reserve and reporting requirements, ~~and prudential~~ and conduct of business regulations. These requirements are set 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, ~~the~~ 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. ~~The supervisors~~Supervisors' continuing supervision of financial institutions is conducted through a variety of regulatory tools, including the collection of information by way of ~~prudential returns,~~ 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, ~~these~~ regulators have ~~a more~~an outcome-focused regulatory approach that involves ~~more~~ proactive enforcement and ~~more punitive~~ 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 ~~are focusing~~focus strongly on consumer protection and on conduct risk and will continue to do so. 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 onin the relevant jurisdictions onin which we operate give ~~the~~ regulators the power to make temporary product intervention rules either to improve a ~~firm’s~~company's systems and controls in relation to product design, product management and implementation, or to address problems identified with financial products. These problems may potentially cause significant detriment to consumers because of certain product features, or governance flaws or distribution strategies. Such rules may prevent institutions from entering into product agreements with customers until such problems have been solved. Some ofregulators in the ~~regulatory regimes on the relevant~~ jurisdictions onin which we operate also require us to be in compliance ~~across all aspects of our business, including the~~with training, authorization and supervision of personnel, systems, processes and ~~documentation.~~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 ~~relevant~~ regulations, there would be a risk of an adverse impact on our business from sanctions, fines or other actions imposed by ~~the~~ 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 ~~an action,~~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.~~

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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.

We are subject to ~~certain~~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;~~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 proceedings or of any related settlement may spur the initiation of similar claims by other 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 ~~regulator or other~~ breach.

Our operations are subject to regular and ongoing inspection by our ~~bank~~banking and other ~~financial market~~ regulators, which may result in the ~~U.S. As a result of such inspections, regulators may identify areas in which we may~~ need ~~to take actions, which may be significant,~~ 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 expectations of the Company’s regulators’ 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 ~~the~~ 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.

The Company is also at risk when it has agreed to indemnify others for losses related to legal proceedings, including litigation and governmental investigations and inquiries, they face, such as in connection with the purchase or sale of a business or assets. In addition, 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 product. The results of such proceedings could lead to significant monetary damages or penalties, adverse judgments, settlements, fines, injunctions, restrictions on the way in which the Company conducts its business, or reputational harm.

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.

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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~~and our ~~relevant~~ counterparties’) services as a conduits for money laundering (including illegal cash operations) or other illegal activities without our ~~(and~~and our ~~relevant~~ 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 ~~are~~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.

In addition, if the Company does not obtain ownership of 80% or more of SC Common Stock, the tax and other potential benefits described in Item 1 “Business - General” above may not be realized.

Changes in taxes and other assessments may adversely affect us.

The legislatures and tax authorities in the ~~tax~~ 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 and the deduction of interest on home equity loans. These limitations and eliminations could adversely affect demand for some of our retail banking products and the valuation of assets securing certain of our loans.

Credit Risks

If the level of our non-performing loans ("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.

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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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.

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 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 ~~fall~~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.

~~Disruption and volatility in the global financial markets could have a material adverse effect on our ability to access capital and liquidity on financial terms acceptable to us.~~

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Our cost of obtaining funding is directly related to prevailing market interest rates and to 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 ~~become~~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 ~~between~~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.

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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.

~~We cannot assure you~~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.

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 ~~derivative~~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 ~~our~~ customers, particularly customers who need a minimum rating threshold in order to invest. In addition, under the terms of certain of our ~~derivative~~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 ~~derivative~~derivatives activities through Santander and Santander UK. We estimate that, as of December 31, ~~2015,~~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 ~~derivative~~derivatives and other financial contracts. Refer to further discussion in Note 1514 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 ~~upon~~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.

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In addition, if we were required to cancel our derivatives contracts with certain counterparties and were unable to replace ~~such~~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.

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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 may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios that 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. We cannot assure you that we will be able to effectively control the level of the non-performing loans 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 recent global financial crisis has demonstrated, many of these factors are beyond our control. As a result, there is no precise method for predicting loan and credit losses, and we cannot assure you 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 differs 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 the credit card portfolio o 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.

Mortgage loans are one of our principal assets, comprising 7.8% of our loan portfolio as of December 31, 2015. In addition, we have exposure to a number of large real estate developers. As a result, we are exposed to developments in housing markets. From 2002 to 2007, demand for housing and mortgage financing increased significantly driven by, among other things, economic growth, declining unemployment rates, demographic and social trends and historically low interest rates. During late 2007, the housing market began to adjust as a result of excess supply and higher interest rates. For a prolonged time since 2008, persistent housing oversupply, decreased housing demand, rising unemployment, subdued earnings growth, greater pressure on disposable income, a decline in the availability of mortgage financing and the continued effect of market volatility caused home prices to decline, while mortgage delinquencies increased. These trends, especially higher unemployment rates coupled with declining real estate prices, could have a material adverse impact on our mortgage payment delinquency rates, which in turn could have a material adverse effect on our business, financial condition and results of operations.

~~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 of our loans, which may materially and adversely affect our results of operations and financial condition.

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~~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 derivative contracts under which counterparties have obligations to make payments to us or executing securities, futures, currency or commodity trades from proprietary trading activities 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. 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;

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 may reduce gains or require us to record losses on sales of our loans or securities.

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 ~~the continued~~ economic uncertainty and sovereign debt ~~crisis~~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 orand the market value of our assets and liabilities could be materially adversely affected.

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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 past eight~~recent years, financial markets have been subject to ~~significant stress resulting in steep falls in perceived or actual financial asset values, particularly due to~~ volatility ~~in financial markets~~ 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

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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 ~~these~~ 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 and~~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 ~~derivative~~derivatives transactions that could have a material adverse effect on us.

We enter into ~~derivative~~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 ~~derivative~~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 ~~derivative~~derivatives transactions continues to depend, to a great extent, on our information technology ("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.

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 to 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.

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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 ~~thus~~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.

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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 orand 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 ~~non-performing loans~~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 ~~faced by~~ our customers face could adversely affect us.

Market turmoil and economic recession could materially and adversely affect the liquidity, businesses and/or financial ~~conditions~~condition of our borrowers, which could in turn increase our ~~non-performing loan (NPL)~~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.

~~Changes in our pension liabilities and obligations could have a material adverse effect on us.~~

We provide retirement benefits for many of our former and current employees through a number of employee benefit plans. We calculate the amount of our defined benefit obligations using actuarial techniques and assumptions, including mortality rates, the rate of increase of salaries, discount rates, inflation, the expected rate of return on plan assets, and other assumptions. In light of the nature of these obligations, changes in the assumptions that support valuations, including market conditions, can result in actuarial losses, which would in turn impact the financial condition of our pension funds. Since pension and other employee benefit plan obligations are generally long-term obligations, fluctuations in interest rates have a material impact on the projected costs of our defined benefit obligations and therefore on the amount of employee benefit plan expense we accrue.

Any increase in the current size of the deficit in our defined benefit pension plan, due to reduction in the value of the pension fund assets (depending on the performance of financial markets) or an increase in pension fund liabilities due to changes in mortality assumptions, the rate of increase of salaries, discount rate assumptions, inflation, the expected rate of return on plan assets, or other factors, could result in our having to make increased contributions to reduce or satisfy the deficits which would divert resources from use in other areas of our business and reduce our capital resources. While we can control a number of the above factors, there are some over which we have limited or no control. Increases in our pension liabilities and obligations 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.

Some of our operations are conducted through our ~~financial services~~ 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 ~~contractual~~regulatory 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, 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.

~~In addition, there~~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 ~~this~~ 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.

~~Increasing competition~~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.

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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 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, including among younger customers, could ~~require that we increase~~delay or prevent our ~~rates offered on deposits or lower the rates we charge on loans,~~access to new digital-based markets, which ~~could also~~would in turn have ~~a material~~an adverse effect on ~~us,~~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 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.competitive position.

~~In addition, if~~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.

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.

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Further, our customers may issue complaints and seek redress if they consider that they have suffered loss from our products or services, for example, as a result of any alleged mis-selling or incorrect application of the terms or conditions of a particular product. This could in turn subject us to risks of potential legal action by our customers and intervention by our regulators. For further detail on our legal and regulatory risk exposures, please see the Risk Factor entitled “We are exposed to risk of loss from legal and regulatory proceedings.

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

We allocate management and planning resources to develop strategic plans for organic growth, and to identify possible acquisitions and disposals and areas for restructuring our businesses. From time to time, we evaluate acquisition and partnership opportunities that we believe offer additional value to our shareholder and are consistent with our business strategy. However, we may not be able to identify suitable acquisition or partnership candidates, and our ability to benefit from any such acquisitions or partnerships will depend in part on our successful integration of those businesses. Any such integration entails significant risks such as unforeseen difficulties in integrating operations and systems and unexpected liabilities or contingencies relating to the acquired businesses, including legal claims. We can give no assurances that our expectations with regard to integration and synergies will materialize.

~~We also~~ cannot ~~provide assurance~~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;

~~assess the value, strengths and weaknesses of investment or acquisition candidates;~~

~~finance strategic investments or acquisitions;~~

~~fully integrate strategic investments, or newly-established entities or acquisitions in line with our strategy;~~

align our current ~~information technology~~IT systems adequately with those of an enlarged group;

apply our risk management ~~policy~~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.

In addition, any acquisition or venture could result in the loss of key employees and inconsistencies in standards, controls, procedures, and policies. The success of an acquisition or venture could be subject to a number of political, economic and other factors that are beyond our control. 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, ~~there~~the impairment is ~~an indication that~~measured as this excess of carrying value over fair value. We recognized a $10.5 million impairment ~~exists and a second step to measure the amount of impairment, if any, must be performed. This second step involves calculating the implied fair value~~ of goodwill ~~determined~~ in 2017 primarily due to the ~~same manner as~~unfavorable economic environment in Puerto Rico and the ~~amount~~additional adverse effect of ~~goodwill recognized in a business combination upon acquisition. There were no~~Hurricane Maria. We did not recognize any impairments of goodwill ~~recognized~~ in 2013 or 2014. The Company recorded a goodwill impairment in the fourth quarter of 2015 related to the goodwill from the first quarter consolidation and Change in Control of SC recorded in its SC reporting unit. The stock price of SC has declined since December 31, 2015, and it2016. It is reasonably possible we may be required to record impairment of ~~our remaining $1.0~~$4.5 billion of goodwill attributable to SC and SBNA in ~~periods subsequent to December 31, 2015.~~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.

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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 Directive 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.

~~If we fail or are unable to attract and train, motivate and retain qualified professionals appropriately, our business may also be adversely affected.~~

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.~~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.

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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.~~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. 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 ~~has~~have caused public perception of us and others in the financial services industry to decline.

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.

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.

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United States law applicable to ~~public companies~~certain financial institutions, including the Bank and ~~financial groups~~other Santander entities and ~~institutions provide for~~offices in the U.S., establish several procedures designed to ensure that the transactions entered into with or among our ~~financial~~ 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 ~~our~~their 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 ~~our~~SHUSA's favor.

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

Neither the occurrence nor potential impact of disasters (such as earthquakes, hurricanes, tornadoes, floods and other severe weather conditions, pandemics, dislocations, fires, explosions, ~~and~~or other catastrophic accidents or events), terrorist activities ~~and~~or international hostilities can be predicted. However, these occurrences could impact us directly (for example, by causing significant damage to our facilities or 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 ~~if any,~~ 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 improve or upgrade our ~~information technology~~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 upgrade our ~~information technology~~IT on a timely and cost-effective basis. We must continually make significant investments and improvements in our ~~information technology~~IT infrastructure in order to remain competitive. ~~We cannot assure you~~There can be no assurance that ~~in the future~~ we will be able to maintain the level of capital expenditures necessary to support the improvement or upgrading of our ~~information technology infrastructure.~~IT infrastructure in the future. Any failure to improve or upgrade our ~~information technology~~IT infrastructure and management information systems effectively and in a timely manner could have a material adverse effect on us.

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 we~~which may be a target for attempted cyberattacks.

Many companies across the ~~target~~country and in the financial services industry have reported significant breaches in the security of ~~attempted cyber-attacks, such as denial~~their websites or other systems. Cybersecurity risks have increased significantly in recent years due to the development and proliferation of ~~services, malware~~new technologies, increased use of the internet and ~~phishing-based attacks. Cyber-attacks continue~~telecommunications technology to ~~evolve in scope~~conduct financial transactions, and increased sophistication and ~~we may incur significant costs~~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 our attempts to modify and enhance our protective measures, investigate or remediate any vulnerability or resulting breach, or communicate with our customers regarding cyber-attacks. If we are unable to maintain an effectiverecent years reported cyber incidents that compromised data, ~~collection, management and processing system, we may be materially and adversely affected, including with regard to our reputation, operating results, financial condition and prospects through~~resulted in the ~~payment~~theft of ~~compensation to customers, regulatory penalties and fines, and/~~funds or the ~~loss~~theft or destruction of corporate information and other assets.

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We take protective measures and continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or ~~corruption, but~~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.

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Nevertheless, while we have not experienced any 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, ~~nevertheless~~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, and other events that could have a security impact or give rise to the loss of significant amounts of sensitive information, as well as significant levels of liquid assets, including cash. 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 could result in legal liability, regulatory action and reputational harm. There can be no assurance that we will not suffer material losses from operational risk in the future, including relating to any security breaches.

Computer systems of companies have been targeted in recent years, not only by cyber criminals, but also by activists and rogue states. We have been and continue to be subject to a range of cyber-attacks,cyberattacks such as denial of service, malware, ransomware, phishing, and ~~phishing. Cyber-attacks~~other events that could result in security breaches or give rise to the manipulation or loss of significant amounts of customer data and other sensitive information, ~~as well as~~disrupt, sabotage or degrade service on our systems, or result in the theft or loss of significant levels of liquid assets, ~~(including cash).~~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 ~~addition, cyber-attacks~~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 ~~give rise~~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 ~~disablement~~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 ~~information technology~~cyberattacks and security breaches affecting the systems ~~used~~of such third parties. It could take a significant amount of time for a cyberattack to ~~service~~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 ~~customers.~~ 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.

As attempted ~~attacks~~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 ~~cyber-attacks~~cyberattacks to our customers. ~~Failure~~An interception, misuse or mishandling of personal, confidential or proprietary information sent to ~~effectively manage our cyber security risk~~or received from a client, vendor, service provider, counterparty or third party or a cyberattack could harm our reputation and adversely affect our operating results, financial condition and prospects through the payment of compensation to customers, regulatory penalties and fines, and/or the loss of assets.

~~A breach in the security of our systems could disrupt our businesses,~~ result in ~~the disclosure of confidential information, damage~~ our ~~reputation and create significant financial and legal exposures.~~

~~Although we devote significant resources~~inability to ~~maintain and regularly update our systems and processes~~recover or restore data that are designed to protect the security of our computer systems, software, networks and other technology assets and the confidentiality, integrity and availability of information belonging to us, our customers and clients, there is no assurance that all of our security measures will provide absolute security. Many institutions in our industry have reported significant breaches in the security of their websiteshas been stolen, manipulated or other systems, some of which have involved sophisticated and targeted attacks intended to obtain unauthorized access to confidential information, destroy data, disrupt or degrade service, sabotage systems or cause other damage, including through the introduction of computer viruses or malware, cyber-attacks and other means.

Despite our efforts to ensure the integrity of our systems, it is possible that we may not be able to anticipate, detect or recognize threats to our systems or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently or are not recognized until launched, and because cyber-attacks can originate from a wide variety of sources, including third parties such as persons associated with external service providers or who are or may be involved in organized crime or linked to terrorist organizations or hostile foreign governments. Those parties may also attempt to fraudulently induce employees, customers, third-party service providers or other users of our systems to disclose sensitive information in order to gain access to our data or that of our customers or clients. These risks may increase in the future as we increase mobile and internet-based product offerings and expand internal usage of web-based applications.

A successful penetration or circumvention of the security of our systems could cause serious negative consequences, including significant disruption of operations, misappropriation of confidential information, ordestroyed, damage to our ~~computers or~~ systems and those of our clients, customers and counterparties, ~~and could result in~~ violations of applicable privacy and other laws, ~~financial loss to us~~ or ~~our customers, loss~~other significant disruption of ~~confidence~~operations, including disruptions in our ~~security measures,~~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 ~~dissatisfaction, significant litigation exposure~~satisfaction and ~~harm~~behavior, expose us to ~~our reputation, all of which could have a material adverse effect on us.~~reputational damage, contractual claims, supervisory 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.~~Consolidated Financial Statements. These changes can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

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For example, as noted in Note 2 to the Consolidated Financial Statements in this Form 10-K, in June 2016, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. Effective January 1, 2020, this will substantially change accounting for credit losses on loans and other financial assets banks, financial institutions and other organizations hold. This standard will replace existing incurred loss impairment guidance and establish a single allowance framework for financial assets carried at amortized cost. Upon adoption of ASU 2016-13, companies must recognize credit losses on these assets equal to management’s estimate of credit losses over the assets’ full remaining expected lives. Companies must consider all relevant information when estimating expected credit losses, including details about past events, current conditions, and reasonable and supportable forecasts. In December 2018, the Federal Reserve, the OCC and the FDIC revised their regulatory capital rules to address this upcoming change to the treatment of credit expense and allowances. The final rule provides an optional three-year phase-in period for the Day One adverse regulatory capital effects upon adopting this standard. The impact of the final rule on the Company and the Bank will depend in part on whether we elect to phase in the impact of the standard over a three-year period. The standard is likely to have a negative impact, potentially materially, to the allowance and capital upon adoption in 2020; however, we are still evaluating its anticipated impact. It is also possible that our ongoing reported earnings and lending activity will be negatively impacted in periods following adoption of this ASU.

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.

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The preparation of consolidated financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect our ~~consolidated financial statements~~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") 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.

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~~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.~~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.

~~These~~ 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 ~~have inherent limitations, which include the possibilities that judgments~~and internal controls over financial reporting, are subject to lapses in ~~decision-making can be faulty,~~judgement and ~~that~~ breakdowns ~~can occur because of simple error or mistake. Additionally, controls~~resulting from human failures. Controls can be circumvented by ~~the individual acts~~collusion or improper management override. Because of ~~some persons, by collusion of two or more people or by any unauthorized override of the controls. Consequently, our businesses~~these limitations, there are exposed to risk from potential non-compliance with policies, employee misconduct or negligence and fraud, which could result in regulatory sanctions and serious reputational or financial harm. In recent years, a number of multinational financial institutions have sufferedrisks that material losses due to the actions of ‘rogue traders’ or other employees. It is not always possible to deter employee misconduct and the precautions we take to prevent and detect this activity may not always be effective. Accordingly, because of the inherent limitations in the control system, misstatements due to error or fraud may ~~occur and~~ not be ~~detected.~~

~~As of December 31, 2015, the Company~~prevented or detected, and SC identified material weaknesses in internal controls over financial reporting. The consolidation of SC and the significance of its results to the Company have resulted in material weakness in internal controls at the Company. If SC is unable tothat information may not be reported on a timely ~~remediate its material weaknesses, it could affect the Company's ability to effectively remediate its own material weaknesses.~~

~~Lapses in internal controls including internal control over financial reporting could materially and adversely affect our operations, liquidity and/or reputation.~~basis.

We have identified control deficiencies in our financial reporting process and for which remediation was still in process as of December 31, ~~2015 that constitute material weaknesses, which~~2018. These control deficiencies contributed to the restatement of the audited ~~consolidated financial statements~~Consolidated Financial Statements in our ~~previously filed~~ Form 10-K for the year ended December 31, ~~2015.~~2015 and the unaudited financial statements included in certain of our previously

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filed Quarterly Reports on Form 10-Q. See Part II, Item 9A in this Form ~~10-K/A.~~10-K. We have initiated certain measures, including ~~the enhancement of our model risk management framework and documentation process and~~ 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 the future. If we fail to remediate these 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.

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

~~Our independent registered public accounting firm, Deloitte & Touche LLP, recently advised~~We filed our ~~audit committee that they had identified a matter that raised concerns~~Annual Report on Form 10-K for 2015 and certain Quarterly Reports on Form 10-Q in ~~relation~~2016 after the time periods prescribed by the SEC’s regulations. Those failures to file our periodic reports within the ~~SEC's auditor independence rules.~~

~~The Company’s independent registered public accounting firm, Deloitte & Touche LLP (“Deloitte”), recently advised~~time periods prescribed by the ~~Audit Committee~~SEC, among other consequences, resulted in the suspension of our subsidiary (SC) that it had identified a partner rotation issue under the SEC’s auditor independence rules. Two of Deloitte’s engagement partners for the Company’s 2015 audit had been involved in their roles since SC’s Initial Public Offering (“IPO”) in January 2014. At the time of its initial filing, theeligibility to use Form S-3 registration ~~statement relating to SC’s IPO included audited financial~~ statements ~~for the years ended December 31, 2010, 2011 and 2012, and as a result the two engagement partners were considered to have been involved~~until we timely filed our SEC periodic reports for a period of ~~six years compared~~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 ~~five years that is allowed under~~file our periodic reports within the time periods prescribed by the SEC, ~~auditor independence rules. Upon identification~~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 ~~partner rotation issue, Deloitte identified new engagement partners~~time and resources we need to ~~serve SC for~~spend if we choose to access the year ended December 31, 2015, including the 2015 quarters. Deloitte advised the SC Audit Committee and the Company's Audit Committee that their objectivity, integrity, and impartiality was not impaired as a result of the partner rotation issue with respect to planning and executing SC's 2015 audit and the associated reviews of the 2015 quarters.

After considering the facts and circumstances, the Audit Committee of SC concurred in Deloitte's conclusion that its objectivity, integrity, and impartiality had not been impaired as a result of the partner rotation matter with respect to its planning and execution of the 2015 audit and its associated reviews of the quarters.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 ~~accounts.~~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 ~~may~~ result in losses.

SC’s growth strategy is subject to significant risks, some of which are outside of 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.~~

The Chrysler Agreement may not result in the anticipated levels of growth, and the agreement is subject to certain performance conditions that could result in its termination if SC is unable to meet them. 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 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.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 ~~it's~~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~~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, ~~liquidity, and~~ results of ~~operations.~~

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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,~~initial public offering ("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.

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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 ~~Lending Club~~LendingClub relationship in February 2016. SC continues to classify loans from its other primary lending relationship, Bluestem, as ~~held-for-sale and~~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 ~~based on an amendment in June 2014,~~which is renewable through April 2022 at Bluestem's option. 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.

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, ~~liquidity, and~~ results of ~~operations.~~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.

In February 2013, SC entered into the Chrysler Agreement with FCA through which SC launched the Chrysler Capital brand on May 1, 2013. Under the Chrysler Agreement, SC provides 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. 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. The unamortized portion would be recognized as expense immediately if the Chrysler Agreement were terminated in accordance with its term.

Under and subject to the terms 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.

In connection with the Chrysler Agreement, SC and FCA entered into an option agreement pursuant to which 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. FCA has announced its intention to establish a captive U.S. auto finance unit and indicated that acquiring Chrysler Capital is one option it will consider.

The equity option agreement does not specify the percentage of equity interests to be represented by the equity participation, but indicates that it can be greater than 80% and provides that FCA would specify the percentage to be purchased at the time of exercise of the option. The equity option agreement contains provisions that are designed to address a situation in which the parties disagree

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on the fair market value of an equity participation interest. There is a risk that SC may ultimately receive less than what SC believes to be the fair market value for that interest, and the loss of SC's associated revenue and profits may not be offset fully by the proceeds for such interest. There can be no assurance that SC would be able to redeploy the immediate proceeds for such interest in other businesses or investments that would provide comparable returns, thereby reducing SC's profitability. Further, the likelihood, timing and structure of any such transaction cannot reasonably be determined at this time. There can be no assurance that SHUSA or SC could successfully or timely implement any such transaction without significant disruption of its operations or restructuring, or without incurring additional liabilities, which could involve significant expense to SHUSA and SC and have a material adverse effect on SHUSA's or SC's business, financial condition and results of operations.

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. SC's obligations include SC meeting specified obligations in relation to escalating penetration rates for the first five years of the agreement, subject to FCA treating SC in a manner consistent with other comparable OEMs' treatment of their captive finance providers. Additional termination rights in favor of FCA include, among other circumstances, (i) a person other than Santander and its affiliates 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 becomes, controls, or becomes controlled by, an OEM that competes with FCA or (iii) certain of SC’s credit facilities become impaired.

SC’s ability to realize the full strategic and financial benefits of its relationship with FCA depends in part on the successful continued development of its Chrysler Capital business, which requires a significant amount of management's time and effort as well as continued cooperation from FCA. If FCA exercises its equity option, if the Chrysler Agreement (or FCA's limited exclusivity obligations thereunder) were to terminate, if FCA seeks to significantly change its business relationship with SC, or if SC otherwise is unable to realize the expected benefits of its relationship with FCA, 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, funding and growth, and SHUSA's and SC's ability to implement its business strategy could be materially adversely affected. The Company has $1.0 billion of goodwill assigned to the SC reporting unit from the 2014 Change in Control of SC. It is possible that changes to the Chrysler Agreement may trigger a goodwill impairment evaluation, which could require the goodwill to be written down if SC's financial condition is materially adversely affected. In addition, the Company has a $65.0 million Chrysler relationship intangible, which may require an impairment evaluation if there are adverse changes to the Chrysler Agreement.

On July 11, 2018 FCA and SC entered into a tolling agreement pursuant to which the parties agreed to preserve their respective rights, claims and defenses under the Chrysler Agreement as they existed on April 30, 2018 and to refrain from delivering a written notice to the other party under the Chrysler Agreement until December 31, 2018. FCA has not delivered a notice to exercise its equity option, and the Company remains committed to the success of the Chrysler Capital business.

ITEM 1B - UNRESOLVED STAFF COMMENTS

The Company and its subsidiary, SC, received comment letters from the Securities and Exchange Commission (the “SEC”) Division of Corporation Finance in August and November 2015 on their periodic reports on Form 10-K for the fiscal year ended December 31, 2014 and for the quarters ended September 30, 2015. As of December 7, 2016, the Company and SC each have responded to the comments received from the SEC as well as follow-up comments and questions raised in discussions with the SEC but neither the Company nor SC has received confirmation from the SEC that it has completed its review.None.

SHUSA's unresolved comments, in general, relate to the accounting methodologies for the fair value option loan portfolios associated with our retail installment contracts ("RICs") and auto loans portfolio, the ACL associated with our retail installment contracts and auto loan portfolio, executive compensation, and certain loan credit quality disclosures. In addition, SC's unresolved comments include, but are not limited to, estimating SC's credit loss allowance and certain TDR disclosures.

~~Table of Contents~~

ITEM 2 - PROPERTIES

As of December 31, ~~2015,~~2018, the Company utilized ~~771~~787 buildings that occupy a total of ~~6.5~~6.3 million square feet, including ~~212~~196 owned properties with ~~1.6~~1.5 million square feet, ~~434~~469 leased properties with ~~3.1~~3.4 million square feet, and ~~125 sale and leaseback~~122 sale-and-leaseback properties with ~~1.7~~1.5 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. SC's corporate headquarters are located at 1601 Elm Street, Dallas, Texas. This location is leased by SC.

~~Nine~~Eleven major buildings serve as the headquarters or house significant operational and administrative functions, and are ~~identified below:~~: Operations Center - 2 Morrissey Boulevard, Dorchester, ~~Massachusetts - Leased,~~Massachusetts-Leased; Call Center and Operations and Loan Processing ~~Center - Santander Way,~~Center-Santander Way; 95 Amaral Street, Riverside, Rhode ~~Island - Leased,~~Island-Leased; SHUSA/SBNA Administrative ~~Offices - 75~~Offices-75 State Street, Boston, ~~Massachusetts - Leased, SBNA Commercial Bank Administrative Offices - 28 State Street, Boston, Massachusetts - Leased,~~Massachusetts-Leased; Call Center and Operations and Loan Processing ~~Center - 450~~Center-450 Penn Street, ~~Reading, Pennsylvania - Leased,~~Reading; Pennsylvania-Leased; Loan Processing ~~Center - 601~~Center-601 Penn ~~Street,~~Street; Reading, ~~Pennsylvania - Owned,~~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 - ~~1130 Berkshire Boulevard, Wyomissing, Pennsylvania~~San Juan, Puerto Rico-Leased; Computer Data Center - ~~Owned,~~Hato Rey, Puerto Rico-Leased; SAM Administrative ~~Offices and Branch - 446 Main Street, Worcester, Massachusetts - Leased,~~Offices-Guaynabo Puerto Rico-leased; and SC Administrative ~~Offices - 1601~~Offices-1601 Elm Street, Dallas, ~~Texas - Leased.~~Texas-Leased.

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The majority of these ~~nine~~eleven properties of the Company identified above are utilized for general corporate purposes. The remaining ~~762~~776 properties consist primarily of bank branches and lending offices. Of the total number of buildings, ~~and square feet, 675 buildings and 2.8 million square feet are~~the Bank has 627 retail branches, ~~of the Bank.~~and BSPR has 27 retail branches.

For additional information regarding the Company's properties refer to Note 76 - "Premises and Equipment" and Note 20 - "Commitments, Contingencies and Guarantees" in the Notes to Consolidated Financial Statements in Item 8 of this Report.

ITEM 3 - LEGAL PROCEEDINGS

~~Reference should be made~~Refer to Note 1615 to the Consolidated Financial Statements for disclosure regarding the lawsuit filed by SHUSA against the Internal Revenue Service ~~("IRS"~~(“IRS”) and Note 20 to the Consolidated Financial Statements for SHUSA’s litigation ~~disclosure,~~disclosures, which are incorporated herein by reference.

ITEM 4 - MINE SAFETY DISCLOSURES

None.

~~Table of Contents~~

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, 2015,~~February 28, 2019, 530,391,043 shares of common stock were outstanding. There were no issuances of common stock during ~~2015.~~2018, 2017, or 2016.

During the year ended, December 31, 2018 and 2017, the Company declared and paid cash dividends of $410.0 million and $10.0 million, respectively, to its shareholder. The Company did not pay any cash dividends on its common stock in ~~2015 or 2014. Refer to Item 1- Business for discussion of regulatory restrictions on the payment of dividends.~~2016.

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 ~~(As Restated)~~

SELECTED FINANCIAL DATA
FOR THE YEAR ENDED DECEMBER 31,
(Dollars in thousands)
2015⁽¹⁾

2014⁽¹⁾
2013
2012⁽¹²⁾

2011 ⁽¹²⁾
Balance Sheet Data
(As Restated) ⁽¹¹⁾

(As Restated) ⁽¹¹⁾

(As Restated) ⁽¹¹⁾

(As Restated) ⁽¹¹⁾

Total assets⁽²⁾
$127,571,282 $118,820,880 $77,184,717 $85,794,560 $80,565,199
Loans held for investment, net of allowance 76,213,081 74,293,865 49,094,360 51,382,462 50,223,888
Loans held-for-sale at fair value 3,183,282 260,252 128,949 843,442 352,471
Total investments 21,875,754 17,559,005 12,466,635 19,737,743 16,133,946
Total deposits and other customer accounts 56,114,232 52,474,007 49,521,406 50,790,038 47,797,515
Borrowings and other debt obligations⁽³⁾
49,086,103 39,679,382 12,355,586 19,259,311 18,278,433
Total liabilities 107,989,507 96,093,424 63,607,619 72,548,200 67,969,036
Total stockholder's equity⁽⁴⁾
19,581,775 22,727,456 13,577,098 13,246,360 12,596,163
Summary Statement of Operations
Total interest income $7,792,606 $6,971,856 $2,295,891 $2,547,881 $5,253,013
Total interest expense 1,204,325 1,054,723 782,120 873,758 1,388,199
Net interest income 6,588,281 5,917,133 1,513,771 1,674,123 3,864,814
Provision for credit losses⁽⁵⁾
4,012,956 2,413,243 46,850 385,780 1,319,951
Net interest income after provision for credit losses 2,575,325 3,503,890 1,466,921 1,288,343 2,544,863
Total non-interest income⁽⁶⁾
2,524,755 4,679,906 1,099,417 1,139,596 1,981,823
Total general and administrative expenses⁽⁷⁾
4,277,290 3,329,602 1,689,524 1,481,248 1,842,224
Total other expenses⁽⁸⁾
4,632,129 343,776 137,538 484,884 517,937
Income/(loss) before income taxes (3,809,339) 4,510,418 739,276 461,807 2,166,525
Income tax provision/(benefit)⁽⁹⁾
(675,238) 1,610,958 83,416 (103,786) 908,279
Net (loss) / income including noncontrolling interest $(3,134,101) $2,899,460 $655,860 $565,593 $1,258,246
Selected Financial Ratios
Return on average assets⁽¹⁰⁾
(2.49 )% 2.67 % 0.82 % 0.68 % 1.37 %
Return on average equity⁽¹⁰⁾
(13.50 )% 13.65 % 4.84 % 4.33 % 10.53 %
Average equity to average
assets⁽¹⁰⁾
18.45 % 19.57 % 16.96 % 15.75 % 12.97 %
Efficiency ratio⁽¹⁰⁾
97.77 % 34.66 % 69.92 % 69.88 % 40.37 %

~~Certain prior period amounts have been reclassified to conform with the current period presentation, which we believe is more meaningful to readers of our consolidated financial statements.~~



	SELECTED FINANCIAL DATA FOR THE YEAR ENDED DECEMBER 31,
(Dollars in thousands)	2018 ⁽¹⁾			2017 ⁽¹⁾			2016⁽¹⁾			2015			2014
Balance Sheet Data
Total assets	$	135,634,285		$	128,274,525		$	138,360,290		$	141,106,832		$	132,839,460
Loans HFI, net of allowance	83,148,738			76,795,794			82,005,321			83,779,641			81,961,652
Loans held-for-sale	1,283,278			2,522,486			2,586,308			3,190,067			294,261
Total investments ⁽²⁾	15,189,024			16,871,855			19,415,330			22,768,783			18,083,235
Total deposits and other customer accounts	61,511,380			60,831,103			67,240,690			65,583,428			62,148,002
Borrowings and other debt obligations ⁽²⁾⁽³⁾	44,953,784			39,003,313			43,524,445			49,828,582			40,381,582
Total liabilities	111,787,053			104,583,693			115,981,532			119,259,732			107,919,751
Total stockholder's equity ⁽⁴⁾	23,847,232			23,690,832			22,378,758			21,847,100			24,919,709
Summary Statement of Operations
Total interest income	$	8,069,053		$	7,876,079		$	7,989,751		$	8,137,616		$	7,330,742
Total interest expense	1,724,203			1,452,129			1,425,059			1,236,210			1,087,642
Net interest income	6,344,850			6,423,950			6,564,692			6,901,406			6,243,100
Provision for credit losses ⁽⁵⁾	2,339,898			2,759,944			2,979,725			4,079,743			2,459,998
Net interest income after provision for credit losses	4,004,952			3,664,006			3,584,967			2,821,663			3,783,102
Total non-interest income ⁽⁶⁾	3,244,308			2,901,253			2,755,705			2,905,035			5,059,462
Total general, administrative and other expenses⁽⁷⁾	5,832,325			5,764,324			5,386,194			9,381,892			4,135,346
Income/(loss) before income taxes	1,416,935			800,935			954,478			(3,655,194		)	4,707,218
Income tax provision/(benefit) ⁽⁸⁾	425,900			(157,040		)	313,715			(599,758		)	1,673,123
Net income / (loss) ⁽¹⁰⁾	$	991,035		$	957,975		$	640,763		$	(3,055,436	)	$	3,034,095
Selected Financial Ratios ⁽⁹⁾
Return on average assets	0.76		%	0.71		%	0.45		%	(2.18		)%	2.46		%
Return on average equity	4.11		%	4.10		%	2.88		%	(11.98		)%	12.95		%
Average equity to average assets	18.37		%	17.39		%	15.67		%	18.15		%	18.99		%
Efficiency ratio	60.82		%	61.81		%	57.79		%	95.67		%	36.59		%

(1)

~~Financial results for the years ended 2015~~On July 1, 2016, ownership of several Santander subsidiaries, including Santander BanCorp, BSI, SIS and ~~2014 include the impact of the Change in Control. Prior~~SSLLC, were transferred to the Change in Control, the Company accounted for its investment in SC through an equity method investment. 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 SCCompany. As these entities were and are solely owned and controlled by ~~the Company~~Santander prior to and after July 1, 2016, in accordance with Accounting Standards Codification ("ASC") ~~No.~~ 805, ~~- Business Combinations (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, Inc. (“SFS”), a finance company located in Puerto Rico, was transferred to the Company. On July 2, 2018, an additional Santander subsidiary, Santander Asset Management LLC ("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. Refer to Note 1 ~~of the Notes to Consolidated Financial Statements~~ for additional information.

(2)

The ~~five-year trend~~decreases in ~~total assets reflects~~Total investments and corresponding decreases in Borrowings and other debt obligations from 2016 to 2017 and 2015 to 2016 were primarily driven by the ~~sale~~use of proceeds from the sales of investment securities ~~used~~ to repurchase and pay ~~down borrowed funds and an increase in the overall loan portfolio, including increases related to the Change in Control.~~off its outstanding borrowings.

(3)

The ~~decrease~~increase in ~~borrowings~~Borrowings and other debt obligations from ~~2012~~2014 to ~~2013 reflects the Company's use of portions~~2015 was primarily a result of the ~~proceeds from~~Company funding the ~~sale of investment securities to pay off borrowed funds. The Change in Control was the primary cause~~growth of the ~~increase in borrowings~~loan portfolio and ~~other debt obligations in 2014.~~operating lease portfolio.


(4)	~~Refer to the Statements of Changes~~The decrease in Stockholder's Equity ~~for details~~from 2014 to 2015 reflects the goodwill impairment recorded of ~~the increase from 2013 to 2014.~~$4.5 billion in 2015.

~~Table of Contents~~

(5)

~~In 2011, 2012,~~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 ~~2013,~~lower provision on the ~~Company experienced favorable credit quality trends~~originated RIC portfolio and ~~declining provisions~~a lower provision on the commercial loan portfolio. The decrease from 2015 to 2016 was primarily due ~~in large part,~~to significantly lower provision on the purchased RIC portfolio, accompanied by slightly lower net charge-offs across the total loan portfolio. The increase from 2014 to 2015, was primarily due to the ~~modest economic recovery in~~build up of the ~~U.S.~~reserve on the growing originated RIC portfolio and ~~the Company’s footprint. In 2014, the Change in Control resulted in an increase of $2.4 billion in the provision for credit losses.~~increased net charge-offs.


(6)	The increase in Non-interest income from 2017 to 2018 is primarily attributed to an increase in lease income corresponding to the growth of the operating lease portfolio. Non-interest income in 2014 includes a one-time $2.4 billion gain on acquisition, which iswas related to the Change in Control. ~~Refer to the MD&A for further discussion.~~

(7)

~~Increases~~General, administrative, and other expenses increased annually between 2016 and 2018, primarily due to growth in ~~general and administrative expenses from 2013 to 2014 are attributable to the Change in Control. Additional increases through 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~~benefits and lease expense, driven by corresponding growth of the ~~Change in Control, preparation for and implementation of new capital requirements, and other regulatory and governance related-projects. Refer to the MD&A for further discussion.~~operating lease portfolio. In 2015, this line included a $4.5 billion goodwill impairment charge on SC.


(8)	Other expenses increased in 2015 due to an impairment charge to goodwill in the amount of $4.5 billion on the Company's consumer finance subsidiary. Other expenses in 2014 included a one-time impairment charge of $64.5 million related to long-lived assets. This also includes debt extinguishment charges of $127.1 million, $6.9 million and $38.7 million in 2014, 2013, and 2012, respectively.

~~(9)~~

Refer to Note 1615 of the Notes to Consolidated Financial Statements for additional ~~information.~~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 iswas 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. The tax benefit in 2012 is mainly due to new investments in 2012 that qualify for federal tax credits. The income tax provision in 2011 includes the tax effect of the gain related to the SC Transaction of $381.6 million, the tax effect related to the accrual for the Trust PIERS litigation, and an increase to the deferred tax valuation allowance.


~~(10)~~(9)	For ~~further information on~~the calculation components of these ratios, see the Non-GAAP Financial Measures section of the MD&A.


~~(11)~~(10)	~~Refer~~Includes net income/(loss) attributable to ~~Note 25~~non-controlling interest ("NCI") of $283.6 million, $405.6 million, $277.9 million, $(1.7) billion, and $464.6 million for the ~~Consolidated Financial Statements for additional information.~~

~~(12)~~

~~The cumulative effect of the errors described in Note 25 on the years-ended December 31, 2013, 2012 and 2011 was $11.3 million and has been recorded in the year~~years ended December 31, ~~2013. In addition, the Company had incorrectly charged-off loans held for investment of $7.0 million during 2012 which has been corrected~~2018, 2017, 2016, 2015 and ~~restated in the 2012 financial data.~~2014, respectively.

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~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~Table of Contents


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

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")

EXECUTIVE SUMMARY

Santander Holdings USA, Inc. ("SHUSA" or the "Company") is the parent holding company of Santander Bank, National Association, (the "Bank" or "SBNA"), a national banking association, and owns approximately ~~59%~~69.9% (as of February 21, 2019) of Santander Consumer USA Holdings Inc. (together with its subsidiaries, "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"). SHUSA is also the parent company of Santander BanCorp (together with its subsidiaries, “Santander BanCorp”), a holding company headquartered in Puerto Rico which offers a full range of financial services through its wholly-owned banking subsidiary, Banco Santander Puerto Rico ("BSPR"); Santander Securities LLC (“SSLLC”), a broker-dealer headquartered in Boston; Banco Santander International (“BSI”), a financial services company located in Miami that offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; Santander Investment Securities Inc. (“SIS”), a registered broker-dealer located in New York providing services in investment banking, institutional sales, trading and offering research reports of Latin American and European equity and fixed-income securities; and several other subsidiaries. SSLLC, SIS and another SHUSA subsidiary, SAM, are registered investment advisers with the Securities and Exchange Commission (the “SEC”).

~~The Bank, previously named Sovereign Bank, National Association, changed its name to Santander Bank, National Association on October 17, 2013.~~ The Bank's principal markets are in the Mid-Atlantic and Northeastern United States. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios. The Bank earns interest income on its loan and investment portfolios. In addition, the Bank generates non-interest income from a number of sources, including deposit and loan services, sales of loans and investment securities, capital markets products and bank-owned life insurance ("BOLI"). The principal non-interest expenses include employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. The ~~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 is a full-service, technology driven consumer finance company focused on vehicle finance and third-party servicing. SC's primary business is the indirect origination and securitization of retail installment contracts ("RICs"), principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to subprime retail consumers. SC also offers a full spectrum of auto financing products and services to Chrysler 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 the Fiat Chrysler Automobiles US LLC ("FCA"), formerly Chrysler Group LLC signed by SC in 2013 (the "Chrysler Agreement"). These products and services include consumer RICs and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. Under the terms of the Chrysler Agreement, certain standards were agreed to, including SC meeting specified escalating penetration rates for the first five years, and FCA treating SC in a manner consistent with comparable original equipment manufacturers ("OEMs") treatment of their captive providers, primarily in regard to sales support. The failure of either party to meet their respective obligations under the agreement could resultFurther information about SC’s business is provided below in the agreement being terminated. While SC has not achieved the targeted penetration rates to date, Chrysler Capital continues to be a focal point of its strategy, and SC continues to work with FCA to improve penetration rates and remains confident about the ongoing success of the Chrysler Agreement.“Chrysler Capital” section.

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

~~On January 22, 2014,~~SC has dedicated financing facilities in place for its Chrysler Capital business. SC periodically sells consumer RICs through these flow agreements and, when market conditions are favorable, it accesses the asset-backed securities ("ABS") market through securitizations of consumer RICs. SC also periodically enters into bulk sales of consumer vehicle leases with a third party. SC typically retains servicing of loans and leases sold or securitized, and may also retain some residual risk in sales of leases. SC has also entered into an agreement with a third party whereby SC will periodically sell charged-off loans.

Chrysler Capital

In conjunction with a ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC ("FCA") that became effective May 1, 2013 (the "Chrysler Agreement"), SC offers a full spectrum of auto financing products and services to FCA customers and dealers under the Chrysler Capital brand ("Chrysler Capital"), These products and services include consumer RICs and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. RICs and vehicle leases entered into with FCA customers under the Chrysler Agreement represent a significant concentration of those portfolios and there is a risk that the Chrysler Agreement could be terminated prior to its expiration date. Termination of the Chrysler Agreement could result in a decrease in the amount of new RICs and vehicle leases entered into with FCA customers as well as dealer loans. Refer to Note 20 for additional details.

Under the terms of the Chrysler Agreement, certain standards were agreed to, including SC meeting specified escalating penetration rates for the first five years, subject to 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 respective obligations under the Chrysler agreement, including SC's ~~registration statement~~failure to meet target penetration rates, could result in the agreement being terminated. SC did not meet these penetration rates. Chrysler Capital continues to be a focal point of the Company's and SC's strategy,

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

and SC continues to work with FCA to improve penetration rates. SC's average penetration rate for the year ended December 31, 2018 was 30%, an ~~initial public~~increase from 18% in 2017.

In June 2018, SC announced that it was in exploratory discussions with FCA regarding the future of FCA's U.S. finance operations. FCA has announced its intention to establish a captive U.S. auto finance unit and indicated that acquiring Chrysler Capital is one option it would consider. Under the Chrysler Agreement, FCA has the option to acquire, for fair market value, an equity participation in the business offering ~~("IPO")~~and providing financial services contemplated by the Chrysler Agreement. In addition, in July 2018 FCA and the Company entered into a tolling agreement pursuant to which the parties agreed to preserve their respective rights, claims and defenses under the Chrysler Agreement as they existed on April 30, 2018 and to refrain from delivering a written notice to the other party under the Chrysler Agreement until December 31, 2018.

FCA has not delivered a notice to exercise its equity option, and the Company remains committed to the success of ~~shares~~the Chrysler Capital business. Although the likelihood, timing and structure of any such transaction, and the likelihood that the Chrysler Agreement will terminate, cannot be reasonably determined, termination of the Chrysler Agreement, or a significant change in the business relationship between SC and FCA, could materially adversely affect SC's and SHUSA's operations, including the origination of receivables through the Chrysler Capital portion of SC's business and the servicing of Chrysler Capital receivables. Moreover, there can be no assurance that SC could successfully or timely implement any such transaction without significant disruption of its ~~common stock (the “SC Common Stock”), was declared effective by the Securities and Exchange Commission (the "SEC"). Prior~~operations or restructuring, or without incurring additional liabilities, which could involve significant expense to ~~the IPO, the Company owned approximately 65% of SC Common Stock.~~

~~On January 28, 2014, the IPO closed, and certain stockholders of SC, including~~ the Company and ~~Sponsor Auto Finance Holdings Series LP ("Sponsor Holdings"), sold 85,242,042 shares~~have a adverse effect on its business, financial condition and results of ~~SC Common Stock. Immediately following the IPO,~~operations.

As of December 31, 2018, the Company ~~owned approximately 61%~~had a $65.0 million Chrysler relationship intangible. The intangible is related to the upfront fee paid to Chrysler in May 2013. A significant change to the Chrysler Agreement could potentially be considered a triggering event requiring re-evaluation of whether or not the remaining unamortized balance of the ~~shares~~upfront fee should be deemed impaired.

In addition, the Company has $1.0 billion of goodwill allocated to the SC ~~Common Stock. In connection with these sales, certain board representation, governance and other rights granted~~reporting unit. A significant change to ~~Dundon DFS, LLC ("DDFS") and Sponsor Holdings were terminated as~~the Chrysler Agreement could potentially be considered a ~~result~~triggering event requiring an interim goodwill impairment analysis. The Company will continue monitoring changes to the Chrysler Agreement that could lead to a potential impairment indicator in 2018. It is reasonably possible that impairment of the ~~reduction in DDFS and Sponsor Holdings’ collective ownership of shares of~~entire goodwill associated with the SC ~~Common Stock below certain ownership thresholds, causing~~reporting unit could be recognized based on future changes to the ~~first quarter 2014 change in control and consolidation of SC (the "Change in Control").~~Chrysler Agreement.

~~Prior to the Change~~SC has dedicated financing facilities in ~~Control, the Company accounted~~place for its ~~investment~~Chrysler Capital business. During the year ended December 31, 2018, SC originated more than $7.9 billion in ~~SC under~~Chrysler Capital loans, which represented 46% of its total RIC originations (unpaid principal balance ("UPB")), with an approximately even share between prime and non-prime, as well as more than $9.7 billion in Chrysler Capital leases. Since its May 2013 launch, Chrysler Capital has originated more than $53.1 billion in retail loans and $33.3 billion in leases, and facilitated the ~~equity method. Following~~origination of $3.0 billion (excluding the ~~Change~~SBNA RIC origination program) in ~~Control,~~leases and dealer loans for the ~~Company consolidated the financial results~~Bank. As of ~~SC in the Company’s Consolidated Financial Statements. The Company’s consolidation~~December 31, 2018, SC's carrying value of ~~SC is treated as an acquisition~~its auto RIC portfolio consisted of SC by the Company in accordance with Accounting Standards Codification ("ASC") 805 - Business Combinations (ASC 805). SC Common Stock is now listed for trading on the New York Stock Exchange (the "NYSE") under the trading symbol "SC".$9.0 billion of Chrysler Capital loans, which represents 36% of SC's carrying value of its auto RIC portfolio.

41SC also originates vehicle loans through a web-based direct lending program, purchases vehicle RICs from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, SC has several relationships through which it has provided other consumer finance products.

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

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

ECONOMIC AND BUSINESS ENVIRONMENT

Overview

During ~~2015,~~the fourth quarter of 2018, unemployment ~~improved while market results declined~~continued to decrease and the preliminary gross domestic product ~~(GDP)~~("GDP") growth rate ~~came in under expectations in most quarters, marking~~slowed slightly from the prior quarter. Year to date market results ended down overall, ~~mixed results for~~primarily driven by third quarter volatility which continued into the ~~U.S. economy.~~fourth quarter.

The unemployment rate at December 31, ~~2015 improved~~2018 was down to ~~5.0% from 5.1%~~3.9% compared to 4.0% at September 30, ~~2015~~2018, and ~~5.6%~~was lower compared to 4.1% one year ago. According to the ~~U.S~~U.S. Bureau of Labor Statistics, ~~this job growth is primarily attributable to the~~employment rose in professional and business services, ~~retail trade,~~healthcare, transportation, and ~~health care sectors.~~warehousing.

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

The Bureau of Economic Analysis ~~advance~~("BEA") initial estimate indicates that real GDP grew at an annualized rate of ~~0.7% during~~2.6% for the fourth quarter of ~~2015. This is down from a rate of 2.0% in~~2018, compared to 3.4% for the third quarter of ~~2015. The decrease during the quarter is primarily attributed~~2018. Growth continued to ~~a decrease~~be driven by increases in personal consumption expenditures, nonresidential fixed investment, exports, and federal government spending. This was offset by decreases to spending in residential fixed investment and ~~federal government spending, but was offset by increased household spending,~~ state and local government, ~~spending, and residential fixed investment.~~as well as increased imports.

Markets improved in the fourth quarter of 2015, but were, in general, down for the year in total resulting from a decline that began in the second quarter, sparked by the Greek debt crisis and by short-term market trading disruptions in China and the U.S. The totalMarket year-to-date returns for the following indices based on closing prices at December 31, ~~2015~~2018 were:



		December 31, ~~2015~~2018
Dow Jones Industrial Average		~~(2.2)~~(5.6)%
Standard & Poor's ("S&P&P") 500		~~(0.7)~~(6.2)%
NASDAQ Composite		~~5.7%~~(3.9)%

At its December ~~2015~~2018 meeting, the Federal Open Market Committee ~~(the “FOMC”) announced an increase~~decided to raise the federal funds rate target to ~~0.25%-0.5%. The~~2.25%-2.50%, reflecting that the labor market has continued to strengthen and that economic activity has continued to expand at a solid pace. Overall inflation ~~rate~~ remains ~~just under~~below the targeted rate of 2.0%. ~~This long anticipated increase did result in some impacts on the stock market and a small boost in interest rates.~~

The ~~10-year~~ten-year Treasury bond rate at December 31, ~~2015~~2018 was ~~2.27%~~2.69%, up from ~~2.17%~~2.40% at December 31, ~~2014. Over the past year, the 10-year Treasury bond rate increased 10 basis points.~~2017. Within the industry, changes within this metric isare often considered to correspond to ~~15-~~changes in 15-year and 30-year mortgage rates. ~~According to statistics published by~~

For the ~~Mortgage Bankers Association,~~third quarter of 2018, mortgage originations ~~decreased 0.26% from September 30, 2015 to December 31, 2015 and~~ increased ~~from December 31, 2014 to December 31, 2015 by 22.2%. Refinancing activity increased by 28.6% from September 30, 2015, and 35.3% from December 31, 2014 to December 31, 2015, respectively.~~

~~Regarding commercial activity, the most recent indicators show that commercial real estate and multifamily originations have decreased compared with~~approximately 1.1% over the prior quarter and 6.7% year-over-year. Mortgage originations for home purchases increased ~~compared with~~3.6% quarter-over-quarter while they increased 3.4% from the ~~prior~~third quarter last year. ~~In addition,~~Mortgage originations from refinancing activity decreased 5.9% from the second quarter of 2018 and 28.5% from the third quarter of last year. These rates are representative of U.S. national average mortgage origination activity.

The ratio of ~~NPL~~nonperforming loans ("NPLs") to total gross loans ~~has declined for the past four consecutive years~~ for U.S. banks ~~including a decreasing trend~~declined for six consecutive years, to just under 1.5% in ~~2015,~~2015. NPL trends have remained relatively flat since that time. NPLs for U.S. commercial banks were approximately 0.98% of loans using the latest available data, which ~~confirms continuing improvement in credit quality and downward trend in general allowance reserves.~~was as of the third quarter of 2018, compared to 1.17% for the prior quarter.

Changing market conditions are considered a significant risk factor to the Company. The ~~continued low~~ interest rate environment ~~presents~~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.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~European Exposure~~

Concerns about the European Union’s sovereign debt and the future of the euro have caused uncertainty for financial markets globally. Other than borrowing agreements and related party transactions with Banco Santander, S.A. ("Santander"), as further described in the Financial Condition section of the MD&A and Notes to the Consolidated Financial Statements, the Company's exposure to European countries, at book value as of December 31, 2015 and December 31, 2014 includes the following:

December 31, 2015
Country Covered Bonds Financial Institution Bonds Non-Financial Institutions Bonds Total
(in thousands)
France $ —
$ 6,000
$ 4,964
$ 10,964
Germany —
—
137,904
137,904
Great Britain —
80,106
255,018
335,124
Italy —
—
56,670
56,670
Netherlands —
45,966
—
45,966
Norway —
—
7,996
7,996
Portugal —
—
40,749
40,749
Spain 93,325
6,999
44,231
144,555
Sweden —
51,950
—
51,950
Switzerland —
4,998
—
4,998
$ 93,325
$ 196,019
$ 547,532
$ 836,876

~~The fair value of the Company's European exposure at December 31, 2015 was $837.9 million.~~

December 31, 2014
Country Covered Bonds Financial Institution Bonds Non-Financial Institutions Bonds Total
(in thousands)
France $ —
$ 143,475
$ 4,953
$ 148,428
Germany —
—
139,233
139,233
Great Britain —
119,048
295,436
414,484
Italy —
48,765
57,803
106,568
Netherlands —
49,886
—
49,886
Norway —
—
7,994
7,994
Portugal —
—
41,081
41,081
Spain 93,938
78,098
61,355
233,391
Sweden —
77,847
—
77,847
Switzerland —
14,970
—
14,970
$ 93,938
$ 532,089
$ 607,855
$ 1,233,882

~~The fair value of the Company's European exposure at December 31, 2014 was $1.3 billion.~~

These investments are included within corporate debt securities discussed in Note 4 to the Consolidated Financial Statements. The Company's total exposure to European entities decreased $397.0 million, or 32.2%, from December 31, 2014 to December 31, 2015.

~~As of December 31, 2015, the Company had approximately $305.1 million of loans that were denominated in a currency other than the U.S. dollar.~~

Overall, gross exposure to the foregoing countries was approximately 0.9% of the Company's total assets as of December 31, 2015, and no more than 1% was to any given country or third party. The Company currently does not have credit protection on any of these exposures, nor does it provide lending services in Europe. The Company transacts with various European banks as counterparties to interest rate swaps and foreign currency transactions for its hedging and customer-related activities; however, these derivatives transactions are generally subject to master netting and collateral support agreements, which significantly limit the Company’s exposure to loss.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

Management conducts periodic stress tests of the Company's significant country risk exposures, analyzing the direct and indirect impacts on the risk of loss from various macroeconomic and capital markets scenarios. The Company does not have significant exposure to foreign country risks because its foreign portfolio is relatively small. However, the Company has identified exposure to increased loss from U.S. borrowers associated with the potential indirect impact of a European downturn on the U.S. economy. The Company mitigates these potential impacts through its normal risk management processes, which includes active monitoring and, if necessary, the application of loss mitigation strategies.

Credit Rating Actions

The following table presents Moody's Investors Service, Inc. (“Moody’s”), S&P and ~~Standard & Poor's ("S&P")~~Fitch credit ratings for the Bank, and BSPR, SHUSA, Santander, and the Kingdom of Spain, as of December 31, ~~2015:~~2018:

BANK

BSPR⁽¹⁾

SHUSA

Moody's

S&P

Fitch ⁽²⁾

Moody's

S&P

Fitch⁽²⁾

Moody's

S&P

Fitch

Long-Term

Baa1

A-

BBB+

Baa1

N/A

BBB+

Baa3

BBB+

Short-Term

P-1

A-2

F-2

P-1/P-2

N/A

F-2

n/a

A-2

F-2

Outlook

Stable

N/A

Stable

SANTANDER

SPAIN

~~Moody's~~

~~S&P~~

Moody's

S&P

~~Moody's~~

~~S&P~~Fitch

Moody's

S&P

Fitch

~~LT Senior Debt~~

~~Baa2~~

~~BBB+~~Long-Term

~~Baa2~~

~~BBB+~~A2

A3Baa1

A-

~~Baa2~~

~~BBB+~~A-

~~ST Deposits~~Short-Term

P-1

~~A-2~~A-1

~~n/a~~

~~A-2~~F-1

P-2

A-2

~~P-2~~

~~A-2~~F-1

Outlook

Stable

~~Negative~~

Stable

~~Positive~~

~~Stable~~

Positive

Stable

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

~~Subsequent to the year end, on February 19, 2016, Moody's downgraded the outlook of the Kingdom of Spain's from positive to stable. In addition, on February 22, 2016, Moody's affirmed~~(2) Short Term Debt and ~~changed the outlook on the A3 long term and senior unsecured debt rating of Santander to stable from positive.~~Short Term Deposit Ratings are both F-2.

SHUSA funds its operations independently of the other entities owned by Santander, and believes its business is not necessarily closely related to the business or outlook of other entities owned by Santander. Future changes in the credit ratings of its parent, Santander, or the Kingdom of Spain could impact SHUSA's or its subsidiaries' credit ratings, and any other change in the condition of Santander could affect SHUSA.

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

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.

During the fourth quarter of 2018, Puerto Rico’s economic conditions continued to improve, assisted by several proceedings under the PROMESA to restructure its outstanding obligations and those of certain of its instrumentalities. As part of the reconstruction process post-Hurricane Irma and Hurricane Maria, Puerto Rico is expected to receive $82 billion in federal relief fund and insurance payouts during the next 10-15 years. Access to this funding is instrumental to restore economic growth in the short term while the government works toward the implementation of structural reform to foster sustainable economic growth in the long term. So far, the partial disbursement of the federal relief funding and insurance is having a positive effect on the economy. The Economic Development Bank Economic Activity Index shows that the island’s economic activity increased 1.5% during 2018 when compared to 2017. The unemployment rate of 8.3% in December 2018 was one of the lowest in decades, while 6,700 jobs were created year-over-year. Other indicators are improving as well: the sale of housing units rose 23% in 2018 versus 2017, the sale of new automobiles continued increasing and tax revenue collections rose by $611.7 million to $3.5 billion from the second half of 2018 versus the same period in 2017.

On November 29, 2018, the Puerto Rico Fiscal Agency and Financial Advisory Authority and the Government Development Bank (“GDB”) announced the closing of the GDB restructuring process under Title VI of PROMESA, resulting in the first closure of a public debt restructuring process. During 2018, the U.S. District Court approved the adjustment plan for the Puerto Rico Urgent Interest Fund Corporation's debt restructuring process under Title III of PROMESA. The plan, already approved by the FOB and Puerto Rico’s legislature, contemplates the payment of $400 million annually in debt service in 2019 and up to $1,000 million annually in 2041.

On December 10, 2018, the Governor of Puerto Rico signed Act 257-2018 PR Tax Reform which includes, among the most significant changes to the Puerto Rico Internal Revenue Code, (i) a decrease in the corporate tax rate from 39% to 37.5, effective for taxable years beginning after December 31, 2018, (ii) a decrease from $500 to $25 on the amount paid or credited as interest subject to withholding, (iii) an increase to 90% of the limit on the deduction of net operating losses, (iv) an increase in the withholding rate on payments on account of services rendered from 7% to 10%, and (v) exemption of business-to-business retention to entities with business volume over $200,000.

Although as of the date hereof the FOB has sought to use the restructuring authority provided by PROMESA, limited to certain Commonwealth instrumentalities, the FOB may use the restructuring authority of Title III or Title VI of PROMESA for others, including its municipalities, in the future. Deterioration of the Commonwealth’s fiscal and economic situation, including any negative ratings implications, could further adversely affect the value of our Puerto Rico public sector exposure.

Although BSPR has a diversified loan portfolio, it continues with efforts to de-risk the portfolio, with credit risk indicators improving significantly year-over-year and surpassing budgeted targets. The lending strategy with respect to the public sector has been to enter into commitments with a short-term maturity, payment priority, and/or strong guarantees as well as with adequate profitability. Such commitments to the public sector amounted approximately to $265 million ($57 million of agencies and public corporations and $208 million of municipalities) and $293 million ($74 million of agencies and public corporations and $219 million of municipalities) as of December 31, 2018 and 2017, respectively, which represent 16% of BSPR's commercial loan portfolio for both periods. A substantial portion of BSPR’s credit exposure to the Government of Puerto Rico is either collateralized loans or obligations that have a specific source of income or revenues identified for their repayment, fixed income investment or real estate. For agencies and public corporations, guarantees are mainly mortgages, securities and standby letter of credits from low-risk multinational entities. In the case of municipalities, the main sources of income are from the Municipal Revenue Collection Center for property taxes and from the Secretary of the Treasury for sales and use taxes. In most cases, these are “general obligations” of a municipality, to which the municipality has pledged its good faith, credit and unlimited taxing power, or “special obligations” of a municipality, to which the applicable municipality has pledged other revenues. As of December 31, 2018 and 2017, $25 million, or 9%, and $40 million, or 13%, respectively, of commercial loans granted to the public sector mature in one year or less.

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

Impact from Hurricanes

Our footprint was impacted by three significant hurricanes during 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. SC, headquartered in Dallas, Texas, BSI, headquartered in Miami, Florida, and Santander BanCorp, BSPR and SSLLC subsidiaries in Puerto Rico were most directly affected by these hurricanes. In Puerto Rico, there was significant damage to the infrastructure and the power grid on the entire island, which resulted in extended delays in BSPR returning to normal operations.

The Company assessed the potential additional credit losses related to its consumer and commercial lending exposures in the greater Texas, Florida and Puerto Rico regions. As a result, the Company's allowance for loan and lease losses (“ALLL") had approximately $25.0 million of reserves specifically related to the hurricanes at December 31, 2018 compared to $110 million at December 31, 2017. Approximately $50.0 million of the decrease in the qualitative allowance related to the hurricanes has been offset by an increase in model and specific reserves to other portfolios requiring additional allowance, including the municipality, commercial, and residential loan portfolios in Puerto Rico. The remaining hurricane reserve at December 31, 2018 is a specific reserve recorded for a commercial loan located in Puerto Rico.

See Note 20 to the Consolidated Financial Statement for a discussion of FINRA arbitration claims and class action litigation to which the Company and its affiliates are subject as a result of the sale of Puerto Rico bonds and closed-end funds.

REGULATORY MATTERS

The activities of the Company and its subsidiaries, including the Bank and SC, are subject to regulation under various U.S. federal laws and regulatory agencies which impose regulations, supervise and conduct examinations, and may affect the operations and management of the Company and its ability to take certain actions, including making distributions to our parent and shareholders. The Company is regulated on a consolidated basis by the ~~Bank Holding Company ("BHC") Act,~~Board of Governors of the Federal Reserve ~~Act, the National Bank Act,~~System (the “Federal Reserve”), including the Federal ~~Deposit Insurance Act~~Reserve Bank (the ~~"FDIA"~~"FRB")~~, the Dodd-Frank Act (the "DFA"), the Truth-in-Lending Act (which governs disclosures~~ of credit terms to consumer borrowers), the Truth-in-Savings Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act (which governs the provision of consumer information to credit reporting agenciesBoston, and the use of consumer information), the Fair Debt Collection Practices Act (which governs the manner in which consumer debts may be collected by collection agencies), the Home Mortgage Disclosure Act (which requires financial institutions to provide certain information about home mortgage and refinanced loans), the Service members Civil Relief Act (the "SCRA"), the Unfair and Deceptive Practices Act, Section 5 of the Federal Trade Commission Act (which prohibits unfair or deceptive acts or practices in or affecting commerce), the Real Estate Settlement Procedures Act, and the Electronic Funds Transfer Act (which governs automatic deposits to and withdrawals from deposit accounts and customers' rights and liabilities arising from the use of ATMs and other electronic banking services), as well as other federal and state laws.

~~As SC is a subsidiary of the Company, it is also subject to regulatory oversight from the FRB for BHC regulatory supervision purposes, as well as~~ the Consumer Financial Protection Bureau (the "CFPB"). The Company's banking and bank holding company subsidiaries are further supervised by the Federal Deposit Insurance Corporation (the "FDIC") and the Office of the Comptroller of the Currency (the “OCC”). As a subsidiary of the Company, SC is also subject to regulatory oversight by the Federal Reserve as well as the CFPB. Santander BanCorp and BSPR also are supervised by the Puerto Rico Office of the Commissioner of Financial Institutions.

Payment of Dividends

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

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

Foreign Banking Organizations ("FBOs")

In February 2014, the Federal Reserve issued the final rule implementing certain enhanced prudential standards (“EPS”) mandated by Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act ~~("DFA"~~(the “DFA")

~~On July 21,2010~~ (the “FBO Final Rule”). Under the ~~DFA, was enacted. The DFAinstituted major changes~~Final Rule, FBOs with over $50 billion of U.S. non-branch assets, including Santander, were required to consolidate U.S. subsidiary activities under an intermediate holding company (an “IHC"). In addition, the ~~banking~~FBO Final Rule required U.S. bank holding companies ("BHCs") and financial institutions regulatory regimes in light of the performance of and government intervention in the financial services sector during the financial crisis and includes a number of provisions designed to promote enhanced supervision and regulation of financial companies and financial markets. The DFA introduced a substantial number of reforms that reshape the structure of the regulation of the financial services industry. The enhanced regulation has and will continue to involve higher compliance costs and negatively affect the Company's revenue and earnings.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~More specifically, the DFA imposes enhanced prudential standards on BHCs~~FBOs with at least ~~$50.0~~$50 billion in total U.S. consolidated non-branch assets to be subject to EPS and heightened capital, liquidity, risk management, and stress testing requirements. Due to both its global and U.S. non-branch total consolidated asset size, Santander was subject to both of the above provisions of the FBO Final Rule. As a result of this rule, Santander has transferred substantially all of its U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. A phased-in approach is being used for the standards and requirements at both the FBO and the IHC. As a result of the phased-in approach, on July 1, 2017, Santander transferred ownership of Santander Financial Services, Inc. ("SFS") and on July 2, 2018, Santander transferred ownership of an additional entity, Santander Asset Management, LLC ("SAM") to the IHC. As a U.S. BHC with more than $50 billion in total consolidated assets, ~~(often referred to as “systemically important financial institutions” ), including~~ the Company and requires 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 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~~became subject to ~~annual stress tests by~~ the Federal Reserve, 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,EPS 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.~~

Under the Durbin Amendment to the DFA, in June 2011 the Federal Reserve issued the final rule implementing debit card interchange fee and routing regulation. The final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers, including the Bank, are “reasonable and proportional” 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.

In March 2013, the CFPB issued a bulletin recommending that indirect vehicle lenders, which include SCUSA, take steps to monitor and impose controls over vehicle dealer "mark-up" policies under which dealers impose higher interest rates on certain consumers, with the mark-up shared between the dealer and the lender. In accordance with SC's policy, dealers were allowed to mark-up interest rates by a maximum of 2.00%, but in October 2013 SC reduced the maximum compensation (participation from 2.00% (industry practice) to 1.75%). The Company believes this restriction removes the dealers' incentive to mark-up rates beyond 1.75%. The Company plans to continue to evaluate this policy for effectiveness and may make further changes to strengthen oversight of dealers and mark-up rates.

The CFPB is also conducting supervisory audits of large vehicle lenders and has indicated it intends to study and take action with respect to possible ECOA “disparate impact” credit discrimination in indirect vehicle finance. If the CFPB enters into a consent decree with one or more lenders on disparate impact claims, it could negatively impact the business of the affected lenders, and potentially the business of dealers and other lenders in the vehicle finance market. This impact on dealers and lenders could increase SCUSA's regulatory compliance requirements and associated costs. On July 23, 2014, an automotive finance industry publication reported on complaints related to automotive finance institutions filed with the CFPB over the first half of 2014 compared to the prior year. SCUSA believes that the rise in CFPB complaints for SCUSA over the last year is attributable to portfolio growth, including its entire serviced portfolio (on- and off-book) and consumer credit quality. Based on an internal analysis, SCUSA believes that it was at fault in less than 6% of its CFPB complaints. SCUSA logs and investigates all complaints, and tracks each complaint until it is resolved or otherwise settled.

On July 31, 2015, the CFPB notified SC that it had referred to the Department of Justice (the "DOJ") certain alleged violations by SC of 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. On September 25, 2015, the DOJ notified SC that it had initiated, based on the referral from the CFPB, an investigation under the ECOA of SC's pricing of automobile loans.

4539

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

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

Provisions of the DFA relating to the applicability of state consumer protection laws to national banks, including the Bank, became effective in July 2011. Questions may arise as to whether certain state consumer financial laws that were previously preempted by federal law are no longer preempted as a result of these new provisions. Depending on how such questions are resolved, the Bank may experience an increase in state-level regulation of its retail banking business and additional compliance obligations, which likely would impact revenue and costs. SC is already subject to such state-level regulation.Economic Growth Act

In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (the "Economic Growth Act") was signed into law. The ~~DFA and~~Economic Growth Act scales back certain other legislation and regulations impose various restrictions on compensation of certain executive officers. The Company's ability to attract and/or retain talented personnel may be adversely affected by these restrictions.

~~Other~~ requirements of the DFA, ~~include increases~~primarily benefiting banks with $10 billion or less in assets, but also reducing regulatory requirements and modifying the ~~amount~~enhanced supervision and EPS that may benefit certain mid-sized and larger BHCs and financial institutions. The Company applied the change during the fourth quarter of ~~deposit insurance assessments~~2018, which impacted highly volatile acquisition, development and construction ("HVADC") loans and resulted in an insignificant impact to RWA and the Bank must pay; changes to the nature and levels of fees charged to consumers, which are negatively affecting the Bank's income; banning banking organizations from engaging in proprietary trading and restricting their sponsorship of, or investing in, hedge funds and private equity funds, subject to limited exceptions; and increasing regulation of the derivatives markets through measures that broaden the derivative instruments subject to regulation and requiring clearing and exchange trading as well as imposing additional capital and margin requirements for derivatives market participants, which will increase the cost of conducting this business.risk-based ratios.

~~Volcker Rule~~Regulatory Capital Requirements

The Company implemented certain policies and procedures, training programs, record keeping, internal controls and other compliance requirements that are necessary to comply with the Volcker Rule before July 21, 2015. As required by the Volcker Rule, the compliance infrastructure has been tailored to each banking entity based on the size of the~~entity and its level of~~trading activities. Santander's compliance program includes, among other things, processes for prior approval of new activities and investments that are permitted under the rule, testing and auditing for compliance and a process for attesting annually that the compliance program is reasonably designed to achieve compliance with the Volcker Rule.On March 31, 2016, the Chief Executive Officer of the Company, on behalf of Santander, provided an attestation to the federal agencies responsible for administering the rule that the compliance program requirements applicable to Santander’s U.S. operations under the Volcker Rule were met by July 21, 2015.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~Federal Deposit Insurance Corporation Improvement Act~~

~~Basel III~~

New and evolving capital standards, both as a result of the DFA and the implementation in the U.S. of Basel III, have and will continue to have a significant effect on banks and BHCs, including the Company and the Bank. 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.~~III that are applicable to both SHUSA and the Bank. The final rules established a comprehensive capital framework that includes both the advanced approaches for the largest internationally active U.S. banks, formerly known as Basel II, and a standardized approach that applies to all banking organizations with over $500 million in assets. Subject to various transition periods, ~~the~~this rule became effective for ~~the largest banks on January 1, 2014, and for all other banks~~SHUSA on January 1, 2015.

The ~~new~~ 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, ~~will~~ require banking organizations, including the Company and the Bank, to maintain a minimum common equity ~~tier~~Tier 1 ("CET1") capital ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0% and a minimum leverage ratio, ~~of 4.0%,~~ calculated as the ratio of Tier 1 capital to average consolidated assets for the ~~quarter. These requirements for the Company and the Bank went into effect on January 1, 2015.~~quarter, of 4.0%.

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

The U.S. Basel III regulatory capital rules include ~~new~~ deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights ("MSRs"), deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities are deducted from CET1 to the extent any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 for the Company and the Bank began on January 1, 2015 and ~~will be phased in~~was initially planned over three ~~years.~~

~~As of December 31, 2015, the Bank's and the Company's CET1 ratio under Basel III, on~~years, with a fully phased-in ~~basis under~~requirement of January 1, 2018. However, during 2017, the ~~standardized approach, were 13.36%~~regulatory agencies finalized changes to the capital rules that became effective on January 1, 2018. These changes extended the current treatment and 11.01%, respectively. Under the transitions provided under Basel III, the Bank's and the Company's CET1 ratio under the standardized approach, were 13.81% and 11.97%, respectively. The calculation of the CET1 ratio under both a fully phased-in and transition basis is based on management's interpretation ofwill defer the final ~~rules adopted~~transition provision phase-in at non-advanced approach institutions for certain capital elements, and suspend the risk-weighting to 100 percent for deferred taxes and mortgage servicing assets not disallowed from capital, in lieu of advancing to 250 percent. In addition, the regulatory agencies issued a secondary proposal in 2017 to further revise the capital rule by introducing new treatment of high volatility acquisition, development and construction loans, and by modifying the ~~Federal Reserve in July 2013. As part of the implementation of any regulations, management interprets the rules in order to implement the new regulations. If~~calculation for minority interest includible within capital, for which the regulators have not released a final decision. In 2018, the regulatory agencies issued an additional proposal that would ~~interpret~~revise the ~~rules differently, there could be an impact to the results~~definition of the calculation which may have a negative impact to the calculation of CET1. As mentioned above, the minimum required CET1 ratio is comprised of the 4.5% minimum and the 2.5% conservation buffer. On that basis, the Company believes that, as of December 31, 2015, it would remain above regulatory minimums under the currently enacted capital adequacy requirements of Basel III, including when implemented on a fully phased-in basis.high volatility commercial real estate exposures.

See the Bank Regulatory Capital section of ~~the~~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.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

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

~~Historically, regulation~~On April 10, 2018, the Federal Reserve issued a notice of proposed rulemaking ("NPR") seeking comment on a proposal to simplify capital rules for large banks. If finalized as proposed, the NPR would eliminate the quantitative objection in CCAR and ~~monitoring of bank and BHC liquidity has been addressed~~replace the capital conservation buffer. The capital conservation buffer would be replaced with a new stress capital buffer ("SCB"). The SCB is calculated as ~~a supervisory matter, both~~the maximum decline in CET1 in the ~~U.S.~~severely adverse scenario (subject to a 2.5% floor) plus four quarters of dividends. The proposal would result in new regulatory capital minimums which are equal to 4.5% CET1 plus the SCB, any globally systemically important bank ("GSIB") surcharge, and ~~internationally, without required formulaic measures.~~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 and, absent prior Federal Reserve approval, would continue to be limited to the capital distributions included in their capital plan. Supervisory expectations for capital planning processes would not change under the proposal. The Company is still evaluating the impact this proposed rule would have on its financial position, results of operations and disclosures.

Stress Testing and Capital Planning

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

Liquidity Rules

In September 2014, the Federal Reserve, the FDIC, and the OCC finalized a rule to implement the Basel III liquidity ~~framework will require~~coverage ratio (the “LCR”) for certain internationally active banks and ~~BHCs to measure their liquidity against specific liquidity tests~~nonbank financial companies, and a modified version of the LCR for certain depository institution holding companies that although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, will be required by regulation going forward. One test, referred to as the liquidity coverage ratio ("LCR"),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. ~~The other, referred to as the net stable funding ratio ("NSFR"), is designed to promote more medium and long-term funding of the assets and activities of banking entities over a one-year time horizon.~~

On October 24, 2013, the Federal Reserve, the FDIC, and the OCC issued a proposal to implement the Basel III 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. On September 3, 2014, the agencies approved the final LCR rule. The agencies stressed that LCR is a key component in their effort to strengthen the liquidity soundness of the U.S. financial sector and is used to complement the broader liquidity regulatory framework and supervisory process such as Enhanced Prudential Standards ("EPS") and Comprehensive Capital Analysis and Review ("CCAR"). The agencies have mandatedThis 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 ~~report their~~begin phasing-in the LCR ~~calculation beginning~~requirements in January 1, 2015. Smaller covered companies (more than $50 billion in assets), such as ~~SHUSA are~~the Company, were required to ~~report their~~calculate the LCR ~~calculation~~ monthly beginning January 1, 2016. OnIn November ~~13,~~ 2015, the Federal Reserve published a revised final LCR rule. Under this revision, the Company iswas required to calculate the ~~'Modified~~modified US LCR (the "US LCR") on a monthly basis beginning with data as of January 31, 2016 ~~for the BHC. There~~and is ~~no requirement to submit the calculation to the Fed. The Company will be~~ required to ~~publicly disclose its~~satisfy a minimum US LCR ~~results starting July 1, 2017. Based on management's interpretation~~requirement of ~~the~~100%. We are required to disclose elements under this final rule ~~effective~~for quarterly periods ending after October 1, 2018, which can be found on ~~January 1, 2016, the Company's~~our website at https://www.santanderus.com/us/investorshareholderrelations. At December 31, 2018, SHUSA's US LCR was ~~in excess of the regulatory minimum of 90% which will increase to~~above 100% ~~on January 1, 2017.~~.

OnIn October ~~31,~~ 2014, the Basel Committee on Banking Supervision issued the final standard for the ~~NSFR.~~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, ~~thus~~thereby reducing the likelihood that disruptions to a bank's regular sources of funding will erode its liquidity ~~position~~ 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 ~~will become a minimum standard by January 1, 2018.~~applicable to U.S. financial institutions. The proposed rule has not been finalized, and the Company is currently evaluating the impact the proposed rule would have on its financial position, results of operations and disclosures.

Resolution Planning

The DFA requires all BHCs and FBOs with assets of $50 billion or more to prepare and regularly update resolution plans ("165(d) Resolution Plan"). The 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 Act (“FDI Act”) rules, the Insured Depository Institution ("IDI") Resolution Plan rule requires that a bank with assets of $50 billion or more develop a plan for its resolution that supports depositors’ rapid access to their insured deposits, maximizes the net present value return from the sale

or disposition of its assets, and minimizes the amount of any loss realized by creditors in resolution. The most recent IDI Resolution Plan was submitted to the FDIC in June 2018. SHUSA and SBNA are currently awaiting feedback.

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

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. GSIBs and to IHCs with $50 billion or more in U.S. non-branch assets that are controlled by a global systemically important FBO. The Company is such an IHC.

Under the TLAC Rule, companies are required to maintain a minimum amount of TLAC, which consists of a minimum amount of LTD and Tier 1 capital. As a result, SHUSA will need to hold the higher of 18% of its risk-weighted assets ("RWAs") or 9% of its total consolidated assets in the form of TLAC, of which 6% of its RWAs or 3.5% of total consolidated assets must consist of LTD. In addition, SHUSA must maintain a TLAC buffer composed solely of CET1 capital and will be subject to restrictions on capital distributions and discretionary bonus payments based on the size of the TLAC buffer it maintains. The TLAC Rule became effective on January 1, 2019.

Volcker Rule

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

Because the term “banking entity” includes an 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 May 2018, the joint agencies responsible for administering the Volcker Rule released an NPR to revise the Volcker Rule. The NPR would tailor 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 NPR would also replace the short-term intent test in the Volcker Rule with an accounting test. The Company is still evaluating the impact this proposed rule would have on its financial position, results of operations and disclosures.

~~The next step will be publication of a U.S. notice of proposed rule-making on implementation of NSFR.~~Risk Retention Rule

~~Stress Tests~~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 2015. Compliance with the rule with regard to all other classes of ABS was required beginning in December 2016. SHUSA, primarily through SC, is an active participant in the structured finance markets and ~~Capital Adequacy~~began to comply with the retention requirements effective in December 2016.

~~Pursuant~~Heightened Standards

In September 2014, the OCC finalized guidelines to strengthen the ~~DFA,~~governance and risk management practices of large financial institutions commonly known as ~~part~~“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.

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

Transactions with Affiliates

Depository institutions must remain in compliance with Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve's ~~annual CCAR, certain banks and BHCs, including~~Regulation W, which governs the activities of the Company and its banking subsidiaries with affiliated companies and individuals. Section 23A imposes limits on certain specified “covered transactions,” which include loans, lines, and letters of credit to affiliated companies or individuals, and investments in affiliated companies, as well as certain other transactions with affiliated companies and individuals. The aggregate of all covered transactions is limited to 10% of a bank’s capital and surplus for any one affiliate and 20% for all affiliates. Certain covered transactions also must meet collateral requirements that range from 100% to 130% depending on the ~~Bank, are required to perform stress tests and submit capital plans to~~type of transaction.

Section 23B of the Federal Reserve Act prohibits a depository institution from engaging in certain transactions with affiliates unless the transactions are considered arms'-length. To meet the definition of arm's-length, the terms of the transaction must be the same,

or at least as favorable, as those for similar transactions with non-affiliated companies. As a U.S. domiciled subsidiary of a global parent with significant non-bank affiliates, the Company faces elevated compliance risk in this area.

Regulation AB II

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.

Community Reinvestment Act ("CRA")

SBNA and BSPR are subject to the requirements of the CRA, which requires the appropriate federal financial supervisory agency to assess an institution's record of helping to meet the credit needs of the local communities in which it is located. BSPR’s current CRA rating is “Outstanding” and SBNA’s current CRA rating is "Satisfactory." The OCC ~~on an annual basis,~~takes into account the Bank’s CRA rating in considering certain regulatory applications the Bank makes, including applications related to establishing and ~~receive a notice of non-objection to those capital plans from~~relocating branches, and the Federal Reserve ~~and~~does the ~~OCC before taking capital actions, such as paying dividends, implementing common equity repurchase programs, or redeeming or repurchasing capital instruments. As a consolidated subsidiary of~~same with respect to certain regulatory applications the Company makes.

Other Regulatory Matters

On February 25, 2015, SC ~~is included in~~entered into a consent order with the ~~Company's stress tests and capital plans. In March 2014 and 2015, the Federal Reserve, as part~~Department of its CCAR process, objected on qualitative grounds to the capital plans submitted by the Company. In its 2015 public report on CCAR, the Federal Reserve cited widespread and critical deficiencies in the Company's capital planning processes, including specific deficiencies in governance, internal controls, risk identification and risk management, management information systems, and supporting assumptions and analysis. As a result of the 2014 and 2015 CCAR objections, the Company is not permitted to make any capital distributions without the Federal Reserve's approval other than the continued payment of dividends on the Company's outstanding class of preferred stock, until a new capital plan isJustice (the "DOJ"), approved by the ~~Federal Reserve. The Company submitted~~United States District Court for the Northern District of Texas, which resolves the DOJ’s claims against SC that certain of its ~~annual capital plan on April 5, 2016~~repossession and ~~expects to receive~~collection activities during the ~~Federal Reserve's assessment in mid-2016. The Federal Reserve did not object to SHUSA’s payment~~period of ~~dividends on its outstanding class of preferred stock.~~

~~On May 1, 2014,~~time between January 2008 and February 2013 violated the ~~Board of Directors of SC declared a cash dividend of $0.15 per share of SC Common Stock~~Servicemembers’ Civil Relief Act (the ~~"May SC dividend"~~“SCRA”). The ~~Federal Reserve informed the Company on May 22, 2014 that it did not object~~consent order requires SC to SC's payment of the May SC dividend, provided that Santander contribute at least $20.9 million of capital to the Company prior to such payment, so that the Company's consolidated capital position would be unaffected by the May SC dividend. The Federal Reserve also informed the Company that, until the Federal Reserve issuespay a non-objection to the Company's capital plan, any future SC dividend will require prior receipt of a written non-objection from the Federal Reserve. On May 28, 2014, the Company issued 84,000 shares of its common stock, no par value per share, to Santander in exchange for cashcivil fine in the amount of ~~$21.0 million.~~$55,000, as well as at least $9.4 million to affected servicemembers, consisting of $10,000 per servicemember plus compensation for any lost equity (with interest) for each repossession by SC and $5,000 per servicemember for each instance where SC sought to collect repossession-related fees on accounts where a repossession was conducted by a prior account-holder. The consent order requires us to undertake additional remedial measures. The consent order also subjects SC to monitoring by the DOJ for compliance with the SCRA for a period of five years.

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

4843

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

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

~~On September 15,~~In October 2014, SC received a subpoena from the ~~Company entered~~SEC commencing an investigation into ~~a written agreement with~~ the ~~Federal Reserve Bank (the "FRB") of Boston~~SC’s securitization practices. In June 2016, the SEC served an additional subpoena on SC requesting documents related to SC’s securitization practices as well as SC’s financial restatements. SC has produced documents responsive to these subpoenas, and the ~~Federal Reserve. Under~~SEC has taken testimony from certain of SC’s employees. In December 2018, the ~~terms~~SEC and SC reached a voluntary agreement to settle the SEC's investigation under which the SEC entered a cease-and-desist order against SC in an administrative matter captioned In the Matter of ~~this written agreement, the Company must serve as a source of strength~~Santander Consumer USA Holdings Inc., File No. 3-18932. According to the ~~Bank; strengthen Board oversight~~SEC’s order, among other things, SC failed to calculate and report its credit loss allowance for certain impaired loans in accordance with GAAP. The SEC’s order also found that SC failed to maintain effective internal control over financial reporting, leading to SC’s financial restatements. Without admitting or denying the findings, SC paid a civil penalty of ~~planned capital distributions by the Company~~$1.5 million in January 2019 and ~~its subsidiaries;~~agreed to cease and ~~not declare or pay, and not permit~~desist from any non-bank subsidiary that is not wholly-owned by the Company to declare or pay, any dividends, and not make, or permit any such subsidiary to make, any capital distribution, in each case without the prior written approvalfuture violations of the ~~FRB of Boston.~~Exchange Act and the rules thereunder.

On March 11, 2015, the Federal Reserve announced that it had objected to the 2015 capital plan the Company submitted on January 5, 2015, on qualitative grounds due to significant deficiencies in the Company’s capital planning process. Subject to the restrictions outlined above with respect to the 2014 written agreement, the FRB did not object to the Company’s payment of dividends on its outstanding class of preferred stock. The FRB of Boston did object to the requested payment of dividends on21, 2017, SC ~~Common Stock.~~

~~On July 2, 2015,~~and 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~~enhance its oversight of SC's management and 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 ~~respect~~the CFPB.

As of December 31, 2018, SSLLC had received 589 FINRA arbitration cases related to Puerto Rico bonds and Puerto Rico closed-end funds ("CEFs"). Most of these cases are based upon concerns regarding the local Puerto Rico securities market. The statements of claims allege, among other ~~matters, board oversight~~things, fraud, negligence, breach of ~~the consolidated organization, risk management, capital planning~~fiduciary duty, breach of contract, unsuitability, over-concentration and ~~liquidity risk management.~~

~~Total Loss Absorbing Capacity~~

On October 30, 2015 the Federal Reserve released a notice of proposed rule making (NPR) on total loss absorbing capacity ("TLAC"), long-term debt ("LTD"), and clean holding company requirements for systemically important U.S. BHCs and intermediate holding companies ("IHCs") of systemically important foreign banking organizations ("FBOs"). SHUSA, as the IHC for Santander in the U.S., will be subjectfailure to ~~these requirements.~~

TLAC represents the amount of equity and debt a company must hold to facilitate its orderly liquidation. In November 2014, the Financial Stability Board ("FSB") issued for public consultation policy proposals on TLAC. Under the Federal Reserve’s proposal, the Company would be required to hold loss absorbing equity and unsecured debt of 18.5% of risk-weighted assets ("RWAs") by January 1, 2019 and then 20.5% of RWAs by January 1, 2022. These amounts represent the TLAC requirement (16% by January 1, 2019 and then 18% by January 1, 2022) plus a TLAC buffer of 2.5%. The Federal Reserve's proposal also establishes a requirement for the LTD component of the TLAC. The LTD requirement for the Company would be 7% of RWAs by January 1, 2019.

~~The comment period on the FRB's TLAC proposal ended on February 19, 2016.~~

~~Enhanced Prudential Standards for Liquidity~~

On February 18, 2014, the Federal Reserve approved the final rule implementing certain of the EPS mandated by Section 165 of the DFA (the "Final Rule"). The Final Rule applies the EPS to (i) U.S. BHCs with $50 billion (and in somesupervise. There were 420 arbitration cases $10 billion) or more in total consolidated assets and (ii) foreign banking organizations ("FBOs") with a U.S. banking presence exceeding $50 billion in consolidated U.S. non-branch assets. The Final Rule implements, as new requirements for U.S. BHCs, risk management requirements (including requirements, duties and qualifications for a risk management committee and chief risk officer), liquidity stress testing and buffer requirements. U.S. BHCs with total consolidated assets of $50 billion or more on June 30, 2014 were subject to the liquidity requirementsthat remained pending as of ~~January 1, 2015.~~

~~Foreign Banking Organizations~~

On February 18, 2014, the Federal Reserve issued the Final Rule to strengthen regulatory oversight of FBOs. Under the Final Rule, FBOs with over $50 billion of U.S. non-branch assets, including Santander, must consolidate U.S. subsidiary activities under a U.S. intermediate holding company ("IHC"). In addition, the Final Rule requires U.S. BHCs and FBOs with at least $50 billion in total U.S. consolidated non-branch assets to be subject to EPS and heightened capital, liquidity, risk management, and stress testing requirements. Due to both its global and U.S. non-branch total consolidated asset size, Santander is subject to both of the above provisions of the Final Rule. As a result of this rule, Santander transfered substantially all its U.S. bank and non-bank subsidiaries currently outside of the Company to the Company, which became an IHC. As required under the Final Rule, the Company submitted its IHC implementation plan to the Federal Reserve on December 31, 2014. A phased-in approach is being used for the standards and requirements at both the FBO and the IHC. As a U.S. BHC with more than $50 billion in total consolidated assets, the Company was subject to EPS as of January 1, 2015. As permitted by the Final Rule, the IHC was formed, with all but 10% of non-BHC assets included, on July 1, 2016. Other standards of the Final Rule will be phased in through January 1, 2018.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~Federal Deposit Insurance Corporation Surcharge Assessment~~

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 expects to commence the surcharge in the third quarter of 2016, and will continue for eight consecutive quarters. After the eight quarters, a shortfall assessment may be charged by the FDIC. The Company is currently evaluating the impact of the assessment on its financial position, results of operations and disclosures.

~~Bank Regulations~~

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

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 ~~OCC's regulations under~~solicitation and purchase of more than $180 million of Puerto Rico bonds and $101 million of CEFs during the ~~National Bank Act.~~period from December 2012 to October 2013. The ~~various laws~~case is pending in the United States District Court for the District of Puerto Rico and ~~regulations administered by~~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 ~~OCC for national banks affect corporate practices~~underwriting and ~~impose certain restrictions on activities~~sale of Puerto Rico municipal bonds, CEFs and investments to ensure that the Bank operates in a safe and sound manner. These laws and regulations also require the Bank to disclose substantial business and financial information to the OCC and the public.

open-end funds.

5044

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

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

~~RESULTS OF OPERATIONS~~

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

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

The following ~~discussion reviews~~activities are disclosed in response to Section 13(r) with respect to affiliates of SHUSA within the ~~Company's financial performance from a consolidated perspective over~~Santander Group. During the ~~past three years. This review is analyzed~~period covered by this annual report:

Santander UK plc (“Santander UK”) holds two savings accounts and one current account for two customers. Both of the customers, who are resident in the ~~following two sections - "Results of Operations for~~UK, are currently designated by the ~~Years Ended December 31, 2015~~U.S. under the Specially Designated Global Terrorist ("SDGT") sanctions program. Revenues and 2014" and "Results of Operations for the Years Ended December 31, 2014 and 2013." Each section includes a detailed income statement and segment results review. Key consolidated balance sheet trends are discussedprofits generated by Santander UK on these accounts in ~~the "Financial Condition" section.~~

As discussed further in Note 25 of the Notes to the audited consolidated financial statements contained in this Form 10-K/A, we are restating herein our audited consolidated financial statements for the years ended December 31, 2015, 2014 and 2013. The following discussion has been updated to reflect the effects of the restatement.

~~RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2015 AND 2014~~

Year Ended December 31,
2015 2014
(As Restated) (As Restated)
(in thousands)
Net interest income $ 6,588,281
$ 5,917,133
Provision for credit losses (4,012,956 ) (2,413,243 )
Total non-interest income 2,524,755
4,679,906
General and administrative expenses (4,277,290 ) (3,329,602 )
Other expenses (4,632,129 ) (343,776 )
(Loss)/income before income taxes (3,809,339 ) 4,510,418
Income tax benefit/(provision) 675,238
(1,610,958 )
Net (loss)/income⁽¹⁾
$ (3,134,101 ) $ 2,899,460

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

~~The Company reported pre-tax loss of $3.8 billion for~~ the year ended December 31, ~~2015, compared~~2018 were negligible relative to ~~pretax income~~the overall profits of ~~$4.5 billion~~Santander.

Santander UK holds one savings account with a balance of £1.24 as of December 31, 2018 and one current account with a balance of £1,884.53 as of December 31, 2018, for another customer resident in the UK who is currently designated by the U.S. under the SDGT sanctions program. The United Nations and European Union removed this customer from their equivalent sanctions lists in 2008. The customer relationship predates the designations of the customer under these sanctions. After identifying the U.S. sanctions issue, Santander UK confirmed the absence of any U.S. dollar payments to or from the customer's accounts, determined to put a block on the accounts and the accounts were closed on January 14, 2019. Revenues generated by Santander UK on these accounts in the year ended December 31, ~~2014. Factors contributing~~2018 were negligible relative to ~~these changes were as follows:~~the overall profits of Santander.

~~Net interest income increased $671.1 million~~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 2018. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander UK's Collections and Recoveries Department. No revenues or profits were generated by Santander UK on these accounts through year ended December 31, 2018.

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

In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the year ended December 31, ~~2015, compared~~2018, which were negligible relative to the ~~corresponding period~~overall revenues and profits of Santander. Santander has undertaken significant steps to withdraw from the Iranian market, such as closing its representative office in ~~2014. This increase was primarily~~Iran and ceasing all banking activities therein, including correspondent relationships, deposit- taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. Santander is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the ~~increased interest income on loans as a result~~case of the ~~growing RIC~~export credits). As such, Santander intends to continue to provide the guarantees and ~~auto loan portfolio.~~hold these assets in accordance with company policy and applicable laws.

The provision for credit losses increased $1.6 billion for the year ended December 31, 2015, compared to the corresponding period in 2014. The increase was primarily due to the continued growth in the RIC and auto loan portfolio and the related provisions for these portfolios.

Total non-interest income decreased $2.2 billion for the year ended December 31, 2015, compared to the corresponding period in 2014. The decrease was primarily due to the one-time net gain recognized in the first quarter of 2014 related to the Change in Control.

Total general and administrative expenses increased $947.7 million for the year ended December 31, 2015, compared to the corresponding period in 2014. The increase was primarily due to increases in lease expense and compensation and benefits throughout the year.

Other expenses increased $4.3 billion for the year ended December 31, 2015, compared to the corresponding period in 2014. The increase was primarily due to an impairment charge of goodwill in the fourth quarter of 2015 of $4.5 billion.

The income tax provision decreased $2.3 billion for the year ended December 31, 2015, compared to the corresponding period in 2014. The decrease was due to the income tax provision on the gain on Change in Control that occurred in 2014 and the creation of a tax benefit from the impairment of goodwill in 2015.

5145

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~NON-GAAP FINANCIAL MEASURES~~

The Company's non-generally accepted accounting principle ("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 or codified in federal banking regulations and, therefore, 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 allows 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 reconciles non-GAAP financial measures to GAAP.~~

Year Ended December 31,
2015 2014 2013 2012 2011
(As Restated) (As Restated) (As Restated)
(in thousands)
Return on Average Assets:
Net (loss)/income $ (3,134,101 ) $ 2,899,460
$ 655,860
$ 565,593
$ 1,258,246
Average assets 125,854,089
108,573,818
79,832,312
83,044,676
92,078,048
Return on average assets (2.49 )% 2.67 % 0.82 % 0.68 % 1.37 %

Return on Average Equity:
Net (loss)/income $ (3,134,101 ) $ 2,899,460
$ 655,860
$ 565,593
$ 1,258,246
Average equity 23,215,709
21,249,196
13,543,840
13,075,464
11,944,901
Return on average equity (13.50 )% 13.65 % 4.84 % 4.33 % 10.53 %

Average Equity to Average Assets:
Average equity $ 23,215,709
$ 21,249,196
$ 13,543,840
$ 13,075,464
$ 11,944,901
Average assets 125,854,089
108,573,818
79,832,312
83,044,676
92,078,048
Average equity to average assets 18.45 % 19.57 % 16.96 % 15.75 % 12.97 %

Efficiency Ratio:
General and administrative expenses $ 4,277,290
3,329,602
$ 1,689,524
$ 1,481,248
$ 1,842,224
Other expenses 4,632,129
343,776
137,538
484,884
517,937
Total expenses (numerator) 8,909,419
3,673,378
1,827,062
1,966,132
2,360,161

Net interest income $ 6,588,281
$ 5,917,133
$ 1,513,771
$ 1,674,123
$ 3,864,814
Non-interest income 2,524,755
4,679,906
1,099,417
1,139,596
1,981,823
Total net interest income and non-
interest income (denominator) 9,113,036
10,597,039
2,613,188
2,813,719
5,846,637

Efficiency ratio 97.77 % 34.66 % 69.92 % 69.88 % 40.37 %

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

SBNA SHUSA
December 31, 2015 December 31, 2014 December 31, 2015 December 31, 2014

Common Equity
Tier 1⁽¹⁾

Tier 1 Common Capital ⁽²⁾

Common Equity
Tier 1⁽¹⁾

Tier 1 Common Capital ⁽²⁾
(dollars in thousands)
Total stockholder's equity $ 13,325,978
$ 13,192,333
$ 17,136,805
$ 18,675,061
Add/(Subtract):
Preferred stock —
—
(195,445 ) (195,445 )
Goodwill (3,402,637 ) (3,402,637 ) (4,444,389 ) (8,951,484 )
Intangible assets (131,747 ) (322,237 ) (639,055 ) (704,236 )
Deferred taxes on goodwill and intangible assets 344,678
341,793
584,805
1,682,709
Other adjustments to CET1/Tier 1 common —
(23,952 ) 638,892
1,570,014
Disallowed deferred tax assets (418,420 ) (1,052,921 ) (244,388 ) (1,210,951 )
Accumulated other comprehensive loss 139,804
98,777
139,641
96,410
Common equity tier 1/Tier 1 common capital (numerator) $ 9,857,656
$ 8,831,156
$ 12,976,866
$ 10,962,078
Risk weighted assets (denominator)⁽³⁾
$ 71,395,253
$ 66,762,918
$ 108,395,130
$ 100,605,835
Ratio 13.81 % 13.23 % 11.97 % 10.90 %

~~(1) Common equity tier 1 ("CET1") is calculated under Basel III regulations required as of January 1, 2015.~~

~~(2) Tier 1 common capital is calculated under Basel I regulations required through December 31, 2014.~~

(3) 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 risk-weighted assets ("RWAs").

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

CONDENSED CONSOLIDATED AVERAGE BALANCE SHEET / TAX EQUIVALENT NET INTEREST MARGIN ANALYSIS
YEAR ENDED DECEMBER 31,

2015 ⁽¹⁾, AS RESTATED

2014⁽¹⁾, AS RESTATED
2013, AS RESTATED

Average
Balance
Interest Income
Yield/
Rate

Average
Balance
Interest Income
Yield/
Rate

Average
Balance
Interest Income
Yield/
Rate
(dollars in thousands)
EARNING ASSETS
INVESTMENTS AND INTEREST EARNING DEPOSITS $ 22,112,946
$ 390,336
1.85 % $ 15,484,051
$ 304,035
2.20 % $ 17,995,203
$ 375,559
2.09 %
LOANS⁽²⁾:

Commercial loans 29,882,943
921,520
3.13 % 25,934,861
842,455
3.30 % 24,380,697
822,802
3.42 %
Multifamily 8,927,502
361,858
4.06 % 9,032,193
375,949
4.17 % 7,799,415
344,757
4.44 %
Consumer loans:
Residential mortgages 6,759,740
267,429
3.96 % 8,956,321
364,136
4.07 % 10,158,329
232,025
3.60 %
Home equity loans and lines of credit 6,170,036
218,017
3.53 % 6,218,560
223,186
3.59 % 6,439,009
408,141
4.02 %
Total consumer loans secured by real estate 12,929,776
485,446
3.75 % 15,174,881
587,322
3.87 % 16,597,338
640,166
3.86 %
Retail installment contracts and auto loans 24,628,954
4,843,839
19.67 % 19,864,890
4,100,193
20.64 % 169,288
12,557
7.42 %
Personal unsecured 2,796,803
684,731
24.48 % 1,830,034
638,839
34.91 % 453,306
49,551
10.93 %
Other consumer⁽³⁾
1,159,887
104,876
9.04 % 1,440,909
123,063
8.54 % 1,491,051
89,076
5.97 %
Total consumer 41,515,420
6,118,892
14.74 % 38,310,714
5,449,417
14.22 % 18,710,983
791,350
4.23 %
Total loans 80,325,865
7,402,270
9.23 % 73,277,768
6,667,821
9.12 % 50,891,095
1,958,909
3.88 %
Allowance for loan and lease losses ⁽⁴⁾
(2,552,608 ) —
—%
(1,294,958 ) —
—%
(937,398 ) —
— %
NET LOANS 77,773,257
7,402,270
9.54 % 71,982,810
6,667,821
9.28 % 49,953,697
1,958,909
3.95 %
Intercompany investments⁽¹⁰⁾
14,640
886
6.07 % 18,572
1,055
5.68 % —
—
— %
TOTAL EARNING ASSETS 99,900,843
7,793,492
7.83 % 87,485,433
6,972,911
8.03 % 67,948,900
2,295,892
3.46 %
Other assets⁽⁵⁾
25,953,246
21,088,385
11,883,412

TOTAL ASSETS $ 125,854,089
$ 108,573,818
$ 79,832,312

INTEREST BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest bearing demand deposits $ 11,523,138
$ 55,246
0.48 % $ 11,163,159
$ 38,131
0.34 % $ 9,594,230
$ 15,280
0.16 %
Savings 3,953,200
4,768
0.12 % 3,993,387
5,281
0.13 % 3,849,615
5,377
0.14 %
Money market 22,957,561
127,214
0.55 % 19,911,128
89,043
0.45 % 18,065,866
78,198
0.43 %
Certificates of deposit 8,143,775
73,652
0.90 % 7,310,390
77,338
1.06 % 10,391,908
112,663
1.08 %
TOTAL INTEREST BEARING DEPOSITS 46,577,674
260,880
0.56 % 42,378,064
209,793
0.50 % 41,901,619
211,518
0.50 %
BORROWED FUNDS:
Federal Home Loan Bank advances 10,208,082
181,397
1.78 % 7,675,404
262,456
3.42 % 10,335,211
330,027
3.19 %
Federal funds and repurchase agreements 14,535
27
0.19 % 1,014
1
0.10 % 535,800
2,111
0.39 %
Other borrowings 34,160,493
762,021
2.23 % 26,808,151
582,473
2.17 % 3,588,585
238,463
6.64 %
TOTAL BORROWED FUNDS ⁽⁶⁾
44,383,110
943,445
2.13 % 34,484,569
844,930
2.45 % 14,459,596
570,601
3.95 %
TOTAL INTEREST BEARING FUNDING LIABILITIES 90,960,784
1,204,325
1.32 % 76,862,633
1,054,723
1.37 % 56,361,215
782,119
1.39 %
Noninterest bearing demand deposits 8,145,948
8,003,908
7,940,852

Other liabilities⁽⁷⁾
3,531,648
2,458,081
1,986,405

TOTAL LIABILITIES 102,638,380
87,324,622
66,288,472

STOCKHOLDER’S EQUITY 23,215,709
21,249,196
13,543,840

TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY $ 125,854,089
$ 108,573,818
$ 79,832,312

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

TAXABLE EQUIVALENT NET INTEREST INCOME

$ 1,565,857

NET INTEREST SPREAD ⁽⁸⁾
6.50 % 6.66 % 2.07 %
NET INTEREST MARGIN ⁽⁹⁾
6.63 % 6.82 % 2.23 %
TAX EQUIVALENT BASIS ADJUSTMENT

(52,086 )
NET INTEREST INCOME 6,588,281
5,917,133
1,513,771

Ratio of interest-earning assets to interest-bearing liabilities 1.10x
1.14x
1.21x


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


~~(2)~~	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").


~~(3)~~	~~Other consumer primarily includes recreational vehicle ("RV") and marine loans.~~


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


~~(5)~~	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 10 to the Consolidated Financial Statements for further discussion.


~~(6)~~	~~Refer to Note 12 to the Consolidated Financial Statements for further discussion.~~


~~(7)~~	~~Other liabilities primarily includes accounts payable and accrued expenses, derivative liabilities, net deferred tax liabilities and the unfunded lending commitments liability.~~


~~(8)~~	~~Represents the difference between the yield on total earning assets and the cost of total funding liabilities.~~


~~(9)~~	~~Represents annualized, taxable equivalent net interest income divided by average interest-earning assets.~~


~~(10)~~	Intercompany investments were included within Investments and Interest Earning Deposits as of December 31, 2014 and December 31, 2013. The related average balance, tax equivalent interest, and yield at those dates were: $18.6 million, $1.1 million and 5.68%, and $39.4 million, $2.0 million, and 5.00%, respectively.

~~NET INTEREST INCOME~~

Year Ended December 31,
2015 2014
(As restated) (As restated)
(in thousands)
INTEREST INCOME:
Interest-earning deposits $ 8,556
$ 8,468
Investments available-for-sale 329,556
258,646
Other investments 52,224
36,921
Total interest income on investment securities and interest-earning deposits 390,336
304,035
Interest on loans 7,402,270
6,667,821
Total Interest Income 7,792,606
6,971,856
INTEREST EXPENSE:
Deposits and customer accounts 260,880
209,793
Borrowings and other debt obligations 943,445
844,930
Total Interest Expense 1,204,325
1,054,723
NET INTEREST INCOME $ 6,588,281
$ 5,917,133

Net interest income increased $671.1 million for the year ended December 31, 2015, compared to the corresponding period in 2014. This was primarily due to interest income earned on continued growth in the RIC and auto loan portfolio and one additional month of interest income on SC's loan portfolio in 2015 compared to 2014, offset by an increase in interest expense on debt obligations due to one additional month of interest expense on SC's debt obligations in 2015 compared to 2014.

~~Interest Income on Investment Securities and Interest-Earning Deposits~~

Interest income on investment securities and interest-earning deposits increased $86.3 million for the year ended December 31, 2015, compared to the corresponding period in 2014. The average balance of investment securities and interest-earning deposits for the year ended December 31, 2015 was $22.1 billion with an average yield of 1.85%, compared to an average balance of $15.5 billion with an average yield of 2.20% for the corresponding period in 2014. Overall, the increase in interest income on investment securities was primarily attributable to an increase of $63.1 million in collateralized mortgage obligations ("CMOs") as the average balance increased to $8.2 billion from $4.6 billion for the year ended December 31, 2015 compared to the corresponding period in 2014.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~Interest Income on Loans~~

Interest income on loans increased $734.4 million for the year ended December 31, 2015, compared to the corresponding period in 2014. The increase in interest income on loans was primarily due to the growth in originations of the RIC and auto loans and unsecured loan portfolios. Interest income on the RIC and auto loans portfolio increased $743.6 million for the year ended December 31, 2015 compared to the corresponding period in 2014. This was offset by a decrease in interest on residential mortgage loans of $96.7 million for the year ended December 31, 2015.

The average balance of total loans was $80.3 billion with an average yield of 9.23% for the year ended December 31, 2015, compared to $73.3 billion with an average yield of 9.12% for the corresponding period in 2014. The increase in the average balance of total loans of $7.0 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 $24.6 billion with an average yield of 19.67% for the year ended December 31, 2015, compared to $19.9 billion with an average yield of 20.64% for the corresponding period in 2014.

~~Interest Expense on Deposits and Related Customer Accounts~~

Interest expense on deposits and related customer accounts increased $51.1 million for the year ended December 31, 2015 compared to the corresponding period in 2014. The average balance of total interest-bearing deposits was $46.6 billion with an average cost of 0.56% for the year ended December 31, 2015, compared to an average balance of $42.4 billion with an average cost of 0.50% for the corresponding period in 2014. The increase in interest expense on deposits and customer-related accounts during the year ended December 31, 2015 was primarily due to the increase in the volume of deposit accounts, along with an increase in average interest rates.

~~Interest Expense on Borrowed Funds~~

Interest expense on borrowed funds increased $98.5 million for the year ended December 31, 2015, compared to the corresponding period in 2014. The increase in interest expense on borrowed funds was due to a $9.9 billion increase in total average borrowings for the year ended December 31, 2015, compared to the corresponding period in 2014. This increase was primarily due to $3.1 billion of new debt issued by SBNA and the Company and net $2.5 billion of SC securitization activity. The average balance of total borrowings was $44.4 billion with an average cost of 2.13% for the year ended December 31, 2015, compared to an average balance of $34.5 billion with an average cost of 2.45% for the corresponding period in 2014.

~~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, 2015~~ was $4.0 billion, compared to $2.4 billion for the corresponding period in 2014. The activity for the year ended December 31, 2015 is primarily related to RIC and auto loan activity. At the date of the Change in Control of SC, the Company recognized the purchased loans at fair value with no allowance for loan losses pursuant to the business combination guidance in ASC 805. Subsequent to the Change in Control, for the purchased portfolios for which we have not elected the FVO, the Company recognizes provisions for credit losses, when incurred losses on the portfolio exceed the unaccreted purchase discount. The activity in the ALLL for the years ended December 31, 2015 and 2014 was as follows:

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

Year Ended December 31,
2015 2014
(As Restated) (As Restated)
(in thousands)
Allowance for loan and lease losses, beginning of period $ 1,701,602
$ 834,337
Charge-offs:
Commercial (165,682 ) (109,718 )
Consumer (4,434,574 ) (2,664,747 )
Total charge-offs (4,600,256 ) (2,774,465 )
Recoveries:
Commercial 61,364
40,379
Consumer 2,026,918
1,167,328
Total recoveries 2,088,282
1,207,707
Charge-offs, net of recoveries (2,511,974 ) (1,566,758 )
Provision for loan and lease losses ⁽¹⁾
3,998,200
2,495,243
Other⁽²⁾:

Consumer (27,117 ) (61,220 )
Allowance for loan and lease losses, end of period $ 3,160,711
$ 1,701,602

Reserve for unfunded lending commitments, beginning of period $ 132,641
$ 220,000
Provision for unfunded lending commitments ⁽¹⁾
14,756
(82,000 )
Loss on unfunded lending commitments —
(5,359 )
Reserve for unfunded lending commitments, end of period 147,397
132,641
Total allowance for credit losses ("ACL"), end of period $ 3,308,108
$ 1,834,243


~~(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 provision for unfunded lending commitments.~~

~~(2)~~

For 2015, the "Other" amount represents the impact on the allowance for loan and lease losses in connection with SC classifying approximately $1.0 billion of RICs as held-for-sale during the first quarter of 2015. For 2014, the "Other" amount represents the impact on the allowance for loan and lease losses in connection with the sale of approximately $484.2 million of troubled debt restructurings ("TDRs") and non-performing loans ("NPLs") classified as held-for-sale during the quarter ended September 30, 2014.

The Company's net charge-offs increased for the year ended December 31, 2015, compared to the corresponding period in 2014. The ratio of net loan charge-offs to average total loans was 3.1% for the year ended December 31, 2015, compared to 2.2% for the corresponding period in 2014.

Consumer loan net charge-offs as a percentage of average consumer loans increased to 5.8% for the year ended December 31, 2015 compared to 4.0% for the year ended December 31, 2014. The increases in consumer loan net charge-offs as a percentage of average consumer loans is primarily attributable to SC's personal unsecured loan portfolios being reclassified as held-for-sale, as well as the lower of cost or fair value adjustments on certain RICs and auto loans, which were reflected as charge-offs of $451.0 million for the year ended December 31, 2015.

~~For the year ended December 31, 2015, the lower of cost or fair value adjustments associated with RIC and auto loan sales was $73.4 million.~~

Commercial loan net charge-offs as a percentage of average commercial loans, including multifamily loans, were less than 0.3% for the year ended December 31, 2015, compared to less than 0.2% for the year ended December 31, 2014.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~NON-INTEREST INCOME~~

Year Ended December 31,
2015 2014
(As Restated) (As Restated)
(in thousands)
Consumer fees $ 454,697
$ 382,854
Commercial fees 187,539
185,373
Mortgage banking income, net 107,983
204,558
Equity method investments (loss)/income, net (8,818 ) 8,515
Bank-owned life insurance 57,913
60,278
Capital markets revenue 37,408
51,671
Lease income 1,489,574
790,737
Miscellaneous income 181,457
551,123
Net gain recognized in earnings 17,002
2,444,797
Total non-interest income $ 2,524,755
$ 4,679,906

Total non-interest income decreased $2.2 billion for the year ended December 31, 2015, compared to the corresponding period in 2014. The decrease for the year ended December 31, 2015 was primarily due to the one-time gain recognized in 2014, included in Net gain recognized in earnings, related to the Change in Control.

~~Consumer Fees~~

Consumer fees increased $71.8 million for the year ended December 31, 2015, compared to the corresponding period in 2014. The increase was primarily due to the $89.6 million increase in loan servicing fees, which is largely attributable to the Company's growing RIC and auto loan portfolio. This growth was offset by a decrease in insurance service and consumer deposit fees.

~~Commercial Fees~~

Commercial fees consists of deposit overdraft fees, deposit ATM fees, cash management fees, letter of credit fees, and loan syndication fees for commercial accounts. Commercial fees increased $2.2 million for the year ended December 31, 2015 compared to the corresponding period in 2014.

~~Mortgage Banking Revenue~~

Year Ended December 31,
2015 2014
(in thousands)
Mortgage and multifamily servicing fees $ 45,151
$ 44,234
Net gains on sales of residential mortgage loans and related securities 47,591
144,885
Net gains on sales of multifamily mortgage loans 30,261
26,378
Net gains on hedging activities 5,758
13,859
Net gains/(losses) from changes in MSR fair value 3,948
(2,817 )
MSR principal reductions (24,726 ) (21,981 )
Total mortgage banking income, net $ 107,983
$ 204,558

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 $96.6 million for the year ended December 31, 2015, compared to the corresponding period in 2014. This change was primarily due to a decrease in the gain on sales of residential mortgage loans and related securities offset by an increase in the change in MSR fair value discussed in further detail below.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~Since 2013, mortgage interest rates have remained stable, resulting in relative stability in mortgage banking fee fluctuations 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
March 31, 2014 4.38 % 3.50 %
June 30, 2014 4.13 % 3.38 %
September 30, 2014 4.25 % 3.50 %
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 %

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

Mortgage and multifamily servicing fees increased $0.9 million for the year ended December 31, 2015, compared to the corresponding period in 2014. At December 31, 2015 and December 31, 2014, the Company serviced mortgage and multifamily real estate loans for the benefit of others with a principal balance totaling $858.2 million and $2.9 billion, respectively.

Net gains on sales of residential mortgage loans and related securities decreased $97.3 million for the year ended December 31, 2015, compared to the corresponding period in 2014. For the year ended December 31, 2015, the Company sold $2.5 billion of mortgage loans for a gain of $47.6 million, compared to $3.3 billion of loans sold for a gain of $144.9 million for the year ended December 31, 2014.

The Company periodically sells qualifying mortgage loans to the Federal Home Loan Mortgage Corporation ("FHLMC"), Government National Mortgage Association and 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 MBS, servicing rights, and representation and warranty reserves is recognized as gain or loss on sale.

~~Net gains on sales of multifamily mortgage loans increase~~d $3.9 million for the year ended December 31, 2015, compared to the corresponding period in 2014. The increase was primarily due to a $29.9 million release in the FNMA recourse reserve for the year ended December 31, 2015. The release of FNMA recourse reserves was attributable to the $1.4 billion purchases of multifamily mortgages during the third quarter from FNMA.

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, 2015 and December 31, 2014, the Company serviced loans with a principal balance of $552.1 million and $2.6 billion, respectively, for FNMA. These loans had a credit loss exposure of~~ ~~$34.4 million~~ and $152.8 million as of December 31, 2015 and December 31, 2014, respectively, and 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.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

The Company has established a liability related to the fair value of the retained credit exposure for multifamily loans sold to FNMA. This liability represents the amount the Company estimates it would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of the estimated losses the portfolio is projected to incur based upon internal specific information and an industry-based default curve with a range of estimated losses. As of ~~December 31, 2015~~ ~~and~~ ~~December 31, 2014, the Company had a liability of~~ ~~$6.8 million~~ ~~and~~ ~~$40.7 million, respectively, related to the fair value of the retained credit exposure for multifamily loans sold to FNMA under this program.~~

Net gains on hedging activities decreased $8.1 million for the year ended December 31, 2015, compared to the corresponding period in 2014. This decrease was primarily due to the decrease in the mortgage loan pipeline valuation and the Company's hedging strategy in the current mortgage rate environment.

Net gains/(losses) from changes in MSR fair value resulted in a gain of $3.9 million for the year ended December 31, 2015, compared to a loss of $2.8 million for the corresponding period in 2014. The carrying value of the related MSRs at December 31, 2015 and December 31, 2014 were $147.2 million and $145.0 million, respectively. The MSR asset fair value increase for the year ended December 31, 2015 was the result of increases in interest rates.

The Company recognized $24.7 million of principal reductions for the year ended December 31, 2015, compared to $22.0 million for the corresponding period in 2014. This increase was due to continued increases in prepayments and mortgage refinancing as a result of the anticipation of rising interest rates in the near future.

~~Equity Method Investments (Loss) / Income, net~~

Equity method investments (loss) / income, net decreased $17.3 million for the year ended December 31, 2015. The decrease for the year ended December 31, 2015 was primarily attributable to the Change in Control. In 2014 the Company included one month of accounting for SC as an equity method investment prior to the Change in Control. The Company began accounting for SC as a consolidated subsidiary beginning January 28, 2014. For further discussion see Item 1 Business.

~~BOLI~~

BOLI income represents fluctuations in the cash surrender value of life insurance policies on certain employees. The Bank is the beneficiary and the recipient of the insurance proceeds. Income from BOLI decreased $2.4 million, for the year ended December 31, 2015, compared to the corresponding period in 2014.

~~Capital Markets Revenue~~

~~Capital markets revenue decreased~~ ~~$14.3 million~~ for the year ended December 31, 2015, compared to the corresponding period in 2014. The decrease was primarily related to a decrease in derivative trading accounts for the year ended December 31, 2015.

~~Lease income~~

~~Lease income increased $698.8 million, on an average leased vehicle portfolio balance of $7.6 billion for the year ended~~ ~~December 31, 2015, compared to an average balance of $4.4 billion for the corresponding period in 2014. This increase was the result of the Company's efforts to grow the lease portfolio.~~

As disclosed within Note 1 to the Consolidated Financial Statements, during the year, the Company re-classified subvention payments from an addition to Lease income to a reduction to Lease expense in the Consolidated Statements of Operations for all periods presented.

~~Net gain recognized in earnings~~

Net gains recognized in earnings decreased $2.4 billion for the year ended December 31, 2015, compared to the corresponding period in 2014. The decrease for the year ended December 31, 2015 was primarily due to the one-time gain the Company recognized in connection with the Change in Control during the first quarter of 2014. For additional information on the Change in Control, see Note 3 to the Consolidated Financial Statements.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

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 asset-backed securities ("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. The net gain realized for the year ended December 31, 2014 was primarily comprised of the sale of state and municipal securities with a book value of $89.0 million for a gain of $5.2 million, the sale of corporate debt securities with a book value of $219.6 million for a gain of $4.8 million, and the sale of MBS with a book value of $579.4 million for a gain of $13.1 million.

~~Miscellaneous Income~~

Miscellaneous income decreased $369.7 million for the year ended December 31, 2015, compared to the corresponding period in 2014. The decrease for the year ended December 31, 2015 was primarily due to a $235.9 million decrease in fair value associated with the portfolio of loans that the Company accounts for at the fair value option ("FVO"). The decrease was also attributable to a reclassification that the Company made of their personal unsecured loans from held-for-investment ("HFI") to held-for-sale ("HFS") in the third quarter of 2015 and credit losses attributed to these portfolios. For further discussion please see Note 5.

~~GENERAL AND ADMINISTRATIVE EXPENSES~~

Year Ended December 31,
2015 2014
As Restated As Restated
(in thousands)
Compensation and benefits $ 1,367,088
$ 1,214,348
Occupancy and equipment expenses 541,291
470,439
Technology expense 178,078
163,015
Outside services 277,296
195,313
Marketing expense 80,179
52,448
Loan expense 369,536
324,328
Lease expense 1,121,734
595,711
Other administrative expenses 342,088
314,000
Total general and administrative expenses $ 4,277,290
$ 3,329,602

~~Total general and administrative expenses increased $947.7 million for the year ended December 31, 2015 from the corresponding period in 2014. Factors contributing to these increases were as follows:~~

Compensation and benefits expense increased $152.7 million for the year ended December 31, 2015 from the corresponding period in 2014. The primary driver of this increase was the Company's continued investment in personnel through increased salary, benefits and headcount. During the third quarter, the Company initiated a process to improve its operating efficiency, specifically focused on organizational simplification. As a result of this process, the Company incurred a severance accrual of $28.0 million for the year ended December 31, 2015.

Occupancy and equipment expenses increased $70.9 million for the year ended December 31, 2015 from the corresponding period in 2014. This was primarily due to an increase in depreciation expense for the year ended December 31, 2015 of $40.0 million which accounted for 56.5% of the increase. This was partially attributable to the second quarter of 2015. The Bank closed 29 branches located throughout its footprint in order to gain operational efficiencies. These closures resulted in accelerated depreciation expense of $7.6 million of related assets and a vacancy accrual charge of $6.4 million in the form of rent expense.

Outside services increased $82.0 million for the year ended December 31, 2015 from the corresponding period in 2014. This increase was primarily due to increased consulting service fees that relate to regulatory-related initiatives, including preparation for meeting the requirements of the IHC implementation rules. Consulting fees increased $93.5 million for the year ended December 31, 2015 from the corresponding period in 2014. The increase was offset by a decrease in outside processing services.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

Loan expense increased $45.2 million for the year ended December 31, 2015 from the corresponding period in 2014. This increase was primarily due to an increase of $63.9 million in collection expenses largely associated with the growing RIC and auto loan portfolio. The increase was offset by a decrease in loan servicing expenses.

Lease expense increased $526.0 million for the year ended December 31, 2015 from the corresponding period in 2014. This increase was primarily due to the continued growth of the Company's leased vehicle portfolio.

Other administrative expenses increased $28.1 million for the year ended December 31, 2015 from the corresponding period in 2014. The increase was due to a $8.4 million increase of legal fees and a $24.8 million increase in non-income related tax expenses that were recognized throughout the year. This was offset by a $11.7 million decrease in employee expenses throughout the year.

~~OTHER EXPENSES~~

Year Ended December 31,
2015 2014
(As Restated) (As Restated)
(in thousands)

Amortization of intangibles $ 67,932
$ 96,421
Deposit insurance premiums and other expenses 56,946
55,746
Loss on debt extinguishment —
127,063
Impairment of capitalized software —
64,546
Impairment of goodwill 4,507,095
—
Investment expense on affordable housing projects 156
—
Total other expenses $ 4,632,129
$ 343,776

~~Total other expenses increased $4.3 billion for the year ended December 31, 2015 compared to the corresponding period in 2014. The primary factors contributing to the increase were:~~

Amortization of intangibles decreased $28.5 million for the year ended December 31, 2015, compared to the corresponding period in 2014. This decrease was primarily due to an impairment of $28.5 million recognized in 2014 offset by a fourth quarter 2015 impairment of $3.5 million of the Company's indefinite-lived trade name. For further discussion on the impairment of this indefinite-lived trade name, please see Note 9 of the Consolidated Financial Statements.

Deposit insurance premiums expenses increased $1.2 million for the year ended December 31, 2015, compared to the corresponding period in 2014. This variance was caused by a change in FDIC insurance premium rates and the assessment base for the Bank.

There were no losses on debt extinguishment during the year ended December 31, 2015, compared to $127.1 million of losses in the year ended December 31, 2014. This expense was primarily related to early termination fees incurred by the Company in association with the 2014 termination of legacy FHLB advances.

There was no impairment charges recorded on capitalized software during 2015. In the second quarter of 2014, an impairment of capitalized software charge of $64.5 million was recorded due to the restructuring of the Company's capitalized software.

For the year ended December 31, 2015 the Company recorded an impairment of goodwill in the amount of $4.5 billion. For further discussion on this matter, see the section of the MD&A captioned "Goodwill".

The Company incurred an investment expense on affordable housing projects of $156 thousand for the year ended December 31, 2015. This expense was directly related to low income housing tax credit ("LIHTC") investments. This is attributed to the adoption of Accounting Standards Update ("ASU") 2014-01. See Note 1 to the Consolidated Financial Statements for additional information.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~INCOME TAX PROVISION~~

~~An income tax benefit of $675.2 million was recorded for the year ended~~ ~~December 31, 2015, compared to an income tax provision of $1.6 billion for the corresponding period in~~ ~~2014. This resulted in effective tax rates of 17.7% for the year ended~~ ~~December 31, 2015, compared to 35.7% for the corresponding period in 2014.~~

The lower income tax provision in 2015 was primarily due to two drivers. In 2015, the Company recognized an impairment of the goodwill with respect to its investment in SC, which reduced the Company's deferred tax liability for the excess carrying value over its tax basis in the investment. The Company recognized a tax benefit of $996.1 million for the reduction in the deferred tax liability. In 2014, the Company recognized a tax expense of $913.4 million (approximately $837.6 million of which was deferred) on a book gain of $2.4 billion related to the Change in Control. The book gain was primarily due to the excess of fair value over the carrying value of the assets on SC's books at the time of the Change in Control. The $837.6 million of deferred tax liability would be recognized upon the Company's disposition of its interest in SC or if the goodwill associated with the Change in Control becomes impaired.

The lower effective tax rate for the year ended December 31, 2015 was driven primarily by two components. The first was the 2015 impairment of goodwill related to the Company's investment in SC in the amount of $4.5 billion, which put the Company in a consolidated pretax loss position. The Company is not able to recognize a tax benefit for the impairment. In addition, the Company increased the reserve for income taxes under dispute with the United States for certain financing transactions by $104.2 million. Both of these items reduce the overall effective tax rate on a pretax base that is a loss.

The Company's effective tax rate 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~~

Since the Original Filing of the December 31, 2015 Form 10-K, 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 goals of the Company and provide enhanced customer service to its clients. Accordingly, the following changes were made within the Company's reportable segments to provide greater focus on each of its core businesses:

The small business banking, commercial business banking, and auto leasing lines of business formerly included in the Auto Finance and Business Banking reportable segment, were combined with the Consumer and Business Banking reportable segment.

~~The Real Estate and Commercial reportable segment was split into the Commercial Real Estate reportable segment and the Commercial Banking reportable segment.~~

~~The CEVF and dealer floor plan lines of business, formerly included in the Auto Finance & Business Banking reportable segment, were moved to the Commercial Banking business unit.~~

~~The internal FTP guidelines and methodologies were revised to align with Santander corporate criteria for internal management reporting. These FTP changes impact all reporting segments, excluding SC.~~

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

The Company's segments at December 31, 2015 consisted of Consumer and Business Banking, Commercial Banking, Commercial Real Estate, Global Corporate Banking and SC. For additional information with respect to the Company's reporting segments, see Note 24 to the Consolidated Financial Statements.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~Results Summary~~

~~Consumer and Business Banking~~

Net interest income increased $21.8 million for the year ended December 31, 2015, compared to the corresponding period in 2014. The average balance of the Consumer and Business Banking segment's gross loans was $17.4 billion for the year ended December 31, 2015, compared to $19.8 billion for the corresponding period in 2014, the decrease driven by a troubled debt restructuring ("TDR") sale during the third quarter of 2014, and the securitization of $2.1 billion of mortgage loans to MBS as part of securitization transactions. The average balance of deposits was $39.4 billion for the year ended December 31, 2015, compared to $38.4 billion for the corresponding period in 2014, primarily driven by growth in money market accounts. Total non-interest income increased $81.5 million for the year ended December 31, 2015, compared to the corresponding period in 2014. The provision for credit losses decreased $24.6 million for the year ended December 31, 2015, compared to the corresponding period in 2014, driven by an improvement in credit quality in 2015. Total expenses increased $240.8 million for the year ended December 31, 2015, compared to the corresponding period in 2014, primarily due to increased consulting service fees, which was mostly related to the CCAR plan, as well as increased maintenance expenses.

Total assets for the year ended December 31, 2015 was $21.6 billion, compared to $22.3 billion for the corresponding period in 2014. The decrease was primarily driven by a decrease within the mortgage loan portfolio.

~~Commercial Banking~~

Net interest income increased $34.0 million for the year ended December 31, 2015, compared to the corresponding period in 2014. Total average gross loans was $10.4 billion for the year ended December 31, 2015, compared to $8.8 billion for the corresponding period in 2014, driven by growth in the dealer lending and commercial equipment and vehicle funding ("CEVF") business lines. Total non-interest income increased $3.7 million for the year ended December 31, 2015, compared to the corresponding period in 2014, due primarily to growth in the indirect leasing business line, which was launched in 2014. The Commercial Banking segment ceased originations in the indirect leasing business line during the second quarter of 2015. The provision for credit losses decreased $9.3 million for the year ended December 31, 2015, compared to the corresponding period in 2014, driven by a reversal of a management adjustment to provisions for Business Banking. Total expenses increased $34.1 million for the year ended 2015, compared to the corresponding period in 2014, due primarily to growth in the indirect leasing business line.

Total assets was $16.6 billion for the year ended December 31, 2015, compared to $15.1 billion for the corresponding period in 2014, driven by the growth in the indirect leasing business line. Total average deposits was $8.9 billion for the year ended December 31, 2015, compared to $7.8 billion for the corresponding period in 2014, driven by the growth in non-interest bearing core deposits.

~~Commercial Real Estate~~

Net interest income increased $23.1 million during the year ended December 31, 2015, compared to the corresponding period in 2014. The average balance of this segment's gross loans was $14.5 billion and $14.3 billion, for the years ended December 31, 2015 and 2014, respectively. The average balance of deposits remained flat at $0.8 billion during the year ended December 31, 2015. Total non-interest income increased $7.4 million during the year ended December 31, 2015, compared to the corresponding period in 2014 due to increased releases of recourse reserves during 2015. The provision for credit losses was $25.7 million for the year ended December 31, 2015, compared to provision releases of $98.2 million for the corresponding period in 2014 Total expenses decreased $8.2 million during the year ended December 31, 2015, compared to the corresponding period in 2014.

~~Total assets, which includes the related ACL, was $15.1 billion for the year ended December 31, 2015, compared to $14.0 billion for the corresponding period in 2014.~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~Global Corporate Banking~~

Net interest income increased $38.7 million for the year ended December 31, 2015, compared to the corresponding period in 2014. The average balance of this segment's gross loans was $9.6 billion for the year ended December 31, 2015, compared to $7.7 billion for the corresponding period in 2014. The average balance of deposits was $1.8 billion for the year ended December 31, 2015, compared to $1.2 billion for the corresponding period in 2014. Total non-interest income increased $5.5 million for the year ended December 31, 2015, compared to the corresponding period in 2014. The provision for credit losses increased $40.2 million for the year ended December 31, 2015, compared to the corresponding period in 2014. Total expenses increased $7.5 million for the year ended December 31, 2015, compared to the corresponding period in 2014.

~~Total assets was $12.1 billion for the year ended December 31, 2015, compared to $10.2 billion for the corresponding period in 2014.~~

~~Other~~

Net interest income decreased $128.6 million for the year ended December 31, 2015, compared to the corresponding period in 2014. Total non-interest income decreased $92.5 million for the year ended December 31, 2015, compared to the corresponding period in 2014. There was a provision for credit losses of $8.2 million for the year ended December 31, 2015, compared to a provision of $1.3 million during the corresponding period in 2014. Total expenses decreased $23.4 million during the year ended December 31, 2015, compared to the corresponding period in 2014.

~~Total assets was $26.6 billion for the year ended December 31, 2015, compared to $25.3 billion for the corresponding period in 2014.~~

From December 2011 until January 28, 2014, SC was accounted for as an equity method investment. In 2014, SC's results of operations were consolidated with SHUSA. SC is managed as a separate business unit, with its own systems and processes, and is reported as a separate segment. For more information, see Note 3 to the Consolidated Financial Statements.

Net interest income increased $459.0 million for the year ended December 31, 2015, compared to the corresponding period of 2014. Total non-interest income increased $255.3 million for the year ended December 31, 2015, compared to the corresponding period in 2014. This increase in income was primarily attributable to increases in loans and leased vehicles during the year. A one time gain on change in control of $2.4 billion occurred in 2014 due to the consolidation of SCUSA. The provision for credit losses increased $267.5 million for the year ended December 31, 2015, compared to the corresponding period in 2014. Total expenses increased $278.2 million during the year ended December 31, 2015, compared to the corresponding period in 2014, also attributable to the growth in the loan and leased vehicle portfolios during the year.

~~Total assets was $35.6 billion for the year ended December 31, 2015, compared to $31.9 billion for the corresponding period of 2014.~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2014 AND 2013~~

Year Ended December 31,
2014 2013
(As Restated) (As Restated)
(in thousands)
Net interest income $ 5,917,133
$ 1,513,771
Provision for credit losses (2,413,243 ) (46,850 )
Total non-interest income 4,679,906
1,099,417
General and administrative expenses (3,329,602 ) (1,689,524 )
Other expenses (343,776 ) (137,538 )
Income before income taxes 4,510,418
739,276
Income tax provision (1,610,958 ) (83,416 )
Net income including Noncontrolling interest $ 2,899,460
$ 655,860

The company reported a pre-tax income of $4.5 billion for the year ended December 31, 2014, compared to pretax income of $739.3 million for the year ended December 31, 2013. Factors contributing to this increase are as follows:

~~Net interest income increased $4.4 billion for the year ended December 31, 2014, compared to 2013 of which $4.4 billion is attributed to the Change in Control.~~

~~Provision for credit losses increased $2.4 billion for the year ended December 31, 2014, compared to 2013. This increase was due to the Change in Control. All other impacts were negligible.~~

Total non-interest income increased $3.6 billion for the year ended December 31, 2014, compared to 2013. This was primarily due to the gain recognized from the Change in Control of $2.4 billion (pre-tax) and increased fee and other income activity following the Change in Control of $1.3 billion.

Total general and administrative expenses increased $1.6 billion for the year ended December 31, 2014, compared to 2013. This change of $1.6 billion was primarily as a result of activity added by the Change in Control. The remaining increase was primarily due to increased compensation and benefits, loan expenses and the addition of lease expense.

Other expenses increased $206.2 million for the year ended December 31, 2014, compared to 2013. Approximately $49.6 million of this increase was the result of amortization on intangible assets added by the Change in Control. The remaining increase was primarily due to a one-time impairment of our capitalized software of $64.5 million and early termination fees from debt repurchases.

The income tax provision increased $1.5 billion for the year ended December 31, 2014 compared to 2013. This increase was primarily due to the $608.6 million tax impact on provision from the Change in Control.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~NET INTEREST INCOME~~

Year Ended December 31,
2014 2013
(As Restated)
(in thousands)
INTEREST INCOME:
Interest-earning deposits $ 8,468
$ 6,494
Investments available-for-sale 258,646
302,820
Other investments 36,921
27,669
Total interest income on investment securities and interest-earning deposits 304,035
336,983
Interest on loans 6,667,821
1,958,908
Total interest income 6,971,856
2,295,891
INTEREST EXPENSE:
Deposits and customer accounts 209,793
211,520
Borrowings and other debt obligations 844,930
570,600
NET INTEREST INCOME: $ 5,917,133
$ 1,513,771

~~Net interest income increased $4.4 billion for the year ended December 31, 2014, compared to 2013, of which $4.4 billion is attributed to the Change in Control.~~

~~Net Interest Income on Investment Securities and Interest-Earning Deposits~~

Interest income on investment securities and interest-earning deposits decreased $32.9 million for the year ended December 31, 2014 compared to the corresponding period in 2013. The average balance of investment securities and interest-earning deposits for the year ended December 31, 2014 was $15.5 billion, which was a decrease of $2.5 billion, compared to an average balance of $18.0 billion for the year ended December 31, 2013. Overall, the decrease in interest income on investment securities and the decrease in the average investment balance were primarily attributable to the sales of certain MBS and CMO investments occurring in the second half of 2013 and additional sales in 2014.

The average tax equivalent yield of investment securities and interest-earning deposits was 2.20% for the year ended December 31, 2014, compared to 2.09% for the corresponding period in 2013. The increase from the prior year reflects increasing coupons on investment securities spurred by economic improvement.

~~Interest Income on Loans~~

~~Interest income on loans increased $4.7 billion for the year ended December 31, 2014, compared to 2013. The increase in interest income on loans was primarily due to the Change in Control.~~

The average balance of total loans was $73.3 billion with an average yield of 9.12% for the year ended December 31, 2014, compared to $50.9 billion with an average yield of 3.88% for the year ended December 31, 2013. The increase in the average balance of total loans was primarily due to the Change in Control. The average balance of retail installment contracts and auto loans, which comprised a majority of the increase, was $19.9 billion with an average yield of 20.64% for the year ended December 31, 2014, compared to $169.3 million with an average yield of 7.42% for the year ended December 31, 2013.

~~Interest Expense on Deposits and Related Customer Accounts~~

Interest expense on deposits and related customer accounts decreased $1.7 million for the year ended December 31, 2014, compared to the year ended December 31, 2013. The average balance of total interest-bearing deposits was $42.4 billion with an average cost of 0.50% for the year ended December 31, 2014, compared to an average balance of $41.9 billion with an average cost of 0.50% for the year ended December 31, 2013. The decrease in interest expense on deposits and customer-related accounts during the year ended December 31, 2014 was primarily due to the lower interest rate environment as well as the Bank's continued focus on repositioning its account mix.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


~~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 $274.3 million for the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase in interest expense on borrowed funds was due to the Change in Control, which accounted for $437.1 million of total interest expense on borrowings for the year ended December 31, 2014. This was offset by a decrease in interest expense on borrowed funds of $162.8 million for the Bank and the Company for the year ended December 31, 2014, as a result of the Bank's use of the proceeds from the sale of investment securities to pay off existing borrowed funds. The average balance of total borrowings was $34.5 billion with an average cost of 2.45% for the year ended December 31, 2014, compared to an average balance of $14.5 billion with an average cost of 3.95% for the year ended December 31, 2013.

~~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 loan portfolio. The provision for credit losses for the year ended December 31, 2014 was $2.4 billion compared to $46.9 million for the year ended December 31, 2013. Of the increase, all but an immaterial amount is attributable to the RIC, unsecured and auto loan portfolios added from the Change in Control and subsequent origination activity within the same portfolios.

~~The following table presents the activity in the allowance for credit losses for the periods indicated:~~

Year Ended December 31,
2014 2013
(As Restated) (As Restated)
(in thousands)
Allowance for loan and lease losses, beginning of period $ 834,337
$ 1,013,469
Charge-offs:
Commercial (109,718 ) (123,517 )
Consumer(3) (2,664,747 ) (191,687 )
Total charge-offs (2,774,465 ) (315,204 )
Recoveries:
Commercial 40,379
53,132
Consumer⁽³⁾
1,167,328
46,090
Total recoveries 1,207,707
99,222
Charge-offs, net of recoveries (1,566,758 ) (215,982 )
Provision for loan and lease losses ⁽¹⁾
2,495,243
36,850
Other⁽²⁾:

Commercial —
—
Consumer (61,220 ) —
Allowance for loan and lease losses, end of period $ 1,701,602
$ 834,337

Reserve for unfunded lending commitments, beginning of period 220,000
210,000
Provision for unfunded lending commitments ⁽¹⁾
(82,000 ) 10,000
Loss on unfunded lending commitments (5,359 ) —
Reserve for unfunded lending commitments, end of period 132,641
220,000
Total allowance for credit losses, end of period $ 1,834,243
$ 1,054,337


~~(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 provision for unfunded lending commitments.~~


~~(2)~~	The “Other” amount represents the impact on the allowance for loan and lease losses in connection with the sale of approximately $484.2 million of TDRs and NPLs classified as held-for-sale during the third quarter of 2014.


~~(3)~~	~~Unallocated charge-offs and recoveries for the year ended December 31, 2014 are included in Consumer.~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

The Company's net charge-offs increased for the year ended December 31, 2014 compared to the year ended December 31, 2013. In connection with the Change in Control, the ratio of net loan charge-offs to average total loans increased to 2.2% for the year ended December 31, 2014 compared to 0.4% for the year ended December 31, 2013. The increase was primarily related to the RIC and auto loan portfolio added from the Change in Control and the $1.4 billion of net charge-offs on that portfolio. Commercial loan net charge-offs as a percentage of average commercial loans was 0.2% for the year ended December 31, 2014 compared to 0.2% for the year ended December 31, 2013. The consumer loan net charge-off ratio was 4.0% for the year ended December 31, 2014 compared to 0.8% for the year ended December 31, 2013. The increase in consumer charge-offs is primarily due to the credit quality of the RIC and auto loan portfolio added in the Change in Control, a majority of which are considered non-prime loans (defined by the Company as customers with Fair Isaac Corporation ("FICO") score of below 640). At December 31, 2014, 70% of the RIC and auto loan portfolio was comprised of non-prime loans.

~~NON-INTEREST INCOME~~

Year Ended December 31,
2014 2013
(As Restated) (As Restated)
(in thousands)
Consumer fees $ 382,854
$ 228,666
Commercial fees 185,373
199,486
Mortgage banking income, net 204,558
122,036
Equity method investments 8,515
438,185
Bank owned life insurance 60,278
57,041
Capital markets revenue 51,671
31,742
Net gain recognized in earnings 2,444,797
9,454
Lease income 790,737
—
Miscellaneous income 551,123
12,807
Total non-interest income $ 4,679,906
$ 1,099,417

~~Total non-interest income increased $3.6 billion for the year ended December 31, 2014 compared to the year ended December 31, 2013. This increase is primarily due to the Change in Control.~~

~~Consumer Fees~~

Consumer fees increased $154.2 million for the year ended December 31, 2014, compared to 2013. The increase for the year ended December 31, 2014 was mainly due to the $168.3 million additional loan fees attributable to the Change in Control.

~~Commercial Fees~~

~~Commercial fees decreased $14.1 million for the year ended December 31, 2014, compared to 2013. This decrease was primarily due to lower commercial deposit fees in 2014.~~

~~Mortgage Banking Revenue~~

Year Ended December 31,
2014 2013
(in thousands)
Mortgage and multifamily servicing fees $ 44,234
$ 45,413
Net gains on sales of residential mortgage loans and related securities 144,885
54,362
Net gains on sales of multifamily mortgage loans 26,378
45,961
Net gains / (losses) on hedging activities 13,859
(37,170 )
Net (losses) / gains from changes in MSR fair value (2,817 ) 36,479
MSR principal reductions (21,981 ) (23,009 )
Total mortgage banking income, net $ 204,558
$ 122,036

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

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 includes 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 transactions are also included in Mortgage banking income.

Mortgage banking revenue increased $82.5 million for the year ended December 31, 2014 compared to 2013. This increase was primarily due to an increase in the gain on sale of residential mortgage loans, as well as increased gains from hedging activities, partially offset by a decline in the fair value of MSRs.

~~During 2012 and early 2013, there was significant volatility in mortgage interest rates which impacted the Company's mortgage banking revenue.~~

~~Since mid-2013, these rates have stabilized, resulting in relative stability in mortgage banking fee fluctuations from rate changes.~~

~~The following table details certain residential mortgage rates for the Bank as of the dates indicated:~~

30-Year Fixed 15-Year Fixed
March 31, 2013 3.63 % 2.99 %
June 30, 2013 4.38 % 3.50 %
September 30, 2013 4.38 % 3.38 %
December 31, 2013 4.63 % 3.50 %
March 31, 2014 4.38 % 3.50 %
June 30, 2014 4.13 % 3.38 %
September 30, 2014 4.25 % 3.50 %
December 31, 2014 3.99 % 3.25 %

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

Mortgage and multifamily servicing fees were relatively flat with a $1.2 million decrease for the year ended December 31, 2014 compared to 2013. This decrease was primarily due to decreases in the multifamily servicing portfolio. At December 31, 2014 and 2013, the Company serviced multifamily real estate loans for the benefit of others totaling $2.9 billion and $4.6 billion.

Net gains on sales of residential mortgage loans and related securities increased $90.5 million for the year ended December 31, 2014 compared to 2013. For the year ended December 31, 2014, the Company sold $3.3 billion of loans for a gain of $144.9 million, compared to $4.0 billion of loans sold for a gain of $54.4 million for the year ended December 31, 2013.

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 reserves are recognized as gain or loss on sale.

Net gains on sales of multifamily mortgage loans were $26.4 million for the year ended December 31, 2014, compared to $46.0 million for the year ended December 31, 2013, primarily due to the decrease in sales from 2013 to 2014.

The Company previously sold multifamily loans in the secondary market to FNMA while retaining servicing rights. 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.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

At December 31, 2014 and 2013, the Company serviced $2.6 billion and $4.3 billion, of loans for FNMA. These loans had a credit loss exposure of $152.8 million as of December 31, 2014 and $159.0 million as of December 31, 2013, and losses, if any, resulting from representation and warranty defaults would be in addition to the credit loss exposure. The servicing asset for these loans was completely amortized in 2012.

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 estimated 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. At December 31, 2014 and 2013, the Company had a liability of $40.7 million and $68.0 million, related to the fair value of the retained credit exposure for loans sold to FNMA under this program.

Net gains/(losses) on hedging activities increased $51.0 million from a loss position in 2013 to a gain position for the year ended December 31, 2014, due to the mortgage rate environment and the significant decreases in the mortgage loan pipeline. Also contributing to the change was the Company's change in strategy during 2013 to hold mortgage loans originated as opposed to originating them for sale.

Net gains/ (losses) from changes in MSR fair value decreased $39.3 million for the year ended December 31, 2014 compared to 2013. The carrying value of the related MSRs at December 31, 2014 and 2013 were $145.0 million and $141.8 million, respectively. The MSR asset fair value decrease during 2014 was the result of decreased interest rates.

~~MSR principal reductions resulted in a gain of $1.0 million for the year ended December 31, 2014, compared to 2013. The gain was due to the reduction in prepayments and mortgage refinancing.~~

~~Gain on Change in Control and Equity Method Investments~~

Prior to the closing of the IPO in January 2014, the Company accounted for its investment in SC under the equity method. Following the closing of the IPO, the Company consolidated the financial results of SC in the Company’s Consolidated Financial Statements beginning with its Form 10-Q for the first quarter of 2014. In connection with the Change in Control, the Company recognized a gain of $2.4 billion during the year ended December 31, 2014. The Company recognized a gain of $8.5 million and $438.2 million on equity method investments for the year ended December 31, 2014 and 2013, respectively. The decrease of $429.7 million in equity method investment was due to the Change in Control, which resulted in accounting for SC as a consolidated subsidiary beginning January 28, 2014.

~~BOLI~~

BOLI income represents fluctuations in the cash surrender value of life insurance policies on certain employees. The Bank is the beneficiary and the recipient of the insurance proceeds. Income from BOLI increased $3.2 million, for the year ended December 31, 2014, compared to 2013.

~~Net gain recognized in earnings~~

Net gains recognized in earnings increased $2.4 billion for the year ended December 31, 2014 compared to 2013. The increase was primarily due to the Change in Control. For additional information on the Change in Control, see Note 3 to the Consolidated Financial Statements.

The net gain realized for the year ended December 31, 2014 was primarily comprised of the sale of state and municipal securities with a book value of $89.0 million for a gain of $5.2 million, the sale of corporate debt securities with a book value of $219.6 million for a gain of $4.8 million, and the sale of MBS with a book value of $579.4 million for a gain of $13.1 million. The net gain realized in for the year ended December 31, 2013 was primarily comprised of the sale of CMO with a book value of $4.1 billion for a gain of $69.0 million and the sale of corporate debt securities with a book value of $905.7 million for a gain of $34.7 million, offset by the OTTI charge of $63.6 million.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~Lease Income~~

Lease income for the year ended December 31, 2014 was $790.7 million. This is a result of the Change in Control, as the Company had no lease income prior to the Change in Control. In addition, during 2014, through a flow agreement with SC, SBNA began originating prime and super prime Chrysler Capital consumer vehicle leases which created lease income for the Bank.

~~Miscellaneous Income~~

Miscellaneous income increased $538.3 million for the year ended December 31, 2014, compared to 2013. The increase is primarily due to the purchase accounting marks on fair value option ("FVO") loans associated with the Change in Control.

~~GENERAL AND ADMINISTRATIVE EXPENSES~~

Year Ended December 31,
2014 2013
(As Restated) (As Restated)
(in thousands)
Compensation and benefits $ 1,214,348
$ 697,876
Occupancy and equipment expenses 470,439
381,794
Technology expense 163,015
127,748
Outside services 195,313
102,356
Marketing expense 52,448
55,864
Loan expense 324,328
73,776
Lease expense 595,711
—
Other administrative expenses 314,000
250,110
Total general and administrative expenses $ 3,329,602
$ 1,689,524

~~Total general and administrative expenses increased $1.6 billion for the year ended December 31, 2014, compared to 2013. Factors contributing to this increase are as follows:~~

Compensation and benefits expense increased $516.5 million for the year ended December 31, 2014 compared to 2013. Approximately $430.0 million of the increase was attributable to the Change in Control. The remainder of the increase was primarily due to the Company's investment in personnel through increased salary, headcount, and bonuses.

Occupancy and equipment expense increased $88.6 million for the year ended December 31, 2014 compared to 2013. Approximately $55.1 million was associated with the Change in Control. The remaining increase was primarily due to higher office occupancy, as well as continued higher property maintenance expenses in the periods following the Bank's rebranding.

Technology services expense increased $35.3 million for the year ended December 31, 2014 compared to 2013. This increase was primarily due to the Company's investments in our retail branch teller platform upgrades and also due to the Change in Control.

Outside services increased $93.0 million for the year ended December 31, 2014 compared to 2013. This increase was primarily due to significant consulting fees for CCAR implementation, cash balancing, and valuation services in connection with the Change in Control.

Loan expense increased $250.6 million for the year ended December 31, 2014, compared to 2013. The increase was primarily due to higher volumes of loan servicing and loan originations for the retail installment contracts portfolio.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~The Company incurred lease expense of $595.7 million in December 31, 2014. This is a result of the Change in Control.~~

~~Other administrative expenses increased $63.9 million for the year ended December 31, 2014, compared to 2013. This increase was primarily due to the Change in Control.~~

~~OTHER EXPENSES~~

Year Ended December 31,
2014 2013
(As Restated) (As Restated)
(in thousands)
Amortization of intangibles $ 96,421
$ 27,334
Deposit insurance premiums and other costs 55,746
70,327
Loss on debt extinguishment 127,063
6,877
Impairment of long-lived assets 64,546
33,000
Total other expenses $ 343,776
$ 137,538

~~Total other expenses increased $206.2 million for the year ended December 31, 2014, compared to the year ended 2013. The primary factors contributing to the increase were:~~

Amortization of intangibles increased $69.1 million for the year ended December 31, 2014 compared to the year ended 2013. This was primarily due to the addition of intangibles related to the Change in Control.

Deposit insurance premiums decreased $14.6 million for the year ended December 31, 2014 compared to the year ended 2013. This decrease was primarily related to a lower FDIC insurance premium of $15.0 million, due to overall lower FDIC insurance premium rates and assessments compared to the prior year.

Loss on debt extinguishment increased by $120.2 million in the year ended December 31, 2014 compared to 2013. This increase was primarily due to early termination fees incurred by the Company in association with the 2014 termination of legacy FHLB advances.

~~Impairment of long-lived assets resulted in a one-time impairment assets charge of $64.5 million in 2014.~~

~~INCOME TAX PROVISION~~

An income tax provision of $1.6 billion was recorded for the year ended December 31, 2014 compared to $83.4 million for the year ended December 31, 2013, resulting in an effective tax rate of 35.7% for the year ended December 31, 2014 compared to 11.3% for the year ended December 31, 2013.

The higher income tax provision in 2014 was due to several factors. First, the Company recognized tax expense of $917.5 million (approximately $841.7 million of which was deferred) on book gains of $2.4 billion related to the Change in Control. The book gain was primarily due to the excess of fair value over the carrying value of the assets on SC’s books at the time of the Change in Control. The $841.7 million of deferred tax liability would be recognized upon the Company’s disposition of its interest in SC or if the goodwill associated with the Change in Control becomes impaired. The income tax provision also increased by $654.9 million in 2014 due to the inclusion of the operating income of SC (as adjusted for purchase accounting) in SHUSA’s pre-tax income, as a result of SC’s consolidation into SHUSA’s financial statements. When SC was previously presented as an equity method investment, SHUSA included SC’s net income in SHUSA’s presentation of pre-tax income. The impact of these two items was partially offset by a decline in SHUSA’s (excluding SC) operating pre-tax earnings (excluding the gain recognized from the Change in Control) versus that of 2013, which caused a decrease in tax expense of $178.4 million.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

The higher effective tax rate in 2014 was driven primarily by two factors related to the Change in Control. The consolidation of SC highlights the impact of double taxation on SC’s operating income because the consolidated financial statements include the taxes paid by SC as well as the taxes accrued by SHUSA on its share of SCUSA’s earnings. This was not reflected under equity-method accounting, which was applicable to SHUSA’s 2013 consolidated financial statements. When compared to the results of 2013, the impact of this presentation resulted in an increase in the ETR of approximately 9%. In addition, the significant increase in the pre-tax income resulting from the Change in Control and the inclusion of the operating income of SC reduced the relative impact of favorable permanent tax differences (e.g., tax-exempt income and tax credits). When compared to 2013, the dilution effect of the higher pretax income from these two items on the favorable permanent items resulted in an increase in the effective tax rate ("ETR") of approximately 7%. The impact of these two items was partially offset by a decrease of approximately 3% related to state and local taxes, which was due to SC being taxable in jurisdictions with lower tax rates relative to SHUSA’s historical filing group and changes in law in both New York State and Massachusetts, which had an overall favorable impact on the Company. It is expected that the Company’s ETR will trend higher than for years 2013 and earlier due to the level of income produced by SC that contributes to the dilution effect described above.

~~LINE OF BUSINESS RESULTS~~

~~General~~

~~The Real Estate and Commercial reportable segment was split into the Commercial Real Estate reportable segment and the Commercial Banking reportable segment.~~

~~The CEVF and dealer floor plan lines of business, formerly included in the Auto Finance & Business Banking reportable segment, were moved to the Commercial Banking business unit.~~

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

~~The Company's segments at December 31, 2014 consisted of Consumer and Business Banking, Commercial Banking, Commercial Real Estate and The Global Corporate Banking ("GCB"), and SC.~~

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

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~Results Summary~~

~~Consumer and Business Banking~~

~~Net interest income decreased $12.7 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. The average balance of the~~ ~~Consumer and Business Banking~~ segment's gross loans was $19.8 billion for the year ended December 31, 2014, compared to $21.5 billion in 2013. The average balance of deposits was $38.4 billion for the year ended December 31, 2014, compared to $39.2 billion for 2013. Total non-interest income increased $210.3 million for the year ended December 31, 2014 compared to 2013, primarily due to the increase in the sales of mortgage loans and MBS. The provision for credit losses decreased $84.6 million for the year ended December 31, 2014 compared to 2013. Total expenses increased $154.8 million for the year ended December 31, 2014 compared to 2013, primarily due to increased rent, increased grounds maintenance, re-stocking of branch materials in 2014 mainly due to the Bank's rebranding in 2013, and leasehold improvements in the branches.

~~Total average assets for the year ended December 31, 2014 was $22.3 billion, compared to $21.7 billion for the year ended December 31, 2013.~~

~~Commercial Banking~~

Net interest income increased $13.5 million for the year ended December 31, 2014 compared to the year ended December 31, 2013, driven primarily by the Chrysler Capital dealer floor-plan business line launched in the third quarter of 2013. Total average gross loans were $8.8 billion for the year ended December 31, 2014, compared to $8.1 billion in 2013. Total non-interest income increased $2.4 million for the year ended December 31, 2014 compared to 2013, due primarily to the launch of the indirect leasing segment in 2014. The provision for credit losses increased $54.4 million for the year ended December 31, 2014, compared to 2013. Total expenses decreased $51.8 million for the year ended December 31, 2014 compared to 2013, due primarily to the depreciation expense from operating lease assets associated with the launch of the indirect leasing business in 2014.

Total average assets were $15.1 billion for the year ended December 31, 2014 compared to $13.1 billion for the year ended December 31, 2013, due primarily to the launch of the indirect leasing segment in 2014. Total average deposits were $7.8 billion for the year ended December 31, 2014 compared to $6.0 billion for the year ended December 31, 2013.

~~Commercial Real Estate~~

Net interest income increased $39.0 million for the year ended December 31, 2014 compared to 2013. Driven by growth in the multifamily portfolio, the average balance of this segment's gross loans increased to $14.3 billion during the year ended December 31, 2014, compared to $13.3 billion in 2013. Growth in government banking drove the average balance of deposits to $0.8 billion for the year ended December 31, 2014, compared to $0.8 billion in 2013. Total non-interest income decreased $25.5 million for the year ended December 31, 2014 compared to 2013. This decline was primarily related to a decrease of serviced portfolio reserve releases in 2014 compared to 2013. The release of credit losses was $98.2 million for the year ended December 31, 2014, compared to a release of $83.2 million for 2013. Total expenses increased $23.7 million for the year ended December 31, 2014 compared to 2013.

~~Total average assets were $14.0 billion for the year ended December 31, 2014, compared to $13.6 billion for the year ended December 31, 2013.~~

~~Global Corporate Banking (GCB)~~

Net interest income increased $12.6 million for the year ended December 31, 2014 compared to 2013. The average balance of this segment's gross loans was $7.7 billion for the year ended December 31, 2014, compared to $7.1 billion in 2013, with the increase primarily driven by growth in the Large Corporate portfolio. The average balance of deposits was $1.2 billion for the year ended December 31, 2014, compared to $0.8 billion in 2013. Total non-interest income increased $2.9 million for the year ended December 31, 2014 compared to 2013. The provision for credit losses increased $1.6 million for the year ended December 31, 2014 compared to 2013. Total expenses increased $23.8 million for the year ended December 31, 2014 compared to 2013.

~~Total average assets were $10.2 billion for the year ended December 31, 2014, compared to $8.1 billion in 2013.~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~Other~~

Net interest income increased $11.3 million for the year ended December 31, 2014 compared to 2013. Total non-interest income increased $150.7 million for the year ended December 31, 2014 compared to 2013. Total expenses increased $246.0 million during the year ended December 31, 2014 compared to 2013.

~~Average assets were $25.3 billion for the year ended December 31, 2014 compared to $20.8 billion for the year ended December 31, 2013.~~

From December 31, 2011 until January 28, 2014, SC was accounted for as an equity method investment. In 2014, SC's results of operations were consolidated with SHUSA. SC is managed as a separate business unit, with its own systems and processes, and is reported as a separate segment.

CRITICAL ACCOUNTING ~~POLICIES~~ESTIMATES

This MD&A is based on the ~~consolidated financial statements~~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 ~~assumptions~~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 ~~consolidation, business combinations, allowance for loan and lease losses~~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, goodwill, ~~derivatives and hedging activities~~fair value measurements and income taxes as the Company's most critical accounting ~~policies and~~ 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.

The Company’s senior management has reviewed these critical accounting policies and estimates with the Company's Audit Committee. Information concerning the Company’s implementation and impact of new accounting standards issued by the Financial Accounting Standards Board ("FASB") is discussed in Note 2 to the Consolidated Financial Statements.

~~Consolidation~~

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.

The Company's consolidated financial statements include the assets, liabilities, revenues and expenses of the Company and its consolidated subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.

In accordance with the applicable accounting guidance for consolidations, the consolidated financial statements include any Voting Rights Entities (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 generally 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 legal entity and the noncontrolling shareholders do not hold any substantive participating or controlling rights. VIEs and VOEs can include equity interests in corporations, and similar legal entities, and partnerships and similar legal entities, subordinated debt, derivative contracts, leases, service agreements, guarantees, standby letters of credit, loan commitments, and other contracts, agreements and financial instruments.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

Upon occurrence of certain significant events, as required by the VIE model the Company reassesses whether a legal entity in which the Company is involved with is a VIE. 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 legal 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 voting rights entities or VIEs if the Company has significant influence over the entity's operating and financing decisions but does not maintain control. Unconsolidated investments in VOEs or VIEs in which the Company has a voting or economic interest of less than 20% are generally carried at cost. These investments are included in "Equity method investments" on the Consolidated Balance Sheet, and the Company's proportionate share of income or loss is included in other income.

In July 2009, Santander contributed SC to the Company. SC's results of operations were consolidated with the Company's from January 2009 until December 31, 2011. As of December 31, 2011, SC was accounted for as an equity-method investment. The Company continued to account for SC as an equity-method investment through December 31, 2013. Refer to Note 8, Equity Method Investments, Variable Interest Entities and Securitizations to the Consolidated Financial Statements for discussion of the re-consolidation of SC effective in January 2014.

~~In accordance with ASC 810-10,~~ ~~Consolidation~~, the Company performs an analysis on a quarterly basis of each variable interest to determine if it is considered to be the primary beneficiary of the VIE. Those entities in which the Company is considered the primary beneficiary are consolidated, and, accordingly, the entity's assets, liabilities, revenues and expenses are included in the Company's consolidated financial statements. As of December 31, 2015 and 2014, there were no VIEs for which the Company was considered the primary beneficiary.

~~Investments in non-consolidated affiliates, including VIEs, are generally accounted for using the equity-method.~~

~~Business Combinations~~

The Company accounts for business combinations using the acquisition method of accounting and records the identifiable assets, liabilities and any non-controlling interests 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 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 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. Please see related discussion under the caption Goodwill below.

~~Allowance~~ALLL for Loan ~~and Lease~~ Losses ~~for Originated Loans~~ 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 ~~inherent~~ in the loan portfolio, past loan and lease loss experience, ~~based on recorded investment,~~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 ~~non-performing loans,~~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 ~~also~~ represents the largest asset on the Consolidated Balance ~~Sheet.~~Sheets. Note 1 to the Consolidated Financial Statements describes the methodology used to determine the ~~allowance for loan and lease losses~~ALLL and reserve for unfunded lending commitments in the Consolidated Balance ~~Sheet.~~Sheets. A discussion of the factors driving changes in the amount of the ~~allowance for loan and lease losses~~ALLL and reserve for unfunded lending commitments for the periods presented is included in the Credit Risk Management section of this MD&A.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

The ALLL includes: (i) an allocated allowance, which is comprised of allowances established on loans ~~individually~~specifically 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 by Board-level committees.~~quarterly.

The Company's allocated reserves are principally based on ~~its~~ various models subject to the Company's Model Risk Management ~~framework.~~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.~~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 ~~inherent~~ in the loan portfolio that may not have been discreetly contemplated in the general and specific components of the allowance, as well as potential variability in estimates. Period-to-period changes in the Company's historical unallocated ~~allowance for loan and lease loss~~ALLL positions are considered in light of these factors.

~~Allowance for Loan~~

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

Valuation of Automotive Lease ~~Losses for Purchased Loans~~Assets and Residuals

The Company ~~assesses~~has significant investments in vehicles in SC's operating lease portfolio. In accounting for operating leases, management must make a determination at the ~~collectability~~beginning of the ~~recorded investment in~~lease contract of the ~~retail installment contracts and personal unsecured loans~~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 ~~collective basis quarterly~~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 ~~determines~~ the ~~allowance for loan and lease losses at levels considered adequate~~contract residual value plus a finance charge. However, since the customer is not obligated to ~~cover probable credit losses incurred in~~purchase the ~~portfolio. Purchased loans, including the loans acquired~~vehicle at the ~~Change in Control, were~~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 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 discountbased on the ~~portfolio.~~

Loans purchased in a bulk purchase or business combination are expected to have greater uncertainty in cash flows which generally result in larger discounts compared to newly originated loans. Purchase discountsresidual value established at contract inception. Periodically, the Company revises the projected value of the leased vehicle at termination based on ~~purchased loans are accreted~~current market conditions and other relevant data points, and adjusts depreciation expense appropriately over the remaining ~~expected lives~~term of the ~~loans using the retrospective effective interest method.~~ lease.

The ~~unamortized portion of the purchase discount is~~Company periodically evaluates its investment in operating leases for impairment if circumstances, such as a ~~reduction to the loans’ recorded investment~~systemic and ~~therefore reduces the allowance requirements. Because the loans purchased~~material decline in used vehicle values occurs. These circumstances could include, for example, 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 lossesdecline 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.

~~The other considerations utilized by the Company to determine the allowance for loan and lease losses for purchased loans are described in the “Allowance for Loan and Lease Losses for Originated Loans and Reserve for Unfunded Lending Commitments”~~ ~~section above.~~

~~Loan Modifications and Troubled Debt Restructuring~~

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 involving a concession that would otherwise not be granted to the borrower. Commercial and consumer 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 defined as six months for a monthly amortizing loan). RIC TDRs are generally placed on non-accrual status until they become 60 days or less past due. 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.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~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, interest rate reductions, etc. Modifications for commercial loan TDRs generally, although not always, result in bifurcation of the original loan into A and B notes. The A note is restructured to allow for an 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 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 presentresidual value of ~~expected future cash flows~~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 ~~collateral-dependent, calculating~~ the fair value of the ~~collateral~~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 ~~cost~~residual value upon eventual disposition. If our operating lease assets are considered to ~~sell.~~ 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"). No such impairment was recognized in 2018, 2017, or 2016.

The ~~TDR classification will remain~~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 ~~loan until it~~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 ~~paid in full or liquidated.~~not able to fully honor its obligation relative to these agreements, the Company's depreciation expense would be negatively impacted.

~~Consumer Loan TDRs~~Accretion of Discounts and Subvention on RICs

Loans held for investment ("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 ~~primary modification program for~~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 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 goalyield of the modification program is to review the customer’s entire financial condition to ensure that the proposed modified payment solution is affordable according to a specific debt-to-income ("DTI") ratio range. The main modification benefits of the program allow for term extensions, interest rate reductions, and/or deferment of principal.related contracts. The Company ~~reviews each customer on a case-by-case basis~~applies significant assumptions, including prepayment speeds in estimating the accretion rates used to ~~determine which benefit or combination of benefits will be offered to achieve the target DTI range.~~

In addition to those identified as TDRs above, accounting guidance also requires loans discharged under Chapter 7 bankruptcy to be considered TDRs and collateral-dependent, regardless of delinquency status. These loans must be written down to fair market value and classified as non-accrual/non-performing for the remaining life of the loan.

For the Company’s other consumer portfolios, including RIC and auto loans, the terms of the modifications generally include one or a combination of the following: 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.

RICs were a new portfolio for the Company in 2014 as a result of the Change in Control. The RIC and auto loan portfolio is primarily comprised of nonprime loans which lead to a higher rate of modifications and deferrals, and thus a higher volume of TDRs, than other portfolios. Loan portfolios acquired as part of a business combination like the Change in Control cannot be designated as TDRs under U.S. GAAP at the Change in Control date. As a result, the increase is primarily driven by RICs and auto loans originated prior to the Change in Control date which received their first modification, deferral greater than 90 days or second deferral subsequent to the Change in Control date during the reporting period. As a percentage of the RIC and auto loan portfolio recorded investment, there have been no significant increases in modification or deferral activity during the reporting period. The increased TDR activity at SHUSA may continue until the loan portfolios acquired as part of the Change in Control runoff.

In accordance with our policies and guidelines, the Company, at times, offer extensions (deferrals) to consumers on our RICs, whereby 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 lifetime months extended for all automobile RICs is eight, while some marine and recreational vehicle 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 have 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.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

At the time a deferral is granted, all delinquent amounts may be deferred or paid, resulting in the classification of the loan as current and therefore not considered a delinquent account. Thereafter, such account is aged based on the timely payment of future installments in the same manner as any other account.approximate effective yield.

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

Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts for loans classified as TDRs used in the determination of the adequacy of the allowance for loan and lease losses 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 allowance for loan and lease losses and related provision for loan and lease losses. Changes in these ratios and periods are considered in determining the appropriate level of allowance for loan and lease losses and related provision for loan and lease losses.

~~TDR Impact to Allowance for Loan and Lease Losses~~

The allowance for loan and lease losses 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, loan-to-value ("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. The amount of the required valuation allowance is equal to the difference between the loan’s impaired value and the recorded investment.

~~When a consumer TDR subsequently defaults, the Company generally measures impairment~~ based on the ~~fair value~~vintage, credit quality at origination and term of the ~~collateral, if applicable, less its estimated cost~~loan. Prepayments in our portfolio are sensitive to ~~sell.~~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.

Typically, commercial loans whose terms are modified in a TDR will have been identified as impaired prior to modification and accounted for generally using a present value of expected future cash flows methodology, unless the loan is considered collateral-dependent. Loans considered collateral-dependent are measured for impairment based on their fair values of the collateral less its estimated cost to sell. Accordingly, upon TDR modification or if a TDR modification subsequently defaults, the allowance methodology remains unchanged.

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 2423 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, ~~2015,~~2018, the reporting units with assigned goodwill were ~~Retail Banking, Auto Finance~~Consumer and Business Banking, Commercial ~~Real Estate, Corporate and Commercial~~ Banking, ~~Global Corporate Banking,~~CIB, and SC.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~Under ASC 350, Intangibles - Goodwill and Other, an~~An entity's quantitative goodwill impairment analysis must be completed ~~in two steps~~ 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. ~~In that case the two-step process may be bypassed. It is worth noting that an~~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 ~~first step~~quantitative analysis of the goodwill impairment test. ~~The Company did not apply the provisions of Step 0 in its 2015 goodwill impairment analysis.~~

The ~~first step of ASC 350 ("Step 1")~~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, ~~there~~impairment is ~~an indication that~~measured as the excess of the carrying amount over the fair value. A recognized impairment ~~exists and a second step must be performed to measure~~charge cannot exceed the amount of ~~impairment,~~goodwill allocated to a reporting unit, and cannot subsequently be reversed even if ~~any, for that~~the fair value of the reporting ~~unit.~~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 /~~ 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.

When required, the second step of testing ("Step 2") involves calculating the implied fair value of each of the affected reporting units. The implied fair value of goodwill is determined in the same manner as the amount of goodwill that is recognized in a business combination, which is the excess of the fair value of the reporting unit determined in step one over the fair value of the net assets and identifiable intangibles as if the reporting unit were being acquired. If the implied fair value of goodwill is in excess of the reporting unit's allocated goodwill amount, then no impairment charge is required. If the amount of goodwill allocated to the reporting unit exceeds the implied fair value of the goodwill, an impairment charge is recognized for the excess. 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.

Goodwill impairment testing involves management's judgment, ~~to the extent that it requires~~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 ~~discounted cash flow ("DCF")~~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") ~~included~~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, the~~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.

The DCF method of the income approach ~~incorporated~~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~~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.

8148

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

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

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 ~~Management's Discussion and Analysis~~this MD&A for further details on the Company's ~~Goodwill,~~goodwill, including the results of ~~Management's~~management's goodwill impairment analyses.

~~Derivatives and Hedging Activities~~Fair Value Measurements

~~SHUSA and its subsidiaries use derivative instruments as part of the risk management process~~The Company uses fair value measurements to manage risk associated with financial assets and liabilities and mortgage banking activities, to assist commercial banking customers with risk management strategies, and for certain other market exposures.

~~Derivative instruments designated in a hedge relationship to mitigate exposure to changes in~~estimate the fair value of ~~an asset, liability or firm commitment attributable~~certain assets and liabilities for both measurement and disclosure purposes. Refer to Note 16 to the Consolidated Financial Statements for a ~~particular risk (such~~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 ~~risk)~~movements, prepayment speeds, credit losses, recovery rates and discount rates are ~~considered~~inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value ~~hedges. Derivative instruments designated~~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 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 Sheet with the corresponding income or expense recorded in the Consolidated Statement 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 Sheet as an asset or liability, with a corresponding charge or credit, net of tax, recorded in Accumulated other comprehensive income within Stockholder's equity on the accompanying Consolidated Balance Sheet. Amounts are reclassified from Accumulated other comprehensive income to the Consolidated Statement of Operations in the period or periods during which the hedged transaction affects earnings. Where certain cash flow hedging relationships have been terminated, the Company continues to defer the net gain or loss in accumulated other comprehensive income and reclassifies it into Interest expense as the future cash flows occur, unless it becomes probable that the future cash flows will not occur.

The portion of gains and losses on derivative instruments not considered highly effective 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 Statement of Operations.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

During 2015 and 2014, the Company had cash flow and fair value hedges recorded in the Consolidated Balance Sheet as “Other assets” or “Other liabilities,” as applicable. For both fair value and cash flow hedges, certain assumptions and forecasts related to the impact of changes in interest rates, foreign exchange and credit risk on the fair value of the derivative and the item being hedged must be documented at the inception of the hedging relationship to demonstrate that the derivative instrument will be effective in hedging the designated risk. If these assumptions or forecasts do not accurately reflect subsequent changes in the fair value of the derivative instrument or the designated item being hedged, the Company might be required to discontinue the use of hedge accounting for that derivative instrument. Once hedge accounting is terminated, all subsequent changes in the faircurrent market value of the derivative instrument must be recorded in earnings, possibly resulting in greater volatility in earnings. If outstanding derivative positions that qualified for hedge accounting as of December 31, 2015 were no longer considered effective, and thus did not qualify for hedge accounting, the impact in 2015 would have been to lower pre-tax earnings by a net of $14.1 million.exchange.

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. 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 ~~were~~are as follows: (a) the ~~expectations~~expectation of future ~~earnings~~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-forwards~~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~~strategies; and (j) current tax laws. Significant judgment is required to assess future earnings trends and the timing of reversals of temporary differences.

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

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~~transaction that occurred in 2011 and the Change in Control that occurred in the first quarter of 2014. 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 1615 of the Consolidated Financial Statements for details on the Company's income taxes.

~~SANTANDER HOLDINGS USA, INC.~~

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

RESULTS OF OPERATIONS

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECMEMBER 31, 2018 AND ~~SUBSIDIARIES~~2017



	Year Ended December 31,						Year To Date Change
(dollars in thousands)	2018			2017			Dollar increase/(decrease)			Percentage
Net interest income	$	6,344,850		$	6,423,950		$	(79,100	)	(1.2	)%
Provision for credit losses	(2,339,898		)	(2,759,944		)	(420,046		)	(15.2	)%
Total non-interest income	3,244,308			2,901,253			343,055			11.8	%
General, administrative and other expenses	(5,832,325		)	(5,764,324		)	68,001			1.2	%
Income before income taxes	1,416,935			800,935			616,000			76.9	%
Income tax provision/ (benefit)	425,900			(157,040		)	582,940			371.2	%
Net income	991,035			957,975			33,060			3.5	%
Net income attributable to non-controlling interest	283,631			405,625			(121,994		)	(30.1	)%
Net income attributable to SHUSA	$	707,404		$	552,350		$	155,054		28.1	%

The Company reported pre-tax income of $1.4 billion for the year ended December 31, 2018, compared to pre-tax income of $800.9 million for the year ended December 31, 2017. Factors contributing to this change were as follows:

Net interest income decreased $79.1 million for the year ended December 31, 2018 compared to 2017. This decrease was primarily due to an increase in interest expense on deposits and customer accounts as a result of higher interest rates overall and promotional rates offered during the year, and an increase in interest expense on borrowings due to higher borrowing rates, offset by an increase in interest income on loans driven by higher interest rates.

The provision for credit losses decreased $420.0 million for the year ended December 31, 2018 compared to 2017. This decrease was primarily due to decline in the Company's net charge-offs, improved credit performance and stable recovery rates of the loan portfolio.

Total non-interest income increased $343.1 million for the year ended December 31, 2018 compared to 2017. This increase was primarily due to lease income associated with the continued growth of the lease portfolio and an increase in gain on sale of assets coming off lease.

Total general, administrative and other expenses increased $68.0 million for the year ended December 31, 2018 compared to 2017. This increase was primarily due to an increase in lease depreciation expense as a result of growth of the Company's leased vehicle portfolio, offset by lower compensation and benefits expenses and lower loss on debt repurchases for the year ended December 31, 2018.

Income tax provisions increased $582.9 million for the year ended December 31, 2018 compared to 2017. The income tax provision increased in 2018 primarily due to the enactment of the Tax Cuts and Jobs Act (“TCJA”) in 2017, which resulted in a significant benefit in 2017 to re-measure the net deferred tax liabilities due to the federal rate reduction.

��

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, 2018 AND 2017
	2018 ⁽¹⁾							2017 ⁽¹⁾										Change due to
(dollars in thousands)	Average Balance			Interest		Yield/ Rate⁽²⁾		Average Balance			Interest		Yield/ Rate⁽²⁾		Increase/(Decrease)			Volume			Rate
EARNING ASSETS
INVESTMENTS AND INTEREST EARNING DEPOSITS	$	21,342,992		$	522,677	2.45	%	$	26,251,822		$	498,734	1.90	%	$	23,943		$	(43,686	)	$	67,629
LOANS⁽³⁾:
Commercial loans	31,416,207			1,325,001		4.22	%	32,897,457			1,216,958		3.70	%	108,043			(50,931		)	158,974
Multifamily	8,191,487			328,147		4.01	%	8,334,329			311,068		3.73	%	17,079			(5,054		)	22,133
Total commercial loans	39,607,694			1,653,148		4.17	%	41,231,786			1,528,026		3.71	%	125,122			(55,985		)	181,107
Consumer loans:
Residential mortgages	9,716,021			392,660		4.04	%	8,471,891			334,463		3.95	%	58,197			50,381			7,816
Home equity loans and lines of credit	5,602,240			261,745		4.67	%	5,902,819			233,477		3.96	%	28,268			(11,214		)	39,482
Total consumer loans secured by real estate	15,318,261			654,405		4.27	%	14,374,710			567,940		3.95	%	86,465			39,167			47,298
RICs and auto loans	27,559,139			4,570,641		16.58	%	26,881,782			4,603,561		17.13	%	(32,920		)	120,049			(152,969		)
Personal unsecured	2,362,910			630,394		26.68	%	2,500,670			619,053		24.76	%	11,341			(27,823		)	39,164
Other consumer⁽⁴⁾	526,170			37,788		7.18	%	698,654			58,765		8.41	%	(20,977		)	(13,174		)	(7,803		)
Total consumer	45,766,480			5,893,228		12.88	%	44,455,816			5,849,319		13.16	%	43,909			118,219			(74,310		)
Total loans	85,374,174			7,546,376		8.84	%	85,687,602			7,377,345		8.61	%	169,031			62,234			106,797
Intercompany investments	3,572			142		3.98	%	10,832			626		5.78	%	(484		)	(330		)	(154		)
TOTAL EARNING ASSETS	106,720,738			8,069,195		7.56	%	111,950,256			7,876,705		7.04	%	192,490			18,218			174,272
Allowance for loan losses⁽⁵⁾	(3,835,182		)					(3,954,133		)
Other assets⁽⁶⁾	28,346,465							26,526,834
TOTAL ASSETS	$	131,232,021						$	134,522,957
INTEREST-BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest-bearing demand deposits	$	9,116,631		$	40,355	0.44	%	$	10,138,818		$	23,560	0.23	%	$	16,795		$	(2,084	)	$	18,879
Savings	5,887,341			12,325		0.21	%	5,888,011			11,004		0.19	%	1,321			(1		)	1,322
Money market	25,308,245			248,683		0.98	%	25,403,882			132,993		0.52	%	115,690			(497		)	116,187
CDs	5,989,993			87,765		1.47	%	6,592,535			73,487		1.11	%	14,278			(5,603		)	19,881
TOTAL INTEREST-BEARING DEPOSITS	46,302,210			389,128		0.84	%	48,023,246			241,044		0.50	%	148,084			(8,185		)	156,269
BORROWED FUNDS:
Federal Home Loan Bank ("FHLB") advances, federal funds, and repurchase agreements	2,066,575			53,674		2.60	%	4,258,450			65,294		1.53	%	(11,620		)	(18,987		)	7,367
Other borrowings	38,152,038			1,281,401		3.36	%	37,983,865			1,145,791		3.02	%	135,610			5,126			130,484
TOTAL BORROWED FUNDS ⁽⁷⁾	40,218,613			1,335,075		3.32	%	42,242,315			1,211,085		2.87	%	123,990			(13,861		)	137,851
TOTAL INTEREST-BEARING FUNDING LIABILITIES	86,520,823			1,724,203		1.99	%	90,265,561			1,452,129		1.61	%	272,074			(22,046		)	294,120
Noninterest bearing demand deposits	15,117,229							15,629,718
Other liabilities⁽⁸⁾	5,490,385							5,239,268
TOTAL LIABILITIES	107,128,437							111,134,547
STOCKHOLDER’S EQUITY	24,103,584							23,388,410
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	131,232,021						$	134,522,957

NET INTEREST SPREAD ⁽⁹⁾						5.57	%						5.43	%
NET INTEREST MARGIN ⁽¹⁰⁾						5.95	%						5.74	%
NET INTEREST INCOME ⁽¹¹⁾				$	6,344,850						$	6,423,950
						1.23x							1.24x


(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, 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.

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

NET INTEREST INCOME



	Year Ended December 31,				Year To Date Change
(dollars in thousands)	2018		2017		Dollar increase/(decrease)			Percentage
INTEREST INCOME:
Interest-earning deposits	$	137,753	$	86,205	$	51,548		59.8	%
Investments available-for-sale ("AFS")	297,557		352,601		(55,044		)	(15.6	)%
Investments held-to-maturity ("HTM")	68,525		38,609		29,916			77.5	%
Other investments	18,842		21,319		(2,477		)	(11.6	)%
Total interest income on investment securities and interest-earning deposits	522,677		498,734		23,943			4.8	%
Interest on loans	7,546,376		7,377,345		169,031			2.3	%
Total interest income	8,069,053		7,876,079		192,974			2.5	%
INTEREST EXPENSE:
Deposits and customer accounts	389,128		241,044		148,084			61.4	%
Borrowings and other debt obligations	1,335,075		1,211,085		123,990			10.2	%
Total interest expense	1,724,203		1,452,129		272,074			18.7	%
NET INTEREST INCOME	$	6,344,850	$	6,423,950	$	(79,100	)	(1.2	)%

Net interest income decreased $79.1 million for the year ended December 31, 2018 compared to 2017. This decrease was primarily due to an increase in interest expense on deposits and customer accounts due to higher interest rates overall and rate promotions offered during the period, and an increase in interest expense on borrowings due to higher borrowing rates, offset by an increase in interest income on loans driven by higher interest rates.

Interest Income on Investment Securities and Interest-Earning Deposits

Interest income on investment securities and interest-earning deposits increased $23.9 million for the year ended December 31, 2018 compared to 2017. The average balances of investment securities and interest-earning deposits for the year ended December 31, 2018 were $21.3 billion with an average yield of 2.45% compared to an average balance of $26.3 billion and an average yield of 1.90% for the year ended December 31, 2017. The increase in interest income on investment securities and interest-earning deposits for the year ended December 31, 2018 was primarily due to an increase in the average yield on interest-earning deposits resulting from continued increases in the federal funds rate and increases in the average yield on investments HTM, offset by a decrease in the average balance and average yield on AFS investments.

Interest Income on Loans

Interest income on loans increased $169.0 million for the year ended December 31, 2018, compared to 2017. This increase was primarily due to an increase in the residential mortgage and RIC and auto loan portfolios. The average balance of total loans was $85.4 billion with an average yield of 8.84% for the year ended December 31, 2018 compared to $85.7 billion with an average yield of 8.61% for the year ended December 31, 2017. The decrease in the average balance of total loans of $313.4 million for 2018 was primarily due to a decline in the average balance of the commercial loan portfolio of $1.6 billion, offset by an increase in average consumer loans of $1.3 billion. The decrease in the average balance of the commercial loan portfolio was due to the Company's exit from the Commercial Mortgage Warehouse portfolio during 2018 and efforts to reduce risk exposure in the loan portfolio.

Interest Expense on Deposits and Related Customer Accounts

Interest expense on deposits and related customer accounts increased $148.1 million for the year ended December 31, 2018 compared to 2017. The increase was primarily due to overall higher interest rates and higher promotional rates offered to customers during the year. Higher rates were offered to customers on various deposit products in order to attract and grow the customer base. The average balances of total interest-bearing deposits was $46.3 billion with an average cost of 0.84% for the year ended December 31, 2018, compared to an average balance of $48.0 billion with an average cost of 0.50% for the year ended December 31, 2017.

Interest Expense on Borrowed Funds

Interest expense on borrowed funds increased $124.0 million for the year ended December 31, 2018, compared to 2017. The increase in interest expense on borrowed funds was due to higher interest rates being paid during 2018. The average balances of total borrowings

was $40.2 billion with an average cost of 3.32% for the year ended December 31, 2018, compared to an average balance of $42.2 billion with an average cost of 2.87% for the year ended December 31, 2017. The average balance of borrowed funds decreased in December 31, 2018 compared to December 31, 2017, primarily due to a decrease in FHLB advances as a result of maturities and terminations and repurchases of outstanding notes.

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

PROVISION FOR CREDIT LOSSES



	Year Ended December 31,						Year To Date Change
(in thousands)	2018			2017			Dollar			Percentage
ALLL, beginning of period	$	3,994,887		$	3,814,464		$	180,423		4.7	%
Charge-offs:
Commercial	(108,750		)	(144,002		)	35,252			(24.5	)%
Consumer	(4,974,547		)	(4,891,383		)	(83,164		)	1.7	%
Total charge-offs	(5,083,297		)	(5,035,385		)	(47,912		)	1.0	%
Recoveries:
Commercial	60,140			37,999			22,141			58.3	%
Consumer	2,572,607			2,401,614			170,993			7.1	%
Total recoveries	2,632,747			2,439,613			193,134			7.9	%
Charge-offs, net of recoveries	(2,450,550		)	(2,595,772		)	145,222			(5.6	)%
Provision for loan and lease losses ⁽¹⁾	2,352,793			2,770,556			(417,763		)	(15.1	)%
Other⁽²⁾:
Commercial	—			356			(356		)	(100.0	)%
Consumer	—			5,283			(5,283		)	(100.0	)%
ALLL, end of period	$	3,897,130		$	3,994,887		$	(97,757	)	(2.4	)%
Reserve for unfunded lending commitments, beginning of period	$	109,111		$	122,418		$	(13,307	)	(10.9	)%
Release of reserves for unfunded lending commitments ⁽¹⁾	(12,895		)	(10,612		)	(2,283		)	21.5	%
Loss on unfunded lending commitments	(716		)	(2,695		)	1,979			(73.4	)%
Reserve for unfunded lending commitments, end of period	95,500			109,111			(13,611		)	(12.5	)%
Total ACL, end of period	$	3,992,630		$	4,103,998		$	(111,368	)	(2.7	)%


(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 decreased $145.2 million for the year ended December 31, 2018 compared to 2017.

Consumer charge-offs increased $83.2 million for the year ended December 31, 2018, compared to 2017. This increase was primarily comprised of a $86.4 million increase in RIC and consumer auto loan charge-offs, offset by a $2.7M decrease in charge-offs for consumer loans in Puerto Rico.

Consumer recoveries increased $171.0 million for the year ended December 31, 2018, compared to 2017. This increase was comprised of a $172.0 million increase in RIC and consumer auto loan recoveries and a $1.0 million increase in consumer recoveries in Puerto Rico, offset by $2.3 million decrease in home mortgage recoveries.

Consumer net charge-offs as a percentage of average consumer loans were 5.2% for the year ended December 31, 2018, compared 5.6% in 2017.

Commercial charge-offs decreased $35.3 million for the year ended December 31, 2018, compared to 2017. This decrease was comprised of a $22.8 million decrease in Commercial Banking charge-offs, a $6.5 million decrease in Middle Market CRE charge-offs, a $6.8 million decrease in commercial fleet charge-offs, and a $10.6 million decrease in charge-offs for commercial loans in Puerto Rico, offset by a $11.9M increase in Continuing Care Retirement Community charge-offs.

Commercial recoveries increased $22.1 million for the year ended December 31, 2018 compared to 2017. This increase was comprised of an $18.9 million increase in Corporate Banking recoveries, and a $6.0 million increase in Continuing Care Retirement Communities recoveries, partially offset by a $2.1 million decrease in commercial fleet recoveries, and a $1.8 million decrease in Middle Market CRE recoveries.

Commercial loan net charge-offs as a percentage of average commercial loans, including multifamily loans, was less than 0.12% for the year ended December 31, 2018, compared to 0.26% for the year ended December 31, 2017.

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

NON-INTEREST INCOME



	Year Ended December 31,						Year To Date Change
(dollars in thousands)	2018			2017			Dollar increase/(decrease)			Percentage
Consumer fees	$	413,934		$	442,483		$	(28,549	)	(6.5	)%
Commercial fees	154,213			173,955			(19,742		)	(11.3	)%
Lease income	2,375,596			2,017,775			357,821			17.7	%
Miscellaneous income, net	307,282			269,484			37,798			14.0	%
Net losses recognized in earnings	(6,717		)	(2,444		)	(4,273		)	(174.8	)%
Total non-interest income	$	3,244,308		$	2,901,253		$	343,055		11.8	%

Total non-interest income increased $343.1 million for the year ended December 31, 2018 compared to 2017. The increase for the year ended December 31, 2018 was primarily due to an increase in lease income. This increase was partially offset by decreases in consumer and commercial loan fees due to the reduction of loans serviced by the Company.

Consumer fees

Consumer fees decreased $28.5 million for the year ended December 31, 2018 compared to 2017. This decrease was primarily due to a decrease in loan fee income, which was attributable to a reduction in loans serviced by the Company as a result of loan sales and payoffs in 2018. This decrease was partially offset by an increase in consumer insurance-related fees.

Commercial fees

Commercial fees consists of deposit overdraft fees, deposit automated teller machine fees, cash management fees, letter of credit fees, and loan syndication fees for commercial accounts. Commercial fees decreased $19.7 million for the year ended December 31, 2018 compared to in 2017. This decrease was primarily due to lower commercial deposit fee income.

Lease income

Lease income increased $357.8 million for the year ended December 31, 2018 compared to 2017. This increase was the result of the growth in the Company's lease portfolio, with an average balance of $12.3 billion for the year ended December 31, 2018, compared to $10.1 billion during 2017.

Miscellaneous income/(loss)



	Year Ended December 31,						Year To Date Change
(dollars in thousands)	2018			2017			Dollar increase/(decrease)			Percentage
Mortgage banking income, net	$	34,612		$	56,659		$	(22,047	)	(38.9	)%
BOLI	58,939			66,784			(7,845		)	(11.7	)%
Capital market revenue	165,392			195,906			(30,514		)	(15.6	)%
Net gain on sale of operating leases	202,793			127,156			75,637			59.5	%
Asset and wealth management fees	165,765			147,749			18,016			12.2	%
Loss on sale of non-mortgage loans	(351,751		)	(370,289		)	18,538			5.0	%
Other miscellaneous income, net	31,532			45,519			(13,987		)	(30.7	)%
Total miscellaneous income/(loss)	$	307,282		$	269,484		$	37,798		14.0	%

Miscellaneous income increased $37.8 million for the year ended December 31, 2018 compared to 2017. This increase was primarily due to the Company's growing lease portfolio. As the lease portfolio continues to grow, the number of leases that ultimately are liquidated will correspondingly increase, which may result in an increase in the amount of net gain recognized on the sale of operating leases. This increase was partially offset by a decrease in capital markets revenue, due to lower underwriting service fees in 2018 compared to 2017.

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

GENERAL, ADMINISTRATIVE AND OTHER EXPENSES



	Year Ended December 31,				Year To Date Change
(dollars in thousands)	2018		2017		Dollar			Percentage
Compensation and benefits	$	1,799,369	$	1,895,326	$	(95,957	)	(5.1	)%
Occupancy and equipment expenses	659,789		669,113		(9,324		)	(1.4	)%
Technology, outside services, and marketing expense	590,249		581,164		9,085			1.6	%
Loan expense	384,899		386,468		(1,569		)	(0.4	)%
Lease expense	1,789,030		1,553,096		235,934			15.2	%
Other expenses	608,989		679,157		(70,168		)	(10.3	)%
Total general and administrative expenses	$	5,832,325	$	5,764,324	$	68,001		1.2	%

Total general, administrative and other expenses increased $68.0 million for the year ended December 31, 2018 compared to 2017. Factors contributing to this increase were as follows:

Compensation and benefits expense decreased $96.0 million for the year ended December 31, 2018 compared to 2017. This decrease was primarily the result of other compensation and benefits decreasing $149.0 million. This decrease was related to a reduction in severance and employee settlement payments in 2018 compared to 2017, and was offset by increase in salary expense of $57.4 million for 2018 compared to 2017. The increase in salary expense primarily related to merit increases and an increase in employees.

Technology, outside services, and marketing expenses increased $9.1 million for the year ended December 31, 2018 compared to 2017. Technology service expenses increased $25.4 million for the year ended December 31, 2018 compared to 2017, offset by a decrease of $19.5 million in marketing expenses for the year ended December 31, 2018 compared to 2017.

Lease expense increased $235.9 million for the year ended December 31, 2018 compared to 2017. This increase was primarily due to the continued growth of the Company's leased vehicle portfolio and depreciation associated with that portfolio.

Other expenses decreased $70.2 million for the year ended December 31, 2018 compared to 2017. This decrease was primarily attributable to a $26.9 million decrease in loss on debt extinguishment, a $10.5 million decrease in impairment of goodwill, and a $113.9 million decrease in legal expenses, offset by increases in operational risk expenses of $77.8 million and trust and wealth management expenses of $18.5 million for the year ended December 31, 2018, compared to 2017.

INCOME TAX PROVISION

An income tax provision of $425.9 million was recorded for the year ended December 31, 2018, compared to an income tax benefit of $157.0 million for 2017. This resulted in an effective tax rate ("ETR") of 30.1% for the year ended December 31, 2018, compared to (19.6)% for 2017. The income tax provision increased in 2018 primarily due to the enactment of the TCJA in 2017, which resulted in a $427.3 million one-time benefit recognized in 2017 to re-measure the net deferred tax liabilities due to the federal statutory rate reduction from 35% to 21%. The reduction in the federal statutory tax rate reduced the federal tax benefit recognized for state income tax expense in 2018 compared to 2017, therefore increasing the state income tax expense, net of the federal benefit, in 2018 and the overall ETR. The 2018 ETR also increased due to increased losses of subsidiaries in Puerto Rico that have not been tax-benefited due to the history of losses at those entities.

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, 2018 consisted of Consumer and Business Banking, Commercial Banking, CIB which was formerly known as Global Corporate Banking, and SC. For additional information with respect to the Company's reporting segments and changes to the segments beginning in the first quarter of 2018, see Note 23 to the Consolidated Financial Statements.

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

Results Summary

Consumer and Business Banking



	Year Ended December 31,					Year To Date Change
(dollars in thousands)	2018		2017			Dollar increase/(decrease)			Percentage
Net interest income	$	1,301,671	$	1,115,169		$	186,502		16.7	%
Total non-interest income	308,614		356,936			(48,322		)	(13.5	)%
Provision for credit losses	100,523		85,115			15,408			18.1	%
Total expenses	1,487,835		1,500,815			(12,980		)	(0.9	)%
Income/(loss) before income taxes	21,927		(113,825		)	135,752			119.3	%
Intersegment revenue	2,507		2,330			177			7.6	%
Total assets	21,024,741		18,714,285			2,310,456			12.3	%

Consumer and Business Banking reported income before income taxes of $21.9 million for the year ended December 31, 2018, compared to a loss before income taxes of $113.8 million for the year ended December 31, 2017. Factors contributing to this change were:

Net interest income increased $186.5 million for the year ended December 31, 2018 compared to 2017. This increase was primarily driven by deposit product margin due to interest rate increases combined with disciplined pricing. The average balance of this segment's gross loans was $18.6 billion for the year ended December 31, 2018, compared to $17.2 billion for 2017. This increase was primarily driven by an increase in residential mortgages and auto loans of $1.3 billion and $383.0 million, respectively, partially offset by a decrease in home equity loans of $278.0 million.

Total non-interest income decreased $48.3 million for the year ended December 31, 2018 compared to 2017, primarily driven by non-recurring gains on the sale of the Bank's branches in Brooklyn, New York in 2017.

Commercial Banking



	Year Ended December 31,					Year To Date Change
(dollars in thousands)	2018			2017		Dollar increase/(decrease)			Percentage
Net interest income	$	639,558		$	630,078	$	9,480		1.5	%
Total non-interest income	87,803			70,219		17,584			25.0	%
(Release of) /provision for credit losses	(19,405		)	29,586		(48,991		)	(165.6	)%
Total expenses	327,291			324,385		2,906			0.9	%
Income before income taxes	419,475			346,326		73,149			21.1	%
Intersegment revenue	9,420			6,137		3,283			53.5	%
Total assets	25,712,309			25,318,068		394,241			1.6	%

Commercial Banking reported income before income taxes of $419.5 million for the year ended December 31, 2018 compared to income before income taxes of $346.3 million for the year ended December 31, 2017. Contributing to this change were:

The provision for credit losses decreased $49.0 million for the year ended December 31, 2018 compared to 2017. This decrease was primarily due to releases totaling $7.0 million for the Mortgage Warehouse portfolio, $15.6 million for the energy lending portfolio and a $23.5 million release for an asset-based lending customer paying their loan in full.

CIB



	Year Ended December 31,						Year To Date Change
(dollars in thousands)	2018			2017			Dollar increase/(decrease)			Percentage
Net interest income	$	136,402		$	153,622		$	(17,220	)	(11.2	)%
Total non-interest income	195,210			186,749			8,461			4.5	%
Provision for credit losses	9,335			33,275			(23,940		)	(71.9	)%
Total expenses	235,979			218,696			17,283			7.9	%
Income before income taxes	86,298			88,400			(2,102		)	(2.4	)%
Intersegment expense	(12,362		)	(8,086		)	(4,276		)	(52.9	)%
Total assets	8,521,004			6,949,373			1,571,631			22.6	%

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

CIB reported income before income taxes of $86.3 million for the year ended December 31, 2018 compared to income before income taxes of $88.4 million for 2017.

Total assets increased $1.6 billion for the year ended December 31, 2018 compared to 2017, 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,						Year To Date Change
(dollars in thousands)	2018			2017			Dollar increase/(decrease)			Percentage
Net interest income	$	239,664		$	255,096		$	(15,432	)	(6.0	)%
Total non-interest income	405,319			548,806			(143,487		)	(26.1	)%
Provision for credit losses	24,254			93,165			(68,911		)	(74.0	)%
Total expenses	887,681			955,292			(67,611		)	(7.1	)%
Loss before income taxes	(266,952		)	(244,555		)	(22,397		)	(9.2	)%
Intersegment revenue/(expense)	435			(381		)	816			214.2	%
Total assets	36,416,376			37,890,000			(1,473,624		)	(3.9	)%

The Other category reported a loss before income taxes of $267.0 million for the year ended December 31, 2018 compared to a loss before income taxes of $244.6 million for 2017. Factors contributing to this change were:

Total non-interest income decreased $143.5 million for the year ended December 31, 2018 compared to 2017, primarily related to SBNA's auto lease portfolio runoff.

The provision for credit losses decreased $68.9 million for the year ended December 31, 2018 compared to 2017. This decrease was primarily related to the impact of Hurricane Maria in 2017 requiring additional reserves that were not required in 2018.

Total expenses decreased $67.6 million for the year ended December 31, 2018 compared to 2017.

The Chief Operating Decision Maker ("CODM") manages SC on a historical basis by reviewing the results of SC on a pre-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,				Year To Date Change
(dollars in thousands)	2018		2017		Dollar increase/(decrease)			Percentage
Net interest income	$	3,958,280	$	4,114,600	$	(156,320	)	(3.8	)%
Total non-interest income	2,297,517		1,793,408		504,109			28.1	%
Provision for credit losses	2,205,585		2,363,812		(158,227		)	(6.7	)%
Total expenses	2,857,944		2,740,190		117,754			4.3	%
Income before income taxes	1,192,268		804,006		388,262			48.3	%
Total assets	43,959,855		39,402,799		4,557,056			11.6	%

SC reported income before income taxes of $1.2 billion for the year ended December 31, 2018 compared to income before income taxes of $804.0 million for 2017. Contributing to this change was:

Total non-interest income increased $504.1 million for the year ended December 31, 2018 compared to 2017, due to the continued growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.

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

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

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 represented a change in reporting entity, the guidance requires retrospective combination of the entities for all periods presented in these financial statements as if the combination had been in effect since inception of common control. On July 1, 2017, an additional Santander subsidiary, SFS, a finance company located in Puerto Rico, was transferred to the Company and accounted for prospectively. Refer to Note 1 for additional information.



	Year Ended December 31,						Year To Date Change
(dollars in thousands)	2017			2016			Dollar			Percentage
Net interest income	$	6,423,950		$	6,564,692		$	(140,742	)	(2.1	)%
Provision for credit losses	(2,759,944		)	(2,979,725		)	219,781			7.4	%
Total non-interest income	2,901,253			2,755,705			145,548			5.3	%
General, administrative and other expenses	(5,764,324		)	(5,386,194		)	(378,130		)	(7.0	)%
Income before income taxes	800,935			954,478			(153,543		)	(16.1	)%
Income tax provision/(benefit)	(157,040		)	313,715			(470,755		)	(150.1	)%
Net income ⁽¹⁾	$	957,975		$	640,763		$	317,212		49.5	%


~~Item 7.~~(1)	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~Includes NCI.

The Company reported a pre-tax income of $800.9 million for the year ended December 31, 2017, compared to pre-tax income of $954.5 million for the year ended December 31, 2016. Factors contributing to this decline were as follows:

Net interest income decreased $140.7 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.

Provisions for credit losses decreased $219.8 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 decrease in the Corporate Banking and Middle Market CRE portfolio provisions.

Total non-interest income increased $145.5 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 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, administrative, and other expenses increased $378.1 million for the year ended December 31, 2017 compared to 2016. This increase was primarily due to an increase in lease depreciation expense as a result of 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.

The income tax provision decreased $470.8 million for the year ended December 31, 2017 compared to 2016. This decrease was primarily due to the enactment of 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 required 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 net deferred tax liabilities due to the federal rate reduction.

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, 2017 AND 2016
	2017 ⁽¹⁾							2016 ⁽¹⁾							Interest			Change due to
(dollars in thousands)	Average Balance			Interest		Yield/ Rate⁽²⁾		Average Balance			Interest		Yield/ Rate⁽²⁾		Increase/ Decrease			Volume			Rate
EARNING ASSETS
INVESTMENTS AND INTEREST EARNING DEPOSITS	$	26,251,822		$	498,734	1.90	%	$	29,287,122		$	378,404	1.29	%	$	120,330		$	(33,777	)	$	154,107
LOANS⁽³⁾:
Commercial loans	32,897,457			1,216,958		3.70	%	37,313,431			1,219,667		3.27	%	(2,709		)	(20,182		)	17,473
Multifamily	8,334,329			311,068		3.73	%	9,126,075			331,344		3.63	%	(20,276		)	(29,710		)	9,434
Total commercial loans	41,231,786			1,528,026		3.71	%	46,439,506			1,551,011		3.34	%	(22,985		)	(49,892		)	26,907
Consumer loans:
Residential mortgages	8,471,891			334,463		3.95	%	7,887,893			316,015		4.01	%	18,448			23,121			(4,673		)
Home equity loans and lines of credit	5,902,819			233,477		3.96	%	6,076,177			219,691		3.62	%	13,786			(6,015		)	19,801
Total consumer loans secured by real estate	14,374,710			567,940		3.95	%	13,964,070			535,706		3.84	%	32,234			17,106			15,128
RICs and auto loans	26,881,782			4,603,561		17.13	%	26,636,271			4,831,270		18.14	%	(227,709		)	45,177			(272,886		)
Personal unsecured	2,500,670			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 consumer	44,455,816			5,849,319		13.16	%	43,822,023			6,060,336		13.83	%	(211,017		)	79,792			(290,809		)
Total loans	85,687,602			7,377,345		8.61	%	90,261,529			7,611,347		8.43	%	(234,002		)	29,900			(263,902		)
Intercompany investments	10,832			626		5.78	%	14,640			904		6.17	%	(278		)	(224		)	(54		)
TOTAL EARNING ASSETS	111,950,256			7,876,705		7.04	%	119,563,291			7,990,655		6.68	%	(113,950		)	(4,101		)	(109,849		)
Allowance for loan losses⁽⁵⁾	(3,954,133		)					(3,664,095		)
Other assets⁽⁶⁾	26,526,834							26,022,585
TOTAL ASSETS	$	134,522,957						$	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	)
Savings	5,888,011			11,004		0.19	%	5,956,770			12,723		0.21	%	(1,719		)	(186		)	(1,533		)
Money market	25,403,882			132,993		0.52	%	25,029,571			126,417		0.51	%	6,576			2,845			3,731
CDs	6,592,535			73,487		1.11	%	9,738,344			95,869		0.98	%	(22,382		)	(37,978		)	15,596
TOTAL INTEREST-BEARING DEPOSITS	48,023,246			241,044		0.50	%	52,407,408			277,022		0.53	%	(35,978		)	(40,263		)	4,285
BORROWED FUNDS:
FHLB advances, federal funds, and repurchase agreements	4,258,450			65,294		1.53	%	9,466,243			126,799		1.34	%	(61,505		)	(82,860		)	21,355
Other borrowings	37,983,865			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 LIABILITIES	90,265,561			1,452,129		1.61	%	99,915,838			1,425,059		1.43	%	27,070			(124,643		)	151,713
Noninterest-bearing demand deposits	15,629,718							14,410,397
Other liabilities⁽⁸⁾	5,239,268							5,362,817
TOTAL LIABILITIES	111,134,547							119,689,052
STOCKHOLDER’S EQUITY	23,388,410							22,232,729
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	134,522,957						$	141,921,781

NET INTEREST SPREAD ⁽⁹⁾						5.43	%						5.25	%
NET INTEREST MARGIN ⁽¹⁰⁾						5.74	%						5.49	%
NET INTEREST INCOME				$	6,423,950						$	6,564,692
Ratio of interest-earning assets to interest-bearing liabilities						1.24x							1.20x


(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.

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

NET INTEREST INCOME



	Year Ended December 31,				Year To Date Change
(dollars in thousands)	2017		2016		Dollar			Percentage
INTEREST INCOME:
Interest-earning deposits	$	86,205	$	57,361	$	28,844		50.3	%
Investments AFS	352,601		284,796		67,805			23.8	%
Investments HTM	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	7,377,345		7,611,347		(234,002		)	(3.1	)%
Total interest income	7,876,079		7,989,751		(113,672		)	(1.4	)%
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:	$	6,423,950	$	6,564,692	$	(140,742	)	(2.1	)%

Net interest income decreased $140.7 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 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 HTM 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 $234.0 million for the year ended December 31, 2017 compared to 2016, primarily due to declines in RIC rates, which comprised $272.9 million of the decrease. The average balance of total loans was $85.7 billion with an average yield of 8.61% for the year ended December 31, 2017, compared to $90.3 billion with an average yield of 8.43% for the year ended December 31, 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.

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 a higher rate 2017. The average balance of total borrowings was $42.2 billion with an average cost of 2.87% for 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 a decrease in FHLB advances as a result of maturities and terminations. The increase in interest expense on borrowed funds was due to the Company issuing $5.5 billion of long-term debt at higher fixed rates in 2017 to increase liquidity and meet the Federal Reserve's TLAC requirement.

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

PROVISION FOR CREDIT LOSSES

The provision for credit losses is based on credit loss experience, growth or contraction of specific segments of the loan portfolio, and an estimate of losses inherent in the loan portfolio. The provision for credit losses for the year ended December 31, 2017 was $2.8 billion compared to $3.0 billion for the year ended December 31, 2016. This decrease 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,						Year To Date Change
(in thousands)	2017			2016			Dollar			Percentage
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	(4,891,383		)	(4,720,135		)	(171,248		)	3.6	%
Total charge-offs	(5,035,385		)	(4,965,534		)	(69,851		)	1.4	%
Recoveries:
Commercial	37,999			86,312			(48,313		)	(56.0	)%
Consumer	2,401,614			2,442,921			(41,307		)	(1.7	)%
Total recoveries	2,439,613			2,529,233			(89,620		)	(3.5	)%
Charge-offs, net of recoveries	(2,595,772		)	(2,436,301		)	(159,471		)	6.5	%
Provision for loan and lease losses ⁽¹⁾	2,770,556			3,004,620			(234,064		)	(7.8	)%
Other⁽²⁾:
Commercial	356			—			356			100.0%
Consumer	5,283			—			5,283			100.0%
ALLL, end of period	$	3,994,887		$	3,814,464		$	180,423		4.7	%

Reserve for unfunded lending commitments, beginning of period	$	122,418		$	149,021		$	(26,603	)	(17.9	)%
(Release)/provision for unfunded lending commitments ⁽¹⁾	(10,612		)	(24,895		)	14,283			(57.4	)%
(Gain)/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 ACL, end of period	$	4,103,998		$	3,936,882		$	167,116		4.2	%


(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)	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 $159.5 million for the year ended December 31, 2017 compared to 2016.

Consumer charge-offs increased $171.2 million for the year ended December 31, 2017 compared to 2016. This 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. Consumer loan net charge-offs as a percentage of average consumer loans were 5.6% for the year ended December 31, 2017, compared to 5.2% for the year ended December 31, 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 a $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, were 0.26% for the year ended December 31, 2017 compared to 0.34% for the year ended December 31, 2016.

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

NON-INTEREST INCOME



	Year Ended December 31,					Year To Date Change
(dollars in thousands)	2017			2016		Dollar			Percentage
Consumer fees	$	442,483		$	499,591	$	(57,108	)	(11.4	)%
Commercial fees	173,955			190,248		(16,293		)	(8.6	)%
Lease income	2,017,775			1,839,307		178,468			9.7	%
Miscellaneous income, net	269,484			169,056		100,428			59.4	%
Net (losses)/gain recognized in earnings	(2,444		)	57,503		(59,947		)	(104.3	)%
Total non-interest income	$	2,901,253		$	2,755,705	$	145,548		5.3	%

Total non-interest income increased $145.5 million for the year ended December 31, 2017 compared to the 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. The increase was offset by decreases in consumer loan fees due to the reduction in loans serviced by the Company, as well as a decrease in net gains recognized in earnings.

Consumer Fees

Consumer fees decreased $57.1 million for the year ended December 31, 2017 compared to 2016. This decrease was primarily due to a 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 in consumer deposit fees for 2017.

Commercial Fees

Commercial fees consists of deposit overdraft fees, automated teller machine deposit fees, cash management fees, letter of credit fees, and loan syndication fees for commercial accounts. Commercial fees decreased primarily due to lower capital markets income.

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 2017, compared to $9.1 billion for 2016.

Miscellaneous Income



	Year Ended December 31,						Year To Date Change
(dollars in thousands)	2017			2016			Dollar increase/(decrease)			Percentage
Mortgage banking income, net	$	56,659		$	63,790		$	(7,131	)	(11.2	)%
BOLI	66,784			57,796			8,988			15.6	%
Capital market revenue	195,906			190,647			5,259			2.8	%
Net gain on sale of operating leases	127,156			66,909			60,247			90.0	%
Asset and wealth management fees	147,749			148,514			(765		)	(0.5	)%
Loss on sale of non-mortgage loans	(370,289		)	(399,312		)	29,023			7.3	%
Other miscellaneous income, net	45,519			40,712			4,807			11.8	%
Total miscellaneous income/(loss)	$	269,484		$	169,056		$	100,428		59.4	%

Miscellaneous income decreased $100.4 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 $29.0 million. This was 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 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.

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)	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, outside services, and marketing 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 expenses	679,157		682,894		(3,737		)	(0.5	)%
Total general and administrative expenses	$	5,764,324	$	5,386,194	$	378,130		7.0	%

Total general, administrative and other expenses increased $378.1 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 the 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 2017 compared to 2016.

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 2017 compared to 2016. This increase was primarily a result of 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 2017 compared to 2016.

Technology services expense 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 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 expenses decreased $3.7 million for the year ended December 31, 2017 compared to 2016. This decrease was primarily attributable to a decrease of $83.9 million in losses on debt extinguishment for 2017 compared to 2016, offset by an increase in legal reserve expense of $79.7 million for 2017 compared to 2016. During 2017, the Company increased its legal reserves for certain matters discussed in Note 19 to the Consolidated Financial Statements.

INCOME TAX PROVISION

An income tax benefit of $157.0 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 ETR of (19.6)% for the year ended December 31, 2017, compared to 32.9% for 2016.

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%. As a result of the TCJA's enactment, GAAP required 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.

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

LINE OF BUSINESS RESULTS

General

The Company's segments at December 31, 2017 consisted of Consumer and Business Banking, Commercial Banking, CRE, CIB, 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,						Year To Date Change
(dollars in thousands)	2017			2016			Dollar increase/(decrease)			Percentage
Net interest income	$	1,115,169		$	981,951		$	133,218		13.6	%
Total non-interest income	356,936			384,210			(27,274		)	(7.1	)%
Provision for credit losses	85,115			56,446			28,669			50.8	%
Total expenses	1,500,815			1,511,427			(10,612		)	(0.7	)%
Loss before income taxes	(113,825		)	(201,712		)	87,887			43.6	%
Intersegment revenue	2,330			42,168			(39,838		)	(94.5	)%
Total assets	18,714,285			18,131,643			582,642			3.2	%

Consumer and Business Banking reported a loss before income taxes of $113.8 million for the year ended December 31, 2017 compared to a loss before income taxes of $201.7 million for 2016. Factors contributing to this change were:

Net interest income increased $133.2 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.

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 loans and increased delinquency in the credit cards and personal loan portfolios.

Commercial Banking



	Year Ended December 31,				Year To Date Change
(dollars in thousands)	2017		2016		Dollar increase/(decrease)			Percentage
Net interest income	$	630,078	$	638,001	$	(7,923	)	(1.2	)%
Total non-interest income	70,219		87,144		(16,925		)	(19.4	)%
Provision for credit losses	29,586		85,910		(56,324		)	(65.6	)%
Total expenses	324,385		318,400		5,985			1.9	%
Income before income taxes	346,326		320,835		25,491			7.9	%
Intersegment revenue	6,137		28,464		(22,327		)	(78.4	)%
Total assets	25,318,068		26,590,079		(1,272,011		)	(4.8	)%

Commercial Banking reported income before income taxes of $346.3 million for the year ended December 31, 2017, compared to income before income taxes of $320.8 million for 2016. Factors contributing to this change were:

The provision for credit losses decreased $56.3 million for the year ended December 31, 2017 compared to 2016, primarily driven by reserves for the energy finance business line. The decrease in provision for 2017 was due to increased provisions required for the energy finance portfolio in 2016 that did not recur in 2017 and one large, previously unreserved charge-off that occurred in 2016 in the Middle Market portfolio.

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

CIB



	Year Ended December 31,						Year To Date Change
(dollars in thousands)	2017			2016			Dollar increase/(decrease)			Percentage
Net interest income	$	153,622		$	239,074		$	(85,452	)	(35.7	)%
Total non-interest income	186,749			241,992			(55,243		)	(22.8	)%
Provision for credit losses	33,275			7,952			25,323			318.4	%
Total expenses	218,696			228,999			(10,303		)	(4.5	)%
Income before income taxes	88,400			244,115			(155,715		)	(63.8	)%
Intersegment expense	(8,086		)	(1,728		)	(6,358		)	(367.9	)%
Total assets	6,949,373			10,600,872			(3,651,499		)	(34.4	)%

CIB reported income before income taxes of $88.4 million for the year ended December 31, 2017, compared to income before income taxes of $244.1 million for 2016. Factors contributing to this change were:

Net interest income decreased $85.5 million for 2017 compared to 2016. The average balance of this segment's gross loans were $6.0 billion for 2017 compared to $9.3 billion for 2016. The decrease in loan balances was attributable 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 $55.2 million for the 2017 compared to 2016.

The provision for credit losses increased $25.3 million for 2017 compared to 2016. The increase was 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.

Other



	Year Ended December 31,						Year To Date Change
(dollars in thousands)	2017			2016			Dollar increase/(decrease)			Percentage
Net interest income	$	255,096		$	51,736		$	203,360		393.1	%
Total non-interest income	548,806			622,145			(73,339		)	(11.8	)%
Provision for credit losses	93,165			52,490			40,675			77.5	%
Total expenses	955,292			1,065,027			(109,735		)	(10.3	)%
Loss before income taxes	(244,555		)	(443,636		)	199,081			44.9	%
Intersegment revenue	(381		)	(68,904		)	68,523			99.4	%
Total assets	37,890,000			44,498,592			(6,608,592		)	(14.9	)%

The Other category reported a loss before income taxes of $244.6 million for the year ended December 31, 2017, compared to a loss before income taxes of $443.6 million for 2016. Factors contributing to this change were:

Net interest income increased $203.4 million for 2017 compared to 2016.

Total non-interest income decreased $73.3 million for 2017 compared 2016.

The provision for credit losses increased $40.7 million for 2017 compared to 2016.

Total expenses decreased $109.7 million for 2017 compared to 2016.



	Year Ended December 31,				Year To Date Change
(dollars in thousands)	2017		2016		Dollar increase/(decrease)			Percentage
Net interest income	$	4,114,600	$	4,448,535	$	(333,935	)	(7.5	)%
Total non-interest income	1,793,408		1,432,634		360,774			25.2	%
Provision for credit losses	2,363,812		2,468,199		(104,387		)	(4.2	)%
Total expenses	2,740,190		2,252,259		487,931			21.7	%
Income before income taxes	804,006		1,160,711		(356,705		)	(30.7	)%
Total assets	39,402,799		38,539,104		863,695			2.2	%

SC reported income before income taxes of $804.0 million for the year ended December 31, 2017 compared to income before income taxes of $1.2 billion for 2016. Factors contributing to this change were:

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

Total non-interest income increased $360.8 million for 2017 compared to 2016, due to the continued growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.

Total expenses increased $487.9 million for 2017 compared to 2016, primarily due to the continued growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.

FINANCIAL CONDITION

LOAN PORTFOLIO

The Company's ~~loan~~loans held for investment ("LHFI") portfolio⁽¹⁾consisted of the following at the dates ~~provided:~~indicated:


	December 31, 2015				December 31, 2014				December 31, 2013				December 31, 2012				December 31, 2011				December 31, 2018				December 31, 2017				December 31, 2016				December 31, 2015				December 31, 2014
(dollars in thousands)																					Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Commercial LHFI:
CRE																					$	8,704,481	10.0	%	$	9,279,225	11.5	%	$	10,112,043	11.8	%	$	9,846,236	11.3	%	$	9,741,442	11.6	%
Commercial & Industrial ("C&I")																					15,738,158		18.1	%	14,438,311		17.9	%	18,812,002		21.9	%	20,908,107		24.0	%	18,453,165		22.1	%
Multifamily																					8,309,115		9.5	%	8,274,435		10.1	%	8,683,680		10.1	%	9,438,463		10.8	%	8,705,890		10.4	%
Other commercial																					7,630,004		8.8	%	7,174,739		8.9	%	6,832,403		8.0	%	6,257,072		7.2	%	5,539,848		6.6	%
Total commercial loans ⁽¹⁾																					40,381,758		46.4	%	39,166,710		48.4	%	44,440,128		51.8	%	46,449,878		53.3	%	42,440,345		50.7	%
	(As Restated)				(As Restated)				(As Restated)
	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
	(dollars in thousands)
Commercial loans:
Commercial real estate loans	$	8,722,917	10.6	%	$	8,739,233	11.5	%	$	9,303,885	18.6	%	$	10,034,868	18.9	%	$	10,553,174	20.4	%
Commercial and industrial loans and other commercial	22,550,739		27.2	%	19,196,154		25.2	%	14,628,240		29.2	%	15,323,916		28.8	%	12,235,399		23.7	%
Multifamily	9,438,463		11.4	%	8,705,890		11.4	%	8,237,029		16.5	%	7,572,555		14.2	%	7,100,620		13.7	%
Total Commercial Loans	40,712,119		49.2	%	36,641,277		48.1	%	32,169,154		64.3	%	32,931,339		61.9	%	29,889,193		57.8	%
Consumer loans secured by real estate:
Residential mortgages	6,467,755		7.8	%	6,969,309		9.1	%	9,672,204		19.3	%	11,244,409		21.1	%	11,638,021		22.5	%	9,884,462		11.4	%	8,846,765		11.0	%	7,775,272		9.1	%	7,566,301		8.7	%	8,190,461		9.8	%
Home equity loans and lines of credit	6,151,232		7.4	%	6,211,298		8.1	%	6,311,694		12.6	%	6,638,466		12.5	%	6,868,939		13.3	%	5,465,670		6.3	%	5,907,733		7.3	%	6,001,192		7.1	%	6,151,232		7.1	%	6,211,298		7.4	%
Total consumer loans secured by real estate	12,618,987		15.2	%	13,180,607		17.2	%	15,983,898		31.9	%	17,882,875		33.6	%	18,506,960		35.8	%	15,350,132		17.7	%	14,754,498		18.3	%	13,776,464		16.2	%	13,717,533		15.8	%	14,401,759		17.2	%

Consumer loans not secured by real estate:
Retail installment contracts and auto loans	25,553,507		31.0	%	22,430,453		29.5	%	81,804		0.2	%	295,398		0.6	%	958,345		1.9	%
RICs and auto loans - originated																					28,532,085		32.8	%	23,131,253		28.6	%	22,104,918		25.8	%	18,539,588		21.3	%	9,935,503		11.9	%
RICs and auto loans - purchased																					803,135		0.9	%	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																					29,335,220		33.7	%	24,966,121		30.9	%	25,573,721		29.8	%	24,647,798		28.3	%	22,385,029		26.7	%

Personal unsecured loans	2,639,881		3.2	%	2,696,820		3.5	%	493,785		1.0	%	446,416		0.8	%	364,588		0.7	%	1,531,708		1.8	%	1,285,677		1.6	%	1,234,094		1.4	%	1,177,998		1.4	%	3,205,847		3.8	%
Other consumer	1,032,580		1.4	%	1,306,562		1.7	%	1,321,985		2.6	%	1,676,325		3.1	%	1,940,765		3.8	%	447,050		0.4	%	617,675		0.8	%	795,378		0.8	%	1,032,579		1.2	%	1,306,562		1.6	%
Total Consumer Loans	41,844,955		50.8	%	39,614,442		51.9	%	17,881,472		35.7	%	20,301,014		38.1	%	21,770,658		42.2	%
Total Loans	$	82,557,074	100.0	%	$	76,255,719	100.0	%	$	50,050,626	100.0	%	$	53,232,353	100.0	%	$	51,659,851	100.0	%
Total Loans with:

Total consumer loans																					46,664,110		53.6	%	41,623,971		51.6	%	41,379,657		48.2	%	40,575,908		46.7	%	41,299,197		49.3	%
Total LHFI																					$	87,045,868	100.0	%	$	80,790,681	100.0	%	$	85,819,785	100.0	%	$	87,025,786	100.0	%	$	83,739,542	100.0	%

Total LHFI with:
Fixed	$	48,871,915	59.2	%	$	45,345,715	59.5	%	$	23,541,953	47.0	%	$	24,899,616	46.8	%	$	26,632,842	51.6	%	$	56,696,491	65.1	%	$	50,703,619	62.8	%	$	51,752,761	60.3	%	$	52,283,715	60.1	%	$	50,237,181	60.0	%
Variable	33,685,159		40.8	%	30,910,004		40.5	%	26,508,673		53.0	%	28,332,737		53.2	%	25,027,009		48.4	%	30,349,377		34.9	%	30,087,062		37.2	%	34,067,024		39.7	%	34,742,071		39.9	%	33,502,361		40.0	%
Total Loans	$	82,557,074	100.0	%	$	76,255,719	100.0	%	$	50,050,626	100.0	%	$	53,232,353	100.0	%	$	51,659,851	100.0	%
Total LHFI																					$	87,045,868	100.0	%	$	80,790,681	100.0	%	$	85,819,785	100.0	%	$	87,025,786	100.0	%	$	83,739,542	100.0	%

(1) ~~Includes LHFS~~

~~Over~~As of December 31, 2018, the ~~last five years, our overall loan portfolio has increased $30.9 billion or 59.8%, primarily driven by the Change in Control in 2014 which resulted in approximately $22.0 billion~~Company had $311.2 million of ~~loans being consolidated at the time of the Change in Control. In the~~ commercial loans ~~(excluding multifamily loans) portfolio,~~that were denominated in a currency other than the portfolio has increased $8.5 billion or 37.2%, primarily attributable to organic growth in the C&I portfolio over the last two years of $5.7 billion, with the primary driver in the C&I portfolio being the GCB segment. In the multifamily portfolio, the portfolio has increased $2.3 billion or 32.9%, primarily attributable to repurchases from FNMA of $2.2 billion. For the consumer portfolios, consumer loans secured by real estate have decreased $5.9 billion or 31.8%, primarily attributable to securitization transactions of $3.8 billion. Consumer loans not secured by real estate have increased $26.1 billion or 799.0%, primarily attributable to the Change in Control at SC in 2014 when $20.9 billion of RIC and auto loans and $1.0 billion of personal unsecured loans were consolidated by the Company.U.S. dollar.

Commercial

Commercial loans ~~(excluding multifamily loans)~~ increased approximately ~~$3.3~~$1.2 billion, or ~~11.9%, from~~ ~~December 31, 2014~~ to December 31, 2015. The primary driver was organic growth exceeding repayment and runoff activity in the commercial and industrial and other commercial portfolios by $2.6 billion and $325.0 million, respectively.

~~Multifamily loans increased $732.6 million, or 8.4%~~3.1%, from December 31, ~~2014~~2017 to December 31, ~~2015.~~2018. This increase ~~from December 31, 2014 to December 31, 2015~~ was ~~primarily attributable to the $1.4~~comprised of an increase in C&I loans of $1.3 billion ~~repurchase~~and an increase in other commercial loans of ~~FNMA loans during the third quarter of 2015,~~$455.3 million, partially offset by ~~loan repayment and runoff activity exceeding originations by $677.0~~a decrease in CRE loans of $574.7 million, ~~during~~as the ~~year ended December 31, 2015.~~Company switches its focus from CRE loans to place emphasis on core commercial business.

8467

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

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

~~The following table presents the contractual maturity of the Company’s commercial loans at December 31, 2015:~~

AT DECEMBER 31, 2015, MATURING

In One Year
Or Less

One to Five
Years

After Five
Years

Total⁽¹⁾
(As Restated)
(in thousands)
Commercial real estate loans $ 1,828,800
$ 5,102,672
$ 1,791,445
$ 8,722,917
Commercial and industrial loans 8,476,484
11,726,015
2,348,240
22,550,739
Multifamily loans 775,645
6,712,788
1,950,030
9,438,463
Total $ 11,080,929
$ 23,541,475
$ 6,089,715
$ 40,712,119
Loans with: —
Fixed rates $ 2,187,970
$ 9,383,238
$ 2,799,580
$ 14,370,788
Variable rates 8,892,959
14,158,237
3,290,135
26,341,331
Total $ 11,080,929
$ 23,541,475
$ 6,089,715
$ 40,712,119

~~(1)~~ ~~Includes LHFS.~~



	At December 31, 2018, Maturing
(in thousands)	In One Year Or Less		One to Five Years		After Five Years		Total
CRE loans	$	1,990,492	$	5,138,756	$	1,575,233	$	8,704,481
C&I and other commercial	9,160,940		12,378,300		1,828,922		23,368,162
Multifamily loans	628,484		6,070,818		1,609,813		8,309,115
Total	$	11,779,916	$	23,587,874	$	5,013,968	$	40,381,758
Loans with:
Fixed rates	$	3,345,400	$	11,808,260	$	2,538,189	$	17,691,849
Variable rates	8,434,516		11,779,614		2,475,779		22,689,909
Total	$	11,779,916	$	23,587,874	$	5,013,968	$	40,381,758

Consumer Loans Secured By Real Estate

Consumer loans secured by real estate ~~decreased $561.6~~increased $595.6 million, or ~~4.3%~~4.0%, from December 31, ~~2014~~2017 to December 31, ~~2015. The primary drivers~~2018. This increase was comprised of an increase in the residential mortgage portfolio of $1.0 billion due to an increase in new loan originations, offset by a decrease ~~from December 31, 2014 were related to~~in the ~~Residential Mortgage~~home equity loans and lines of credit portfolio ~~specifically loan sales~~ of ~~$2.5 billion and runoff of $1.2 billion exceeding originations of $3.2 billion.~~$442.1 million.

~~The consumer loan portfolio not secured by real estate~~Consumer Loans Not Secured By Real Estate

RICs and auto loans

RICs and auto loans increased ~~$2.8~~$4.4 billion, or ~~10.6%~~17.5%, from December 31, ~~2014~~2017 to December 31, ~~2015.~~2018. The ~~primary driver of the~~ increase ~~from December 31, 2014 was~~in the RIC and auto loan portfolio ~~specifically~~was primarily due to an increase of $5.4 billion in originations, net of ~~$22.1~~securitizations, which was partially offset by a $1.0 billion ~~exceeding paydowns~~decrease in the RIC and ~~charge-off activity~~auto loan portfolio-purchased. This decrease in the RIC and auto loan portfolio-purchased was due to run-off of ~~$11.7 billion~~the portfolio from normal paydown and ~~sales~~chargeoff activity. RICs are collateralized by vehicle titles, and the lender has the right to repossess the vehicle in the event the consumer defaults on the payment terms of ~~$7.9 billion.~~the contract. Most of the Company's RICs HFI are pledged against warehouse lines or securitization bonds. Refer to further discussion of those in Note 11.

As of December 31, ~~2015, 71.6%~~2018, 79.1% (excluding purchase accounting) of the Company's RIC and auto loan portfolio was comprised of nonprime loans (defined by the Company as customers with a Fair Isaac Corporation ("~~FICO"~~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.~~downpayments. While underwriting guidelines were designed to establish that the customer would be a reasonable credit risk, ~~the~~ nonprime loans will nonetheless ~~will~~ experience higher default rates than a portfolio of obligations of prime customers. Additionally, higher unemployment rates, higher gasoline prices, unstable real estate values, re-sets of adjustable rate mortgages to higher interest rates, the general availability of consumer credit, and other factors that impact consumer confidence or disposable income could lead to an increase in delinquencies, defaults, and repossessions, as well as decrease consumer demand for used automobiles and other consumer products, ~~weakening~~weaken collateral values and ~~increasing~~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 ~~ratio,~~("DTI") ratios, loan-to-value ~~ratio,~~("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. ~~We experienced a default rate of 8.3% for nonprime RIC and auto loans and 2.9% for prime RIC and auto loans during the period ended December 31, 2015.~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

In early 2015, we increased our origination volume of RICs to borrowers with limited credit experience, such as those with less than 36 months of credit history or less than four trade lines. For these borrowers, many of whom do not have a FICO® score, other factors such as the LexisNexis risk view score, loan-to-value ratio, and payment-to-income ratio are utilized to assign an internal credit score. Our risk-based pricing methodology generally captures these credit bureau attributes in establishing a risk appropriate annual percentage rate at the time of origination. Origination volume of RICs with less than four trade lines and less than 36 months of credit history was $3.8 billion and $2.2 billion for the years ended December 31, 2015 and 2014, respectively. Remaining unpaid principal balance of these loans was $4.8 billion and $3.2 billion as of December 31, 2015 and 2014, respectively. Our credit loss allowance forecasting models are not calibrated for this higher concentration of RICs with limited bureau information and, accordingly, as of December 31, 2015, we recorded a qualitative adjustment of $158 million, increasing the allowance ratio on individually acquired retail installment contracts by 0.6% of unpaid principal balance. This adjustment was necessary to increase the estimated credit loss allowance for additional charge offs expected on this portfolio, based on the loss performance information available to date, which evidences higher losses in the first months after origination for these RICs in comparison to RICs with standard bureau attributes. This qualitative adjustment was informed by the deteriorating loss trends of the 2015 vintages over a subsequent twelve month forecast horizon. Under assumed scenarios if losses from such 2015 vintages were to increase by 10% and 20%, the allowance for credit losses would increase by approximately $130 million and $261 million, respectively.

December 31, 2015 December 31, 2014
(As Restated) (As Restated)
Credit Score Range⁽²⁾
Retail installment contracts and auto loans Retail installment contracts and auto loans

Standard file⁽³⁾

Non-Standard file⁽⁴⁾

Standard file⁽³⁾

Non-Standard file⁽⁴⁾

No FICOs⁽¹⁾
6.0 % 64.5 % 4.9 % 52.8 %
<600 61.3 % 21.3 % 56.6 % 25.5 %
600-639 19.5 % 6.7 % 19.5 % 9.4 %
640-679 13.2 % 7.5 % 19.0 % 12.3 %
Total 100.0 % 100.0 % 100.0 % 100.0 %

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

~~(2) Credit scores updated quarterly.~~

~~(3) Defined as borrowers with greater than 36 months of credit history or four or more trade lines~~

~~(4) Defined as borrowers with less than 36 months of credit history or less than four trade lines.~~

At December 31, ~~2015,~~2018, a typical RIC was originated with an average annual percentage rate ~~(APR)~~ of ~~16.9%~~17.3% and was purchased from the dealer at a discount of ~~1.8%~~0.2%. All of the Company's RICs and auto loans are ~~fixed rate~~fixed-rate loans.

Nonprime ~~RICs and personal unsecured~~ loans have a higher inherent risk of loss than prime loans. The Company records an ~~allowance for loan and lease losses~~ALLL to cover its estimate of inherent losses on its ~~RIC~~RICs incurred as of the balance sheet ~~date on its RICs. As of September 30, 2015, SC's personal~~date.

Personal unsecured ~~portfolio was transferred to held for sale~~ and ~~thus does not have a related allowance. The inclusion of SC's nonprime~~other consumer loans ~~within the Company's loan portfolio effective upon the Change in Control in 2014, among~~

Personal unsecured and other ~~things, resulted in an increase in the allowance for loan and lease losses as a percentage of~~consumer loans ~~held for investment~~decreased from ~~2.3% at~~ December 31, ~~2014~~2017 to ~~3.9% at~~ December 31, ~~2015.~~2018, by $75.4 million.

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

As a result of the strategic evaluation of SC's personal lending portfolio, in the third quarter of 2015, SC began reviewing strategic alternatives for exiting its personal loan portfolios. In connection with this review, on October 9, 2015, SC delivered a 90-day notice of termination of its loan purchase agreement with LendingClub. On February 1, 2016, it completed the sale of substantially all of our LendingClub loans to a third-party buyer at an immaterial premium to par value. The portfolio was comprised of personal installment loans with an unpaid principal balance of approximately $900 million as of December 31, 2015.

~~The~~SC's other significant personal lending relationship is with Bluestem. ~~Management~~SC continues to perform in accordance with the terms and operative provisions of the agreements under which ~~we are~~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. ~~These and other, smaller, revolving~~The Bluestem loan ~~portfolios are~~portfolio is carried as held for sale in our ~~consolidated financial statements.~~Consolidated Financial Statements. Accordingly, the Company has recorded lower-of-cost-or-market adjustments on ~~these portfolios,~~this portfolio, and there may be further such adjustments required in future periods' financial statements. Management is currently evaluating alternatives for the Bluestem portfolio. As of December 31, 2018, SC's personal unsecured portfolio was held for sale and thus does not have a related allowance.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


~~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 ~~Tolerance~~Appetite Statement. Written loan policies establish 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 ~~established. In order to~~created. To ensure ~~consistency and~~credit quality, loans are originated in accordance with the ~~Company's~~Company’s credit and governance standards ~~authority to approve loans is shared jointly between the businesses and the credit risk group.~~consistent with its Enterprise Risk Management Framework. Loans over certain dollar thresholds require approval by the Company's credit committees, with higher balance loans requiring approval by more senior level committees.

The Credit Risk Review group conducts ongoing independent reviews of the credit quality of the Company’s loan portfolios and credit management processes to ensure the accuracy of the risk ratings, ~~and~~ adherence to established policies and procedures, verify compliance with applicable laws and regulations, provide objective measurement of the risk inherent in the loan portfolio, and ensure that proper documentation exists. The results of these periodic reviews are reported to business line management, Risk Management and the Audit Committee of both the Company and the Bank. The Company maintains a classification system for loans that identifies those requiring a higher level of monitoring by management because of one or more factors, including borrower performance, business conditions, industry trends, the ~~nature~~liquidity and value of the collateral, ~~collateral margin,~~ economic conditions, or other factors. Loan credit quality is subject to scrutiny by ~~line~~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 industrial~~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. ~~Commercial and industrial~~C&I loans are generally secured by the borrower’s assets and by personal guarantees. Commercial real estate loans are originated primarily within the Mid-Atlantic, New York, and New England market areas and are secured by real estate at specified ~~loan-to-value ("LTV")~~LTV ratios and often by a guarantee of the borrower.

Management closely monitors the composition and quality of the total commercial loan portfolio to ensure that significant credit concentrations by borrowers or industries are mitigated. At December 31, 2015 and 2014, 22.3% and 20.1%, respectively, of the commercial loan portfolio, excluding multifamily, was unsecured.

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 ~~debt-to-income~~DTI levels, the creditworthiness of the borrower, and collateral values. In the home equity loan portfolio, combined ~~loan-to-value~~LTV ("CLTV") ratios are generally limited to 90% for both first and second liens. SHUSA originates and purchases fixed-rate and adjustable rate

residential mortgage loans that are secured by the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the creditworthiness of the borrower, including debt-to-equity ratios, credit scores, and adherence to underwriting policies that emphasize conservative ~~loan-to-value~~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 ~~FHLMC~~the Federal Home Loan Mortgage Corporation (the “FHLMC") or ~~FNMA.~~ the Federal National Mortgage Association (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.

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

Consumer Loans Not Secured by Real Estate

The Company’s consumer loans not secured by real estate include RICs acquired ~~RIC~~ from ~~manufacturer franchised~~manufacturer-franchised dealers in connection with their sale of used and new automobiles and trucks, as well as acquired consumer marine, ~~and~~ RV and credit card loans. Credit risk is mitigated to the extent possible through early and ~~aggressive~~robust collection practices, which includes the repossession of vehicles.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


~~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 ~~any and all~~ collateral in a timely manner in order to minimize losses. While liquidation and recovery efforts continue, officers continue to work with the borrowers, if appropriate, to recover all money owed to the Company. The Company monitors delinquency trends at 30, 60, and 90 days past due. These trends are discussed at monthly management Credit Risk Review Committee meetings and at the Company's and the Bank's Board of Directors' meetings.

NON-PERFORMING ASSETS

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

December 31, 2015 December 31, 2014 December 31, 2013 December 31, 2012 December 31, 2011
(As Restated) (As Restated)
(dollars in thousands)
Non-accrual loans:
Commercial:
Commercial real estate $ 113,178
$ 167,780
$ 250,073
$ 291,236
$ 459,692
Commercial and industrial loans and other commercial 88,727
58,703
100,894
122,111
213,617
Multifamily 9,162
9,639
21,371
58,587
126,738
Total commercial loans 211,067
236,122
372,338
471,934
800,047
Consumer:
Residential mortgages 173,780
231,316
473,566
511,382
438,461
Home equity loans and lines of credit 127,171
142,026
141,961
170,486
108,075
RICs and auto loans - originated 701,785
227,132
1,205
—
—
RICs - purchased 417,276
755,590
—
—
—
Personal unsecured and other consumer 24,020
36,102
9,339
18,874
12,883
Total consumer loans 1,444,032
1,392,166
626,071
700,742
559,419

Total non-accrual loans 1,655,099
1,628,288
998,409
1,172,676
1,359,466

Other real estate owned 38,959
65,051
88,603
65,962
103,026
Repossessed vehicles 172,375
126,309
—
—
—
Other repossessed assets 374
11,375
3,073
3,301
5,671
Total other real estate owned and other repossessed assets 211,708
202,735
91,676
69,263
108,697
Total non-performing assets $ 1,866,807
$ 1,831,023
$ 1,090,085
$ 1,241,939
$ 1,468,163

Past due 90 days or more as to interest or principal and accruing interest $ 79,729
$ 93,152
$ 2,545
$ 3,052
$ 4,908
Annualized net loan charge-offs to average loans ⁽²⁾
3.1 % 2.1 % 0.4 % 1.0 % 1.9 %
Non-performing assets as a percentage of total assets 1.5 % 1.5 % 1.4 % 1.5 % 1.8 %
NPLs as a percentage of total loans 2.0 % 2.1 % 2.0 % 2.2 % 2.6 %
Non-performing assets as a percentage of total loans, real estate owned and repossessed assets 2.2 % 2.4 % 2.2 % 2.3 % 2.8 %
ACL as a percentage of total non-performing assets ⁽¹⁾
177.2 % 100.2 % 96.7 % 98.5 % 91.3 %
ACL as a percentage of total NPLs ⁽¹⁾
199.9 % 112.6 % 105.6 % 104.3 % 98.6 %


~~(1)~~	~~The ACL is comprised of the allowance for loan and lease losses and the reserve for unfunded lending commitments. The reserve for unfunded lending commitments is included in other liabilities.~~


~~(2)~~	~~Annualized net loan charge-offs to average loans is calculated as annualized net loan charge-offs divided by the average loan balance for the year ended December 31, 2015.~~



	Period Ended						Change
(dollars in thousands)	December 31, 2018			December 31, 2017			Dollar			Percentage
Non-accrual loans:
Commercial:
CRE	$	88,500		$	139,236		$	(50,736	)	(36.4	)%
C&I loans	189,827			230,481			(40,654		)	(17.6	)%
Multifamily	13,530			11,348			2,182			19.2	%
Other commercial	72,841			83,468			(10,627		)	(12.7	)%
Total commercial loans	364,698			464,533			(99,835		)	(21.5	)%

Consumer loans secured by real estate:
Residential mortgages	216,815			265,436			(48,621		)	(18.3	)%
Home equity loans and lines of credit	115,813			134,162			(18,349		)	(13.7	)%
Consumer loans not secured by real estate:
RICs and auto loans - originated	1,455,406			1,257,122			198,284			15.8	%
RICs - purchased	89,916			256,617			(166,701		)	(65.0	)%
Total RICs and Auto loans	1,545,322			1,513,739			31,583			2.1	%

Personal unsecured loans	3,602			2,366			1,236			52.2	%
Other consumer	9,187			10,657			(1,470		)	(13.8	)%
Total consumer loans	1,890,739			1,926,360			(35,621		)	(1.8	)%
Total non-accrual loans	2,255,437			2,390,893			(135,456		)	(5.7	)%

Other real estate owned	107,868			130,777			(22,909		)	(17.5	)%
Repossessed vehicles	224,046			210,692			13,354			6.3	%
Other repossessed assets	1,844			2,190			(346		)	(15.8	)%
Total other real estate owned ("OREO") and other repossessed assets	333,758			343,659			(9,901		)	(2.9	)%
Total non-performing assets	$	2,589,195		$	2,734,552		$	(145,357	)	(5.3	)%

Past due 90 days or more as to interest or principal and accruing interest	$	98,979		$	96,461		$	2,518		2.6%
Annualized net loan charge-offs to average loans ⁽¹⁾	2.9		%	3.0		%	n/a			n/a
Non-performing assets as a percentage of total assets	1.9		%	2.1		%	n/a			n/a
NPLs as a percentage of total loans	2.6		%	2.9		%	n/a			n/a
ALLL as a percentage of total NPLs	172.8		%	167.1		%	n/a			n/a

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~No commercial loans were 90 days or more past due and still accruing interest as of December 31, 2015.~~ Potential problem loans are loans not currently classified as NPLs for which management has doubts about the borrowers’ ability to comply with the present repayment terms. These assets are principally loans delinquent more than 30 days but less than 90 days. Potential problem commercial loans totaled approximately ~~$57.1~~$98.8 million and ~~$71.8~~$112.3 million at December 31, ~~2015~~2018 and December 31, ~~2014,~~2017, respectively. Potential problem consumer loans amounted to ~~$3.6~~$4.7 billion and ~~$3.4~~$4.4 billion at December 31, ~~2015~~2018 and December 31, ~~2014,~~2017, respectively. Management has included these loans in its evaluation and reserved for them during the respective periods.

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

Non-performing assets ~~increased during the period,~~decreased to ~~$1.9~~$2.6 billion,, or ~~1.5%~~ ~~of total assets, at~~ ~~December 31, 2015, compared to~~ ~~$1.8 billion, or~~ ~~1.5%~~1.9% of total assets, at December 31, ~~2014,~~2018, compared to $2.7 billion, or 2.1% of total assets, at December 31, 2017, primarily attributable to ~~an increase~~a decrease in NPLs in the ~~retail installment contract~~CRE, C&I and ~~auto loan portfolio, offset by decreases in the commercial loans and consumer loans secured by real estate~~Mortgage portfolios.

General

Non-performing assets consist of ~~non-performing loans and leases ("NPLs"),~~NPLs, which represent loans and leases no longer accruing interest, ~~other real estate owned ("OREO")~~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,~~RICs are classified as non-performing ~~status will begin at~~(or non-accrual) when they are greater than 60 days past ~~due.~~due as to contractual principal or interest payments. Personal unsecured loans, including credit cards, generally continue to accrue interest until they are 180 days delinquent, at which point they are charged-off and all accrued but uncollected interest is removed from interest income.

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

Commercial

Commercial NPLs decreased ~~$25.1~~$99.8 million from December 31, ~~2014~~2017 to December 31, ~~2015. At~~ ~~December 31, 2015, commercial~~2018. Commercial NPLs accounted for ~~0.5%~~0.9% and 1.2% of ~~total~~ commercial ~~loans, compared to~~ ~~0.6%~~ ~~of total commercial loans~~LHFI at December 31, ~~2014.~~2018 and December 31, 2017, respectively. The decrease in commercial NPLs was ~~primarily attributable to~~comprised of a $40.7 million decrease ofin C&I NPLs, a $50.7 million decrease in the CRE portfolio, ~~of $54.6~~and a $10.6 million ~~due to continued improvement~~decrease in ~~credit quality, and~~the Other commercial portfolio, partially offset by ana $2.2 million increase ~~of $30.1 million~~ in the ~~C&I~~Multifamily portfolio.

Consumer Loans Not Secured by Real Estate

RICs and amortizing personal loans are classified as non-performing when they are greater than 60 days past due (i.e., 61 or more days past due) with respect to principal or interest. Except for loans accounted for using the FVO, at the time a loan is placed on non-performing status, previously accrued and uncollected interest is reversed against interest income. When an account is 60 days or less past due, it is returned to performing status and the Company returns to accruing interest on the loan. The accrual of interest on revolving personal loans continues until the loan is charged off.

RIC TDRs are placed on non-accrual status when the account becomes past due more than 60 days. For loans on non-accrual status, interest income is recognized on a cash basis; however, the Company continues to assess the recognition of cash received on those loans in order to identify whether certain of 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 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 ~~due~~increased $31.6 million from December 31, 2017 to December 31, 2018. At December 31, 2018, non-performing RICs and auto loans accounted for 5.3% of total RIC and auto LHFI, compared to 6.1% of total RICs and auto loans at December 31, 2017.

NPLs in the ~~energy sector.~~personal unsecured and other consumer loan portfolio decreased $0.2 million from December 31, 2017 to December 31, 2018. At December 31, 2018 and December 31, 2017, non-performing personal unsecured and other consumer loans accounted for 0.6% of total unsecured and other consumer loans, respectively.

Consumer Loans Secured by Real Estate

The following table shows NPLs compared to total loans outstanding for the residential mortgage and home equity portfolios as of December 31, ~~2015~~2018 and December 31, ~~2014,~~2017, respectively:

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

December 31, 2015 December 31, 2014

Residential mortgages ⁽¹⁾
Home equity loans and lines of credit
Residential mortgages⁽¹⁾
Home equity loans and lines of credit
(As Restated) (As Restated)
(dollars in thousands)
Non-performing loans $ 173,780
$ 127,171
$ 231,316
$ 142,026
Total loans $ 6,467,755
$ 6,151,232
$ 6,969,309
$ 6,211,298
NPLs as a percentage of total loans 2.7 % 2.1 % 3.3 % 2.3 %
NPLs in foreclosure status 43.3 % 23.5 % 38.9 % 13.7 %

~~(1) Includes LHFS~~



	December 31, 2018						December 31, 2017
(dollars in thousands)	Residential mortgages			Home equity loans and lines of credit			Residential mortgages			Home equity loans and lines of credit
NPLs	$	216,815		$	115,813		$	265,436		$	134,162
Total LHFI	9,884,462			5,465,670			8,846,765			5,907,733
NPLs as a percentage of total LHFI	2.2		%	2.1		%	3.0		%	2.3		%
NPLs in foreclosure status	43.3		%	56.7		%	48.8		%	52.2		%

The NPL ratio is ~~significantly~~ higher for the Company's residential mortgage loan portfolio compared to its consumer loans secured by real estate portfolio due to a number of factors, ~~including:~~including the prolonged workout and foreclosure resolution processes for residential mortgage ~~loans;~~loans, differences in risk ~~profiles;~~profiles, and mortgage loans located outside the Northeast and Mid-Atlantic United States.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~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, 2018 and December 31, 2017, the Company's delinquencies consisted of the following:



	December 31, 2018					December 31, 2017
(dollars in thousands)	Consumer Loans Secured by Real Estate	RICs and auto loans	Personal Unsecured and Other Consumer Loans	Commercial Loans	Total	Consumer Loans Secured by Real Estate	RICs and auto loans	Personal Unsecured and Other Consumer Loans	Commercial Loans	Total
Total delinquencies	$495,854	$4,760,361	$226,181	$232,264	$5,714,660	$571,229	$4,452,075	$229,547	$295,138	$5,547,989
Total loans⁽¹⁾	$15,564,653	$29,335,220	$3,047,515	$40,381,758	$88,329,146	$14,964,668	$26,067,169	$2,965,442	$39,315,888	$83,313,167
Delinquencies as a % of loans	3.2%	16.2%	7.4%	0.6%	6.5%	3.8%	17.1%	7.7%	0.8%	6.7%


~~Item 7.~~(1)	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~Includes LHFS.

~~Resolution challenges with low foreclosure sales continue~~Overall, total delinquencies increased by $166.7 million, or 3.0%, from December 31, 2017 to ~~impact both residential mortgage~~December 31, 2018 primarily driven by RIC and auto loans, which increased $308.3 million. This was offset by a decrease in consumer loans secured by real estate, ~~portfolio NPL balances, but foreclosure inventory~~of $75.4 million, a decrease in commercial loans of $62.9 million and personal unsecured and other consumer loans, which decreased ~~quarter-over-quarter. The foreclosure moratorium was lifted and activity resumed in~~$3.4 million. Delinquencies may vary from period to period based upon the ~~fourth quarter of 2011, but delays in Pennsylvania, New Jersey, New York, and Massachusetts limited the decline in NPL balances and contributed to a higher NPL ratio. As of~~ ~~December 31, 2015~~, foreclosures in all states except Delaware and Washington, D.C. were moving forward. Both Delaware and Washington, D.C. are delayed due to new legal complexities surrounding documentation required to initiate new foreclosure proceedings.

~~A new foreclosure law was enacted in Massachusetts in August 2012, and the Massachusetts Division of Banks issued its final rules on the implementation~~average age or seasoning of the ~~new foreclosure law in June 2013. These final rules require lenders to offer loan modification terms to certain borrowers prior to proceeding with foreclosure, unless~~portfolio, seasonality within the lender is able to prove that the modification would result in greater losses for the bank or that the borrower has rejected the offer. Lenders are also required to send notice to borrowers regarding their right to request a modification. Breach notices for Massachusetts foreclosures recommenced in September 2013.

~~The following table represents the concentration of foreclosures by state as a percentage of total foreclosures at~~ ~~December 31, 2015~~calendar year, and ~~December 31, 2014, respectively:~~

December 31, 2015 December 31, 2014

New Jersey 17.2% 29.9%
New York 27.4% 18.1%
Pennsylvania 22.3% 13.0%
Massachusetts 10.6% 11.7%
All other states 22.5% 27.3%

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 ~~83.9%~~ ~~of the 90+ day delinquent loan balances in the residential mortgage portfolio are secured by a first lien, while only~~ ~~50.7%~~ 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. The Alt-A segment consists of loans with limited documentation requirements and a portion of which were originated through independent parties ("Brokers") outside the Bank's geographic footprint. At ~~December 31, 2015~~ ~~and December 31, 2014, the residential mortgage portfolio included the following Alt-A loans:~~

December 31, 2015 December 31, 2014
(dollars in thousands)

Alt-A loans $ 531,824
$ 637,327
Alt-A loans as a percentage of the residential mortgage portfolio⁽¹⁾
8.2 % 9.1 %
Alt-A loans in NPL status $ 46,426
$ 67,668
Alt-A loans in NPL status as a percentage of residential mortgage NPLs 26.7 % 29.3 %

~~(1)Includes residential mortgage HFS~~

~~The performance of the Alt-A segment has remained poor, averaging an 8.7% NPL ratio in 2015. Alt-A mortgage originations were discontinued in 2008 and have continued to run off at an average rate of~~ ~~1.9%~~ per month. Alt-A NPL balances represented 64.6% of the total residential mortgage loan portfolio NPL balance at the end of the first quarter of 2009, when the portfolio was placed in run-off, compared to ~~26.7%~~ at ~~December 31, 2015. As the Alt-A segment runs off and higher quality residential mortgages are added to the portfolio, the shift in product mix is expected to lower NPL balances.~~

~~Consumer Loans Not Secured by Real Estate~~

RICs and amortizing term personal loans are classified as non-performing when they are greater than 60 days past due with respect to principal or interest. Except for loans accounted for using the fair value option, at the time a loan is placed on non-performing status, previously accrued and uncollected interest is reversed against interest income. When an account is 60 days or less past due, it is returned to a performing status and the Company returns to accruing interest on the loan. The accrual of interest on revolving personal loans continues until the loan is charged off.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

NPLs in the RICs and consumer loans not secured by real estate portfolios increased $124.3 million from December 31, 2014 to December 31, 2015. At December 31, 2015, non-performing consumer loans not secured by real estate accounted for 3.9% of total consumer loans not secured by real estate, compared to 3.9% of total consumer loans not secured by real estate at December 31, 2014. The increase was primarily attributable to the increase in NPLs in theeconomic factors. Historically, RIC and auto loan ~~portfolio of $144.7 million. This NPL increase is~~delinquencies have been highest in the period from November through January due to ~~the rise of nonprime loans, as a percentage of the portfolio, which have a higher default rate than prime loans.~~consumers’ holiday spending.

~~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 months of sustained payments following modification, as long as the Company believes the principal and interest of the restructured loan will be paid in full. ~~For~~RIC TDRs are placed on nonaccrual status when the ~~RIC portfolio, loans may~~Company believes repayment under the revised terms is not reasonably assured, and considered for return to accrual ~~status~~ when ~~the balance is remediated to current status.~~a sustained period of repayment performance has been achieved. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on the operation of the collateral, the loan may be returned to accrual status based on the foregoing parameters. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on disposal of the collateral, the loan may not be returned to accrual status.

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

The following table summarizes TDRs at the dates indicated:

December 31, 2015 December 31, 2014
(As Restated) (As Restated)
(in thousands)
Performing
Commercial $ 127,989
$ 186,685
Residential mortgage 134,356
83,597
RICs and auto loans 3,434,412
1,696,719
Other consumer 100,474
74,652
Total performing 3,797,231
2,041,653
Non-performing
Commercial 66,042
74,308
Residential mortgage 66,573
70,624
RICs and auto loans 421,356
146,918
Other consumer 48,344
51,672
Total non-performing 602,315
343,522
Total $ 4,399,546
$ 2,385,175

Performing TDRs totaled $3.8 billion at December 31, 2015, an increase of $1.8 billion compared to December 31, 2014. Non-performing TDRs totaled $602.3 million at December 31, 2015, an increase of $258.8 million compared to December 31, 2014. The following table provides a summary of TDR activity:



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

% of loan portfolio	0.5		%	n/a		2.3		%	n/a		17.9		%	n/a		4.0		%	n/a		6.7		%
(1) Excludes LHFS

	As of December 31, 2017
(in thousands)	Commercial			%		Consumer Loans Secured by Real Estate			%		RICs and Auto Loans			%		Other Consumer			%		Total TDRs
Performing	$	146,808		54.4	%	$	292,634		70.8	%	$	5,337,234		88.4	%	$	83,443		68.3	%	$	5,860,119
Non-performing	123,266			45.6	%	120,458			29.2	%	700,461			11.6	%	38,683			31.7	%	982,868
Total	$	270,074		100.0	%	$	413,092		100.0	%	$	6,037,695		100.0	%	$	122,126		100.0	%	$	6,842,987

% of loan portfolio	0.7		%	n/a		2.8		%	n/a		23.2		%	n/a		4.1		%	n/a		8.2		%

(1) Excludes LHFS

91The following table provides a summary of TDR activity:

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~



	Year Ended December 31, 2018						Year Ended December 31, 2017
(in thousands)	RICs and Auto Loans			All Other Loans			RICs and Auto Loans			All Other Loans⁽¹⁾
TDRs, beginning of period	$	6,037,695		$	805,292		$	5,159,135		$	914,369
New TDRs⁽¹⁾	1,877,058			136,716			4,184,380			246,729
Charged-Off TDRs	(1,706,788		)	(14,554		)	(2,211,027		)	(270,219		)
Sold TDRs	(2,884		)	(7,148		)	(3,141		)	(10,410		)
Payments on TDRs	(953,312		)	(249,723		)	(1,091,652		)	(75,177		)
TDRs, end of period	$	5,251,769		$	670,583		$	6,037,695		$	805,292


~~Item 7.~~(1)	~~Management’s Discussion and Analysis~~New TDRs includes drawdowns on lines of ~~Financial Condition and Results of Operations~~credit that have previously been classified as TDRs.

Year Ended December 31, 2015 Year Ended December 31, 2014
(As Restated) (As Restated)
Retail installment contracts and auto loan
All other loans^(1,2)
Retail installment contracts and auto loan
All other loans^(1,2)
(in thousands)
TDRs, beginning of period⁽¹⁾
$ 1,840,970
$ 527,069
$ —
$ 1,003,643
New TDRs 4,174,668
177,944
2,021,835
155,542
Charged-Off TDRs (1,095,858 ) (9,195 ) (107,718 ) (44,987 )
Sold TDRs (605,978 ) —
(930 ) (440,673 )
Payments on TDRs (447,566 ) (151,947 ) (69,550 ) (148,685 )
TDRs, end of period⁽²⁾
$ 3,866,236
$ 543,872
$ 1,843,637
$ 524,840

~~(1) Excludes $16.7 million and zero dollars of SC personal unsecured loans at December 31, 2014 and 2013, respectively, which were reclassified to LHFS during the third quarter of 2015.~~

~~(2) Excludes $12.9 million and $16.7 million of SC personal unsecured loans at December 31, 2015 and 2014, respectively, which were reclassified to LHFS during the third quarter of 2015.~~

~~Commercial~~

Performing commercial TDRs decreased from $186.7 million, or 71.5% of total commercial TDRs at December 31, 2014 to $128.0 million, or 66.0% of total commercial TDRs at December 31, 2015. The decrease is primarily attributable to improving credit quality and performance among commercial borrowers in 2015, including payments on TDRs of $114.4 million exceeding new TDRs of $44.2 million.

~~Residential Mortgages~~

Performing residential mortgage TDRs increased from $83.6 million, or 54.2% of total residential mortgage TDRs at December 31, 2014 to $134.4 million, or 66.9% of total residential TDRs at December 31, 2015. The increase is primarily attributable to the Company receiving refreshed chapter 7 bankruptcy data related to the residential mortgage portfolio, which added $41.4 million to the TDR portfolio in 2015.

~~RIC~~

RICs were a new portfolio for the Company in 2014 as a result of the Change in Control. The RIC and auto loan portfolio is primarily comprised of nonprime loans (71.6% at December 31, 2015) which lead to a higher rate of modifications and deferrals, and thus a higher volume of TDRs, than other portfolios. Total RIC and auto loan portfolio TDRs (performing and non-performing) comprised 8.2% of the Company’s total RIC and auto loan portfolio at December 31, 2014 and 15.1% at December 31, 2015. Loan portfolios acquired as part of a business combination like the Change in Control cannot be designated as TDRs under U.S. GAAP at the Change in Control date. As a result, the increase is primarily driven by RICs and auto loans originated prior to the Change in Control date which received their first modification, deferral greater than 90 days or second deferral subsequent to the Change in Control date during the reporting period. As a percentage of the RIC and auto loan portfolio recorded investment, there have been no significant increases in modification or deferral activity during the reporting period. The increased TDR activity at SHUSA may continue until the loan portfolios acquired as part of the Change in Control runoff.

In accordance with its policies and guidelines, the Company at times ~~offer~~offers payment deferrals to borrowers on its ~~retail installment contracts,~~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.~~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 ~~have~~has been received. During the deferral period, the Company continues to accrue and collect interest on the loan in accordance with the terms of the deferral agreement.

At the time a deferral is granted, all delinquent amounts may be deferred or paid, ~~resulting~~which 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 ~~account~~loan is not brought completely current such as when the account's days past due 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.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

Historically, the majority of deferrals are approved for borrowers who are either 31-60 or 61-90 days delinquent, and these borrowers are typically reported as current after deferral. A customer is limited to one deferral each six months, and if a customer receives two or more deferrals over the life of the loan, the loan will advance to a TDR designation.

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

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

forecasts ~~for loans classified as TDRs~~ used in the determination of the adequacy of the ~~allowance~~ALLL for ~~loan and lease losses~~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 ~~allowance for loan and lease losses~~ALLL and related provision for loan and lease losses. Changes in these ratios and periods are considered in determining the appropriate level of ~~allowance for loan and lease losses~~the ALLL and related provision for loan and lease losses.

~~Other Consumer Loans~~

~~Performing other consumer loan~~ For loans that are classified as TDRs, increased from $74.7 million, or 59.1% of total other consumer loan TDRs at December 31, 2014 to $100.5 million, or 67.5% of total other consumer loan TDRs at December 31, 2015. If a customer’s financial difficulty is not temporary, the Company ~~may agree, or~~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 ~~required by a~~recorded. For loans that are considered collateral-dependent, such as certain bankruptcy ~~court, to grant a modification involving one or a combination~~modifications, impairment is measured based on the fair value of the following: a reduction in interest rate, a reduction in the loan's principal balance, or an extension of the maturity date. The servicer also may grant concessions on the Company's revolving personal loans in the form of principal or interest rate reductions or payment plans.

~~TDR activity in the personal loan and other consumer portfolios was negligible~~collateral, less its estimated costs to ~~overall TDR activity.~~sell.

~~Delinquencies~~ACL

~~For the years ended December 31, 2015 and 2014, the Company's delinquencies consisted of the following:~~

December 31, 2015 December 31, 2014
(As Restated)
Consumer Loans Secured by Real Estate RICs and Auto Loans Personal Unsecured and Other Consumer Commercial Loans Total Consumer Loans Secured by Real Estate RICs and Auto Loans Personal Unsecured and Other Consumer Commercial Loans Total
(dollars in thousands)
Total Delinquencies $390,714 $3,713,852 $236,667 $159,011 $4,500,244 $488,911 $3,398,445 $293,275 $175,131 $4,355,762
Total Loans⁽¹⁾
12,618,987
25,553,507
3,672,461
40,712,119
82,557,074
13,180,607
22,430,453
4,003,382
36,641,277
76,255,719
Delinquencies as a % of Loans 3.1% 14.5% 6.4% 0.4% 5.5% 3.7% 15.2% 7.3% 0.5% 5.7%

~~(1) Includes LHFS~~

Overall, total delinquencies have increased by $144.5 million or 3.3% from December 31, 2014 to December 31, 2015. Consumer loans secured by real estate delinquencies have decreased $98.2 million or 20.1% primarily due to improvements in credit quality in the residential mortgage portfolio. Delinquencies in RICs and auto loans increased $315.4 million or 9.3% due to increased originations in the portfolio which includes non-prime loans. Personal unsecured and other consumer delinquencies combined have decreased $56.6 million primarily due to the increase in nonprime accounts in the RIC and auto loan portfolio. Commercial delinquencies have decreased -$16.1 million primarily due to overall improvements in credit quality.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~ALLOWANCE FOR CREDIT LOSSES ("ACL")~~

The ACL is maintained at levels ~~that~~ management considers adequate to provide for losses based upon an evaluation of known and inherent risks in the loan portfolio. Management's evaluation takes into consideration the risks inherent in the portfolio, past loan and lease loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, the level of originations, credit quality metrics such as ~~Fair Isaac Corporation(“FICO”)~~FICOscores and ~~combined loan-to-value (“CLTV”),~~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 ~~allowance for loan and lease losses~~ALLL and the percentage of each loan type to total ~~loans held for investment~~LHFI at the dates indicated:


	December 31, 2015				December 31, 2014				December 31, 2013				December 31, 2012				December 31, 2011				December 31, 2018				December 31, 2017
	(As Restated)				(As Restated)
	Amount		% of Loans to Total HFI Loans		Amount		% of Loans to Total HFI Loans		Amount		% of Loans to Total HFI Loans		Amount		% of Loans to Total HFI Loans		Amount		% of Loans to Total HFI Loans
	(dollars in thousands)
(dollars in thousands)																					Amount		% of Loans to Total LHFI		Amount		% of Loans to Total LHFI
Allocated allowance:
Commercial loans	$	435,717	51.2	%	$	401,553	48.2	%	$	443,074	64.4	%	$	580,931	62.8	%	$	766,865	58.2	%	$	441,083	46.4	%	$	443,796	48.4	%
Consumer loans	2,679,666		48.8	%	1,267,025		51.8	%	363,647		35.6	%	407,259		37.2	%	292,816		41.8	%	3,409,024		53.6	%	3,504,068		51.6	%
Unallocated allowance	45,328		n/a		33,024		n/a		27,616		n/a		25,279		n/a		23,811		n/a		47,023		n/a		47,023		n/a
Total allowance for loan and lease losses	3,160,711		100.0	%	1,701,602		100.0	%	834,337		100.0	%	1,013,469		100.0	%	1,083,492		100.0	%
Total ALLL																					3,897,130		100.0	%	3,994,887		100.0	%
Reserve for unfunded lending commitments	147,397				132,641				220,000				210,000				256,485				95,500				109,111
Total ACL	$	3,308,108			$	1,834,243			$	1,054,337			$	1,223,469			$	1,339,977			$	3,992,630			$	4,103,998

General

The ACL ~~increased $1.5 billion~~decreased $111.4 million from December 31, ~~2014~~2017 to December 31, ~~2015. The increase~~2018. This change in the overall ACL was primarily attributable to the decreased amount of TDRs within SC's ~~personal unsecured loan portfolios being reclassified as held-for-sale, as well as the lower of cost or fair value adjustments on certain RICs~~RIC and auto ~~loans. In accordance with ASC 805, the Company recognized SC's~~ loan portfolios at their Change in Control date fair value with no allowance for loan losses. Subsequent to the Change in Control, the Company recognizes provisions for credit losses for the purchased portfolios, for which we have not elected the FVO, when incurred losses on the portfolio exceed the unaccreted purchase discount. For loans originated by SC subsequent to the Change in Control, the Company recognizes provision expense as losses are incurred. This is also the primary driver behind the increase in the ACL attributed to consumer loans. The increase in the allowance for loan and lease losses allocated to commercial loans was, in part, attributed to additional reserves recorded on the Company's energy portfolio citing current economic conditions impacting this sector.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 ~~loans held for investment~~LHFI are carried at amortized cost, net of ~~ALLL. The~~ ALLL, which includes the estimate of ~~credit losses during the loss emergence period based on the~~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, ~~which include the loans acquired in the Change in Control,~~ 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 ~~based on nationally published statistics is conducted quarterly.~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~The factors supporting~~and trends by major portfolio against the ~~ACL do not diminish the fact that the entire ACL is available~~levels of peer banking institutions to ~~absorb losses in the loan portfolio~~benchmark our allowance and ~~related commitment portfolio. The Company’s principal focus is to ensure the adequacy of the total ACL.~~

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

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

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~~credit monitoring group to ensure consistency and accuracy in risk ratings, as well as the appropriate frequency of risk rating reviews by the Company’s credit officers. The Company’s Credit Risk Review Committee assesses whether the Company’s Credit Risk Review Framework and risk management guidelines established by the Company’s Board and applicable laws and regulations are being followed, and reports key findings and relevant information to the Board. The Company’s Credit Risk Review group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings. When credits are downgraded below a certain level, the Company’s Workout Department becomes responsible for managing the credit risk. Risk rating actions are generally reviewed formally by one or more credit committees depending on the size of the loan and the type of risk rating action being taken. Detailed analyses are completed that support the risk rating and management’s strategies for the customer relationship going forward.

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

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

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

The portion of the ~~allowance for loan and lease losses~~ALLL related to the commercial portfolio was ~~$435.7~~$441.1 million at December 31, ~~2015~~2018 (1.1% of commercial ~~loans held for investment)~~LHFI) and ~~$401.6~~$443.8 million at December 31, ~~2014~~2017 (1.1% of commercial ~~loans held for investment)~~LHFI). The primary factor resulting in the consistency of the allowance for loan and lease losses coverage is the result of continued improvement of credit quality in the portfolio, as evidenced by the decrease in delinquencies, non-accruals, and TDRs.

~~The~~decreased ACL allocated to the commercial portfolio ~~increased,~~was, in part, due to ~~current economic environment impacting our commercial customers~~a decline in the ~~energy sector. Management recorded additional reserves in relation to this portfolio during 2015.~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

overall balance of the CRE loan portfolio.

Consumer

The consumer loan and small business loan portfolios are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV ratios, and internal and external credit scores. Management evaluates the consumer portfolios throughout their ~~life cycles~~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:~~include a loan that is secured

by collateral and is in the process of ~~collection;~~collection, a loan supported by a valid guarantee or ~~insurance;~~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 ~~allowance for loan and lease losses~~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. As

Item 7. Management’s Discussion and Analysis of ~~December 31, 2015, the Company had $561.8 million~~Financial Condition and ~~$5.4 billion~~Results of consumer home equity loans and lines of credit, which included $240.6 million and $2.9 billion, or 42.8% and 53.0%, in junior lien positions, respectively. Loss severity rates on these consumer home equity loans and lines of credit in junior lien positions were 57.0% and 69.4%, respectively, as of December 31, 2015.Operations

A home equity loan or line of credit not adequately secured by collateral is treated similarly to ~~how~~the way residential mortgages are treated. AThe Company incorporates home equity loan or line of credit ~~also incorporate~~ 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 ~~allowance for loan and lease losses~~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 ~~24.7%~~23.0% of its junior lien home equity principal balances. Of the junior lien home equity loan and line of credit balances that are current, ~~0.8%~~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.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


~~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 percentage of the Company's current home equity lines of credit that are expected to reach the end of their draw periods prior to January 1, 2019 is approximately 2.7% and not considered significant. The Company's home equity lines of credit originated prior to 2007 are generally open-ended, revolving loans with fixed-rate lock options and draw periods of up to 15 years, along with amortizing repayment periods of up to 15 years. 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 ~~score~~scores and LTV ~~ratio.~~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 RIC loans acquired from a third-party lender that are considered to have no credit deterioration at acquisition, and personal unsecured loans at SC, the Company ~~estimates~~maintains an ALLL for the ~~allowance for loan and lease losses~~Company's held-for-investment portfolio not classified as TDRs at a level ~~considered~~estimated to be adequate to ~~cover probable~~absorb credit losses of the recorded investment inherent in the ~~portfolio.~~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 ~~allowance for loan and lease losses~~ALLL using product-specific allowance methodologies applied on a pooled basis. ~~For RICs,~~

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 ~~Company segregates the portfolio~~Markov model are categorized based on ~~homogeneity into pools based on source, then further stratifies each pool by vintage~~account characteristics such as delinquency status, TDR type (e.g., deferment, modification, etc.), internal credit risk, origination channel, seasoning, thin/thick file and ~~custom loss forecasting score. For each vintage and risk segment,~~time since TDR event. The credit models utilized differ among the Company's vintage model predicts timing of unit losses and the loan balances at time of default. The Company also segregates the RIC portfolio into Purchased and Originated portfolios. For the purchased RIC portfolio acquired in the Change in Control, the Company only recognizes an ACL through provision expense when the incurred losses on the portfolio exceed the unaccreted purchase discount balance. The Company's RIC and personal ~~unsecured loans originated since~~loan portfolios. The credit models are adjusted by management through qualitative reserves to incorporate information reflective of the Change in Control are carried at amortized cost, net of allowance for loan and lease losses, which is determined based on credit losses during the loss emergence period based on the expected discount remaining at charge off. 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 Company considers changes in the used vehicle index when forecasting recovery rates to apply to the gross losses forecasted by the vintage model. Its models do not include other macro-economic factors. Instead, the allowance for loan and lease loss process considers factors such as unemployment rates and bankruptcy trends as potential qualitative overlays. Management reviews idiosyncratic and systemic risks facing the business. This qualitative overlay framework enables the allowance for loan and lease loss process to arrive at a provision that reflects all relevant information, including both quantitative model outputs and qualitative overlays.

For the personal unsecured loan portfolio at SC, as of December 31, 2015, there was no allowance associated with the portfolio as the portfolio was transferred to held for sale in the third quarter of 2015. In previous periods, including December 31, 2014, the Company employed product specific models in determining the required allowance for loan and lease losses. For the fixed rate installment loan portfolio, a vintage modeling approach was employed in which the models predicted the timing of losses and the loan balance at the time of default. As these were unsecured loans, the total loss was the loan balance at the time of default. For revolving loans, the model stratified the portfolio based on delinquency categories and age of account. Loss rates were derived from historical experience to determine the expected portfolio losses over the next 12 months.

~~The~~ allowance for consumer loans was ~~$2.7~~$3.4 billion and ~~$1.3~~$3.5 billion at December 31, ~~2015~~2018 and December 31, ~~2014,~~2017, respectively. The allowance as a percentage of ~~held for investment~~held-for-investment consumer loans was ~~6.9%~~7.3% at December 31, ~~2015~~2018 and ~~3.2%~~8.4% at December 31, ~~2014.~~2017. The ~~increase~~decrease in the allowance for consumer loans iswas primarily attributable to ~~SC's personal unsecured loan portfolios being reclassified as held-for-sale, as well as the~~increased recovery rates and lower ~~of cost or fair value adjustments on certain RICs and auto loans, which were reflected as charge-offs of $451.0 million for the year ended December 31, 2015.~~

During the third quarter of 2015, SC determined that it no longer intended to hold its personal unsecured lending assets for investment. As a result, approximately $1.9 billion of personal unsecured loans were transferred to held-for-sale, net of a lower of cost or fair value adjustment of $377.6 million. For the year ended December 31, 2015, the lower of cost or fair value adjustments associated withTDR volume in SC's RIC and auto loan ~~sales was $73.4 million.~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

When adjusting for these lower of cost or fair value adjustments, SC's consumer loan net charge-off rate did not change materially year-over-year. Future loan originations and purchases under SC's personal lending platform will also be classified as held-for-sale. Future lower of cost or fair value adjustments could impact the reported charge-off ratio; otherwise, the Company does not expect significant movements in its charge-off ratios.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 ~~allowance for loan and lease losses~~ALLL is maintained at a level sufficient to absorb inherent losses in the consumer portfolios.

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

Unallocated

~~Additionally, the~~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 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 ~~allowance for loan and lease loss~~ALLL positions are considered in light of these factors. The unallocated ~~allowance for loan and lease losses~~ALLL was ~~$45.3~~$47.0 million at both December 31, ~~2015~~2018 and ~~$33.0 million~~ at December 31, ~~2014~~.2017.

Reserve for Unfunded Lending Commitments

In addition to the ~~allowance for loan and lease losses,~~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 ~~Sheet.~~Sheets. Once an unfunded lending commitment becomes funded and is carried as a loan, the corresponding reserves are transferred to the ~~allowance for loan and lease losses.~~ALLL.

The reserve for unfunded lending commitments ~~increased~~decreased from ~~$132.6~~$109.1 million at December 31, ~~2014~~2017 to ~~$147.4~~$95.5 million at December 31, ~~2015. This increase was~~2018. During the year ended December 31, 2018, the reserve for unfunded commitments decreased $13.6 million, primarily due to the funding of a letter of credit. At the time of funding, the letter of credit had an ~~increase in off-balance sheet lending commitments,~~associated reserve of $14.5 million which ~~is a result~~was transferred to the ALLL. The remaining decrease of the ~~overall increase in~~unfunded reserve is primarily related to the ~~Company's commercial lending business. As a result of these shifts, the~~Company strategically reducing its exposure to certain business relationships and industries. The net impact of the ~~decrease~~change in the reserve for unfunded lending commitments to the overall ACL iswas immaterial.

INVESTMENT SECURITIES

Investment securities consist primarily of U.S. Treasuries, MBS, ~~tax-free municipal securities, corporate debt securities, asset-backed securities ("ABS")~~ABS and stock in the FHLB and ~~the~~ FRB. MBS consist of pass-through, collateralized mortgage obligations (“CMOs"), and adjustable rate mortgages issued by federal agencies. The Company’s MBS are either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by S&P and Moody’s Investor Service at the date of issuance. The Company’s ~~available-for-sale~~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 ~~available-for-sale increased $5.0~~AFS decreased $2.8 billion to ~~$20.9~~$11.6 billion at December 31, ~~2015,~~2018, compared to ~~$15.9~~$14.4 billion at December 31, ~~2014.~~2017. During ~~2015,~~the year ended December 31, 2018, the composition of the Company's investment portfolio changed ~~by decreases~~due to a decrease in ~~ABS, corporate, and municipal securities which were~~MBS, partially offset by ~~increases~~an increase in High Quality Liquid Assets ("HQLA") such as U.S. Treasuries and MBS. HQLA are low risk assets that can easily and immediately be converted into cash at little or no loss of value such as cash or investment securities guaranteedU.S Treasury securities. MBS decreased by ~~a sovereign entity. This increase was primarily driven by activity within the MBS portfolio, offset by activity within the state and municipal portfolio. MBS increased by $6.2~~$3.7 billion primarily due to ~~$8.3~~a transfer to HTM for $1.2 billion, $1.8 billion of ~~investment purchases, offset by~~principal paydowns and $1.2 billion of sales and maturities, partially offset by purchases of ~~$0.7 billion and normal principal amortization during 2015. The state and municipal portfolio decreased~~$575.1 million. U.S. Treasuries increased by ~~$1.1 billion~~$806.6 million, primarily due to ~~sales and maturities~~investment purchases of ~~$1.0 billion. During 2015, the Company began implementing a strategy to improve the Company's liquidity by selling non-high-quality liquid assets and reinvesting the funds into HQLA.~~$776.0 million. For additional information with respect to the Company’s investment securities, see Note ~~4 in the Notes~~3 to the Consolidated Financial Statements.

98Debt 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

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

securities HTM were $2.8 billion at December 31, 2018. The Company had 71 investment securities classified as HTM as of December 31, 2018.

Total gross unrealized losses on investment securities AFS increased ~~$33.2~~by $73.9 million during ~~2015,~~the year ended December 31, 2018. This increase was primarily related to an increase in unrealized losses of $70.0 million on MBS, primarily due to ~~increases in~~rising interest rates. The majority of the increases in unrealized losses during the year were in the MBS portfolios and U.S. Treasury securities. The unrealized losses within the MBS portfolios increased by $28.1 million, and the unrealized losses within the U.S. Treasury securities increased by $5.6 million. Refer to Note 4 in the Notes to the Consolidated Financial Statements for additional details.

~~There were no trading securities held at~~ ~~December 31, 2015, compared to $833.9 million at~~ ~~December 31, 2014~~.

~~Other investments, which consists of FHLB stock and FRB stock, increased from~~ ~~$817.0 million~~ at ~~December 31, 2014~~ to $1.0 billion at December 31, 2015 primarily due to purchases of FHLB and FRB stock, partially offset by the FHLB's repurchase of its stock and adoption of ASU 2014-01 which resulted in the re-classification of $26.4 million in LIHTC investments into Other investments.

The average life of the ~~available-for-sale~~AFS investment portfolio (excluding certain ABS) at December 31, ~~2015~~2018 was approximately ~~3.94~~4.48 ~~years, compared to~~ ~~4.11~~ ~~years at~~ ~~December 31, 2014~~.years. The average effective duration of the investment portfolio (excluding certain ABS) at December 31, ~~2015~~2018 was approximately ~~2.95~~3.52 years. The actual maturities of MBS ~~available-for-sale~~AFS will differ from contractual maturities because borrowers ~~may~~ have the right to prepay obligations without prepayment penalties.

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:


	Year Ended December 31,
	2015		2014
	(in thousands)
Investment securities available-for-sale:
(in thousands)					December 31, 2018		December 31, 2017
Investment securities AFS:
U.S. Treasury securities and government agencies	$	8,197,496	$	4,280,301	$	5,485,392	$	7,042,828
FNMA, and FHLMC securities	8,630,503		4,877,787
FNMA and FHLMC securities					5,550,628		6,840,696
State and municipal securities	767,880		1,823,462		16		23
Other securities ⁽¹⁾	3,255,616		4,926,528		596,951		529,636
Total investment securities available-for-sale	20,851,495		15,908,078
Total investment securities AFS					11,632,987		14,413,183
Investment securities HTM:
U.S. government agencies					2,750,680		1,799,808
Total investment securities HTM⁽²⁾					2,750,680		1,799,808
Other investments	1,024,259		816,991		805,357		658,864
Total investment portfolio	$	21,875,754	$	16,725,069	$	15,189,024	$	16,871,855

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


(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~~stockholder's equity that were held by the Company at December 31, ~~2015:~~

2018:

At December 31, 2015
Amortized Cost Fair Value
(in thousands)
FNMA $ 4,181,555
$ 4,105,847
FHLMC 4,582,419
4,513,446
GNMA ⁽¹⁾
5,032,801
5,002,800
GOVT - Treasuries 3,192,411
3,188,388
Total $ 16,989,186
$ 16,810,481

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

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~



	December 31, 2018
(in thousands)	Amortized Cost		Fair Value
FNMA	$	3,102,447	$	3,011,571
FHLMC	2,636,582		2,539,057
Government National Mortgage Association ⁽¹⁾	6,534,406		6,356,696
Government - Treasuries	1,815,914		1,804,745
Total	$	14,089,349	$	13,712,069


~~Item 7.~~(1)	~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~Includes U.S. government agency MBS.

GOODWILL

~~As described in the Company's Critical Accounting Policies section of Management's Discussion and Analysis, the~~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 ~~impairment of goodwill.~~goodwill impairment. At December 31, ~~2015,~~2018, goodwill totaled $4.4 billion and represented ~~3.5%~~3.3% of total assets and ~~22.7%~~18.6% of total stockholder's equity. The following table shows goodwill by ~~reportable segments~~reporting units at December 31, ~~2015~~2018:

Retail Banking Auto Finance & Business Banking Real Estate and Commercial Banking Global Corporate Banking SC Total
(As Restated) (in thousands)
Goodwill at December 31, 2015 $ 1,550,321
$ 445,923
$ 1,297,055
$ 131,130
$ 1,019,960
$ 4,444,389



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

During 2018, the ~~second quarter~~reportable segments (and reporting units) formerly known as Commercial Banking and CRE were combined and presented as Commercial Banking. Refer to Note 23 for further discussion on the change in reportable segments. There were no

additions or removals of ~~2015, the Company determined that the expiration~~underlying lines of ~~the direct lease origination agreement~~business in connection with ~~SC constituted a potential impairment indicator in the Auto Finance & Business Banking~~this reporting ~~unit.~~change. As a result, goodwill assigned to these former reporting units of $542.6 million and $870.4 million for Commercial Banking and CRE, respectively, have been combined. There were no additions or impairments of goodwill for the ~~Company conducted~~year ended December 31, 2018.

Also during 2018, Santander renamed its Global and Corporate Banking business to CIB to more accurately reflect its business strategy and business proposition to clients, and to align with the name used by a ~~Step 1 interim impairment test on~~majority of its competitors in the ~~Auto Finance & Business Banking~~industry. There were no changes to composition of the reportable segment or reporting unit as a result of April 1, 2015. The Company conducted the interim impairment test in the same manner as its annual impairment test with key inputs and assumptions being updated as of the interim testing date. The results of the interim impairment test validated that the fair value exceeded the carrying value for the Auto Finance & Business Banking reporting unit by over 25%. Based on these results, the Company did not consider the goodwill assigned to the Auto Finance & Business Banking reporting unit to be impaired or at risk for impairment.this change.

~~As of October 1, 2015, the~~The Company conducted its annual goodwill impairment ~~test~~tests as of October 1, 2018 using ~~the~~ generally accepted valuation ~~methods discussed~~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 2018 fourth quarter review, the Company did not identify any indicators which resulted in the Company's ~~Critical Accounting Policies~~conclusion that an interim impairment test would be required to be completed. As discussed further in the section of ~~Management's~~this MD&A above captioned “Executive Summary,” SC and FCA are in exploratory discussions regarding the Chrysler Agreement that could have a future impact on the Company's goodwill.

Item 7. Management’s Discussion and ~~Analysis. After conducting a fair valuation analysis~~Analysis of ~~each reporting unit as~~Financial Condition and Results of ~~the annual testing date, the Company determined that there was no impairment of goodwill identified as a result of the annual impairment analysis.~~Operations

For the ~~Retail~~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 ~~was~~were determined to be comparable. The projected tangible book value ~~(TBV)~~("TBV") of 1.5x was selected based on publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate of ~~9.5%~~10.3%, which iswas 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 ~~Retail~~Consumer and Business Banking reporting unit by ~~21.3%~~15.8%, indicating the ~~Retail Banking~~ reporting unit was not considered to be impaired or at risk for impairment.

For the ~~Auto Finance & Business~~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%~~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 1.5x was selected based on the selected publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate 10.8%, which was most representative of the business' cost of equity at the time of the analysis. Long-term growth rates of 3.5% 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 17.8%, indicating the Commercial Banking 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 1.5x was selected based on the selected publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate of 12.9% which is 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 Auto Finance & Business Banking reporting unit by 34.2%11.6%, ~~indicating the Auto Finance & Business Banking reporting unit was not considered to be impaired or at risk for impairment.~~

For the Commercial Real Estate 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 was 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 of 10.7% which is 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 33.1% indicating the Commercial Real Estate reporting unit was not considered to be impaired or at risk for impairment.

~~100~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

For the Corporate and Commercial Banking reporting unit's fair valuation analysis, an equal weighting of the market and income approach. 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 was 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 11.0% which is 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 Corporate and Commercial Banking reporting unit by 45.3%, indicating the Corporate and Commercial Banking reporting unit was not considered to be impaired or at risk for impairment.

For the GCB 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 was determined to be comparable. The projected TBV of 1.4x was selected based on the selected publicly traded peers of the reporting unit and was equally considered with the projected earnings multiples of 10.0x, 9.0x, and 8.0x which were applied to the reporting unit's 2015, 2016 and 2017 earnings. For the income approach, the Company selected a discount rate of 11.6% which is 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 GCB reporting unit by 94.9%, indicating the GCB reporting unit was not considered to be impaired or at risk for impairment.

For the SC reporting unit's fair valuation analysis, an equal weighting of the market approach, the market capitalization approach and the income approach was applied. For the market capitalization approach, SC's stock price from October 1, 2015 of $21.80 was used and a 35.0% control premium was used based on the Company's review of transactions observable in the market place that was determined to be comparable. For the market approach, the projected TBV of 1.8x was selected based on the selected publicly traded peers of the reporting unit and was equally considered with the projected earnings multiple of 8.3x which was applied to reporting unit's 2015 earnings. For the income approach, the Company selected a discount rate of 9.9% 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 46.2%, 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, 2018 of $19.68 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 ~~11.7%~~48%, indicating that the SC reporting unit was not considered to be impaired. ~~By the time the annual impairment analysis was finalized, the share price of SC had declined from the $21.80 used in the annual impairment analysis. The Company continued~~Management continues to ~~evaluate the decline of the stock price from the time the annual impairment test was complete through the end of the fourth quarter.~~

~~At December 31, 2015, given the decline in~~monitor SC's stock price, ~~between~~along with changes in the ~~2015 annual goodwill impairment analysis~~financial position and ~~year-end,~~results of operations that would impact the ~~Company concluded that the fair value of the SC~~ reporting ~~unit was more likely than not less than its~~unit's carrying value ~~including goodwill. As~~on a ~~result,~~regular basis. Through the ~~Company conducted an interim impairment analysis for possible goodwill impairment~~date of ~~the SC reporting unit's goodwill~~this filing, there have been no indicators which would change management's assessment as of ~~December 31, 2015. For the Step~~October 1, analysis, the Company utilized the market capitalization approach to determine the fair valuation of the reporting unit. The Company used SC's stock price of $15.85, which was the stock's price as of interim testing date. The Company utilized a 35.0% control premium based on the Company's review of transactions observable in the market place that was determined to be comparable.

Based on the Company's interim Step 1 analysis, the Company concluded that the carrying amount of the SC reporting unit's goodwill exceeded the fair value. As a result, the Company moved onto a Step 2 analysis. For Step 2, the Company compared the implied fair value of goodwill to the carrying value of goodwill. The implied fair value of goodwill was determined in the same manner as the amount of goodwill that is recognized in a business combination, which is the excess of the fair value of the reporting unit determined in Step 1 over the fair value of the net assets and identifiable intangibles as if the reporting unit were being acquired. Considerable judgment is involved in the determination of the fair value of assets and liabilities of the reporting unit, and as such, directly impact the fair value of the reporting unit calculation which is part of the Step 2 analysis. The most significant estimates related to the fair valuation of the loans and intangible assets.

Based on the Company's interim Step 1 and Step 2 analyses, the Company concluded that goodwill related to the SC reporting unit was impaired at December 31, 2015. The Company recorded an impairment of goodwill of $4.5 billion. At December 31, 2015, the Company has $1.0 billion of goodwill allocated to the SC reporting unit.

Also, as a result of the Company's interim Step 1 and Step 2 analyses, the Company concluded an indefinite-lived intangible asset trade name was impaired. As a result, the Company booked an impairment of $3.5 million.

~~101~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

At the time the interim impairment test was complete, the share price of SC had declined from $15.85 used in the interim impairment analysis. The Company has continued and will continue to evaluate the SC reporting unit for impairment on a quarterly basis. It is reasonably possible additional impairment, up to the amount of remaining goodwill, would be recognized based on the additional share price decline in the future.2018.

~~PREMISES AND EQUIPMENT~~

Total premises and equipment, net, was $942.4 million at December 31, 2015, compared to $854.7 million at December 31, 2014. The increase in total premises and equipment was primarily due to computer software implementations, purchases of furniture, office equipment and ATMs as well as leasehold improvements in both corporate and retail. In 2014, certain changes to the Company’s IT strategy resulted in the Company conducting an assessment of its capitalized costs related to internally developed software classified as held and used. As part of that assessment, the Company identified a number of assets it determined to have no future service potential as well as assets whose carrying values were not considered recoverable in accordance with applicable accounting standards. This assessment resulted in the Company recording an impairment charge of $64.5 million for the year ended December 31, 2014. See Note 7 for details on premises and equipment.

DEFERRED TAXES AND OTHER TAX ACTIVITY

The ~~Company's~~Company had a net deferred tax liability balance ~~was a liability~~ of ~~$353.4~~$587.5 million at December 31, ~~2015~~2018 (consisting of a deferred tax asset balance of $625.1 million and ~~$1.2 billion~~a deferred tax liability balance of $1,212.5 million), compared to a net deferred tax liability balance of $193.6 million at December 31, ~~2014.~~2017 (consisting of a deferred tax asset balance of $771.7 million and a deferred tax liability balance of $965.3 million). The ~~$806.6~~$393.8 million ~~decrease~~increase in net deferred liabilities for the year ended December 31, ~~2015~~2018 was ~~primarily~~ due to ~~a $996.1 million decrease in the deferred tax liability related to the Company's investment in SC as a result of the goodwill impairment, partially offset by a $573.3 million~~an increase in the deferred tax liability related to accelerated tax deprecation on leasing transactions and a $54.3 million decrease to the deferred tax asset related to the IRC Section 475 mark to market adjustment for SC's business as a dealer. Other activity driving the reduction in the deferred tax liability included a $267.4 million increase in deferred tax assets related to net operating loss carryforwards and tax credits, and a $149.0 million decrease in deferred tax liabilities related to ~~purchase accounting adjustments.~~

The Company has a lawsuit pending against the United States in Federal District Court in Massachusetts relating to the proper tax consequences of two financing transactions with an international bank through which the Company borrowed $1.2 billion. As a result of these financing transactions, the Company paid foreign taxes of $264.0 million during the years 2003 through 2007 and claimed a corresponding foreign tax credit for foreign taxes paid during those years, which the Internal Revenue Service ("IRS") disallowed. The IRS also disallowed the Company's deductions for interest expense and transaction costs, totaling $74.6 million in tax liability, and assessed penalties and interest totaling approximately $92.5 million. The Company has paid the taxes, penalties and interest associated with the IRS adjustments for all tax years, and the lawsuit will determine whether the Company is entitled to a refund of the amounts paid. The Company has recorded a receivable in the Other assets line of the Consolidated Balance Sheets for the amount of these payments, less a tax reserve of $230.1 million, as of December 31, 2015.

On November 13, 2015, the Federal District Court issued a written opinion in favor of the Company on all contested issues, and in a judgment issued on January 13, 2016, ordered amounts assessed by the IRS for years 2003 through 2005 to be refunded to the Company. On March 11, 2016, the IRS filed a notice of appeal. The appeal will be heard in the First Circuit.

In 2013, two different federal courts decided cases involving similar financing structures entered into by the Bank of New York Mellon Corp. ("BNY Mellon") and BB&T Corp. ("BB&T") in favor of the IRS. BNY Mellon and BB&T each appealed. On May 14, 2015, the Court of Appeals for the Federal Circuit decided BB&T's appeal by affirming the trial court's decision to disallow BB&T's foreign tax credits and to allow penalties, but reversing the trial court and allowed BB&T's entitlement to interest deductions. On September 9, 2015, the Court of Appeals for the Second Circuit upheld the trial court's decision in BNY Mellon's case, allowing BNY Mellon to claim interest deductions, but disallowing BNY Mellon's claimed foreign tax credits. On September 29, 2015, BB&T filed a petition requesting the U.S. Supreme Court to hear its appeal of the Federal Circuit Court’s decision. BNY Mellon filed a petition requesting the U.S. Supreme Court hear its appeal of the Second Circuit’s decision on November 3, 2015. On March 7, 2016, the U.S. Supreme Court denied BB&T's and BNY Mellon's petitions.

The Company has not changed its reserve position as of December 31, 2015 and remains confident in the legal merits of its position and believes its reserve amount adequately provides for potential exposure to the IRS related to these items. The Company's reserve position was increased by $104.2 million during the third quarter of 2015. Over the next 12 months, it is reasonably possible that changes in the reserve for uncertain tax positions could rangeaccelerated depreciation from ~~a decrease of $230.1 million to an increase of $201.9 million.~~

~~102~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~OTHER ASSETS~~

Other assets at December 31, 2015 were $1.9 billion, compared to $2.9 billion at December 31, 2014. The decrease in other assets was primarily due to activity in income tax receivables and miscellaneous assets and receivables, offset by an increase in other repossessed assets.

~~Income tax receivables decreased $324.9 million, primarily due to the decrease in accrued federal tax receivables.~~

Miscellaneous assets and receivables decreased $656.2 million primarily due to investment trades unsettled at the end of 2014 that cleared subsequent to December 31, 2014. These unsettled trades were primarily related to $580.7 million in sales of trading securities liquidated in the first quarter of 2015.

The decreases above were offset by an increase in other repossessed assets of $36.4 million between December 31, 2014 and December 31, 2015, primarily due to an increase in the average balance of the auto portfolio and maturities associated with the lease portfolio.leasing transactions.

~~DEPOSITS AND OTHER CUSTOMER ACCOUNTS~~

The Bank attracts deposits within its primary market area by offering a variety of deposit instruments, including demand and interest-bearing demand deposit accounts, money market accounts, savings accounts, customer repurchase agreements, such as certificates of deposit ("CDs") and retirement savings plans. The Bank also issues wholesale deposit products such as brokered deposits and government deposits on a periodic basis, which serve as an additional source of liquidity for the Company.

~~Total deposits and other customer accounts increased~~ ~~$3.6 billion~~ ~~from~~ ~~December 31, 2014~~ to ~~December 31, 2015~~. The increase in deposits was primarily due to increases in money market accounts, CDs and noninterest-bearing accounts, offset by a decrease in interest-bearing accounts. The increase in deposits was primarily comprised of increases in money market accounts of $2.8 billion, or 13.1% and CDs of $1.2 billion, or 16.4% due mainly to continuing better economic conditions encouraging movement from certain interest-bearing investments to money market accounts and CDs.

Interest-bearing deposit accounts decreased $610.4 million, or 5.6%, primarily due to the shift in deposits to money market accounts. The Company continues to focus its efforts on attracting and increasing lower-cost deposits, however, the cost of deposits increased from 0.50% for the fourth quarter of 2014 to 0.56% for the fourth quarter of 2015.

~~Demand deposit overdrafts that have been reclassified as loan balances were~~ ~~$25.2 million~~ ~~and~~ ~~$51.3 million~~ at ~~December 31, 2015~~ ~~and~~ ~~December 31, 2014, respectively. Time deposits of $250,000 or more totaled $1.5 billion and~~ ~~$993.4 million~~ ~~at December 31, 2015 and~~ ~~December 31, 2014, respectively.~~

~~BORROWINGS AND OTHER DEBT OBLIGATIONS~~

The Company has term loans and lines of credit with Santander and other third-party lenders. The Bank utilizes borrowings and other debt obligations as a source of funds for its asset growth and asset/liability management. Collateralized advances are available from the FHLB if certain standards related to creditworthiness are met. 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 retail installment contracts and operating leases, which are structured secured financings. Total borrowings and other debt obligations at December 31, 2015 were $49.1 billion, compared to $39.7 billion at December 31, 2014. Total borrowings increased $9.4 billion, primarily due to $3.1 billion of new debt issued by the Bank and the Holding Company, an increase of $4.4 billion in FHLB Advances, and net $2.5 billion of SC securitization activity, offset by maturing debt of $0.6 billion. See further detail on borrowings activity in Note 12 to the Consolidated Financial Statements.

~~103~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~The following table summarizes information regarding borrowings and other debt obligations of the Company:~~

Year Ended December 31,
2015 2014
(in thousands)
SHUSA borrowings and other debt obligations
SHUSA senior notes:
Balance $3,061,157 $1,570,531
Weighted average interest rate at year-end 3.89 % 3.86 %
Maximum amount outstanding at any month-end during the year $3,668,312 $1,570,531
Average amount outstanding during the year $2,619,067 $1,568,763
Weighted average interest rate during the year 3.74 % 3.86 %
SHUSA subordinated notes: ⁽¹⁾

Balance $0 $0
Weighted average interest rate at year-end — % — %
Maximum amount outstanding at any month-end during the year $0 $756,996
Average amount outstanding during the year $0 $105,758
Weighted average interest rate during the year — % — %
Junior subordinated debentures to capital trusts:
Balance $233,819 $233,766
Weighted average interest rate at year-end 4.13 % 4.04 %
Maximum amount outstanding at any month-end during the year $233,819 $259,071
Average amount outstanding during the year $233,792 $237,768
Weighted average interest rate during the year 4.10 % 4.08 %

~~(1) On February 21, 2014, the subordinated note, with a value of $750.0 million, was converted to 3.0 million shares of SHUSA common stock.~~

~~104~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~The following table summarizes information regarding borrowings and other debt obligations of the Bank:~~

Year Ended December 31,
2015 2014
(in thousands)
Bank borrowings and other debt obligations
REIT preferred:
Balance $ 154,930
$ 153,417
Weighted average interest rate at year-end 13.66 % 13.64 %
Maximum amount outstanding at any month-end during the year $ 154,930
$ 153,417
Average amount outstanding during the year $ 154,155
$ 152,618
Weighted average interest rate during the year 13.59 % 13.70 %
Bank senior notes:
Balance $ 995,796
$ —
Weighted average interest rate at year-end 2.01 % — %
Maximum amount outstanding at any month-end during the year $ 997,808
$ —
Average amount outstanding during the year $ 966,584
$ —
Weighted average interest rate during the year 2.01 % — %
Bank subordinated notes:
Balance $ 498,175
$ 497,530
Weighted average interest rate at year-end 8.92 % 8.92 %
Maximum amount outstanding at any month-end during the year $ 498,175
$ 497,530
Average amount outstanding during the year $ 497,830
$ 497,214
Weighted average interest rate during the year 8.92 % 8.92 %
Term loans:
Balance $ 161,243
$ 170,608
Weighted average interest rate at year-end 6.48 % 6.33 %
Maximum amount outstanding at any month-end during the year $ 170,724
$ 178,556
Average amount outstanding during the year $ 163,979
$ 172,967
Weighted average interest rate during the year 6.09 % 6.12 %
Securities sold under repurchase agreements:
Balance $ —
$ —
Weighted average interest rate at year-end — % — %
Maximum amount outstanding at any month-end during the year $ —
$ —
Average amount outstanding during the year $ 2,877
$ —
Weighted average interest rate during the year 0.32 % — %
Federal funds purchased:
Balance $ —
$ —
Weighted average interest rate at year-end — % — %
Maximum amount outstanding at any month-end during the year $ 100,000
$ —
Average amount outstanding during the year $ 11,658
$ 1,014
Weighted average interest rate during the year 0.16 % 0.14 %
FHLB advances:
Balance $ 13,885,000
$ 9,455,000
Weighted average interest rate at year-end 1.40 % 2.06 %
Maximum amount outstanding at any month-end during the year $ 13,885,000
$ 9,593,309
Average amount outstanding during the year $ 10,208,082
$ 7,675,404
Weighted average interest rate during the year 1.78 % 3.42 %

~~105~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~The following table summarizes information regarding borrowings and other debt obligations of SC:~~

Year Ended December 31,
2015 2014
(in thousands)
SC borrowings and other debt obligations⁽¹⁾

Revolving credit facilities:
Balance $ 9,202,779
$ 9,792,327
Weighted average interest rate at year-end 1.81 % 1.68 %
Maximum amount outstanding at any month-end during the year $ 11,413,550
$ 9,792,327
Average amount outstanding during the year $ 10,116,963
$ 8,654,771
Weighted average interest rate during the year 2.2 % 2.01 %
Public securitizations:
Balance $ 12,679,987
$ 11,523,729
Weighted average interest rate range at year-end 0.89% - 2.29%
0.89% - 2.80%
Maximum amount outstanding at any month-end during the year $ 13,619,087
$ 12,234,892
Average amount outstanding during the year $ 12,896,163
$ 11,831,759
Weighted average interest rate during the year 1.82 % 1.58 %
Privately issued amortizing notes:
Balance $ 8,213,217
$ 6,282,474
Weighted average interest rate range at year-end 0.88% - 2.81%
1.05% - 1.85%
Maximum amount outstanding at any month-end during the year $ 8,213,217
$ 6,347,487
Average amount outstanding during the year $ 6,960,713
$ 5,860,952
Weighted average interest rate during the year 1.48 % 1.29 %

~~(1) Balances as of December 31, 2013 are not presented due to SC being accounted for as an equity method investment at that date.~~

~~ACCRUED EXPENSES AND OTHER LIABILITIES~~

~~Accrued Expenses~~

December 31, 2015 December 31, 2014
(As Restated) (As Restated)
(in thousands)
Accrued interest $ 126,771
$ 85,582
Accrued federal/foreign/state tax credits 189,684
68,742
Deposits payable 105,530
125,365
Expense accruals 452,509
395,899
Payroll/tax benefits payable 337,502
275,556
Accounts payable 154,400
767,987
Miscellaneous payable 299,890
172,104
Total accrued expenses $ 1,666,286
$ 1,891,235

Accrued expenses decreased $224.9 million, or 11.9%, from 2014 to 2015. The decrease in accrued expenses was primarily due to the decrease in accounts payable of $613.6 million. The decrease was related to investment purchases that were in the process of settling at December 31, 2014. Also contributing to the decrease was the release of FNMA recourse reserves during 2015. The release was attributable to the $1.4 billion re-purchase of multifamily mortgages during the third quarter of 2015 from FNMA. This was offset by increases in miscellaneous payables of $127.8 million due to the Separation Agreement executed in connection with the departure of Thomas Dundon as Chief Executive Officer of SC (the “Separation Agreement”) as discussed in Note 1 to these Consolidated Financial Statements and expense accruals of $56.6 million related to workflow accruals. In addition there was an increase in accrued tax credits of $120.9 million.

~~106~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

~~Other Liabilities~~

December 31, 2015 December 31, 2014
(As Restated) (As Restated)
(in thousands)
Total derivative activity $ 320,139
$ 402,775
Official checks and money orders in process 105,102
77,433
Deferred gains/credits 25,683
109,785
Reserve for unfunded commitments 147,456
132,692
Total other liabilities $ 598,380

$ 722,685

Other liabilities decreased $124.3 million, or 17.2%, from 2014 to 2015. The decrease in other liabilities was primarily related to the decrease in liabilities associated with derivative activity of $82.6 million due to fluctuations in the mark-to-market valuations in trading derivative accounts. This was offset by an increase in official checks and money orders in process at year-end of $27.7 million.

OFF-BALANCE SHEET ARRANGEMENTS

See further discussion of the Company's off-balance sheet arrangements in Note 87 and Note 20 to the Consolidated Financial Statements, and the Liquidity and Capital Resources section of ~~the~~this MD&A.

~~PREFERRED STOCK~~

~~On May 15, 2006,~~For a discussion of the status of litigation with which the Company ~~issued 8.0 million shares of Series C non-cumulative perpetual preferred stock and received net proceeds of $195.4 million. The perpetual preferred stock ranks senior~~is involved with the Internal Revenue Service, please refer to Note 13 to the Company's common stock. This is because perpetual preferred stockholders are entitled to receive dividends when and if declared by the Company’s Board of Directors at a rate of 7.30% per annum, payable quarterly, before the Board of Directors may declare or pay any dividend on the Company's common stock. The perpetual preferred stock is redeemable at par. As of December 31, 2015, no preferred stock had been redeemed.Condensed Consolidated Financial Statements.

BANK REGULATORY CAPITAL

The Company's capital priorities are to support client growth and business investment ~~and maintain~~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 retention of quarterly earnings.~~

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, ~~2015~~2018 and December 31, ~~2014, respectively,~~2017, based on the Bank’s capital calculations, the Bank ~~met~~was considered well-capitalized under the ~~well-capitalized~~applicable capital ~~ratio requirements. The~~framework. In addition, the Company's capital levels as of December 31, 2018 and December 31, 2017, based on the Company’s capital calculations, exceeded the required capital ratios ~~required~~ for BHCs.

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

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

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.

~~107~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~


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

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 ~~the Holding Company~~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, or (3) the Bank is not adequately capitalized at the time. ~~In addition, the~~The OCC's prior approval would also be required if the ~~Bank's examination or Community Reinvestment Act ratings fall below certain levels or the~~ Bank iswere notified by the OCC that it is a problem ~~association~~institution or in troubled condition. In addition, the Bank must obtain the OCC's prior written approval to make any capital distribution until it has positive retained earnings. Under a written agreement with the FRB of Boston, the Company must not declare or pay, and must not permit any non-bank subsidiary that is not wholly-owned by the Company, including SC, to declare or pay, any dividends, and the Company must not make, or permit any such subsidiary to make, any capital distribution, in each case without the prior written approval of the FRB of Boston.

Any dividend declared and paid or return of capital has the effect of reducing ~~the Bank's~~ capital ratios. ~~There were no~~During the years ended December 31, 2018 and 2017. The Company paid cash dividends ~~declared or paid in 2015 or 2014. The Bank returned capital~~ of ~~$0.0~~$410.0 million, and ~~$128.0~~$10.0 million, respectively, to its common stock shareholder and cash dividends to preferred shareholders of $11.0 million and $14.6 million, respectively. On August 15, 2018, SHUSA ~~in 2015 and 2014, respectively.~~redeemed all of its outstanding preferred stock.

The following schedule summarizes the actual capital balances of SHUSA and the Bank ~~and SHUSA~~ at December 31, ~~2015:~~2018:


	BANK						SHUSA

	December 31, 2015		Well-capitalized Requirement⁽¹⁾		Minimum Requirement⁽¹⁾		December 31, 2018		Well-capitalized Requirement⁽¹⁾		Minimum Requirement⁽¹⁾
Common equity tier 1 capital ratio	13.81	%	6.50	%	4.50	%
CET1 capital ratio							15.53	%	6.50	%	4.50	%
Tier 1 capital ratio	13.81	%	8.00	%	6.00	%	16.86	%	8.00	%	6.00	%
Total capital ratio	15.09	%	10.00	%	8.00	%	18.35	%	10.00	%	8.00	%
Leverage ratio	11.46	%	5.00	%	4.00	%	14.03	%	5.00	%	4.00	%

~~131~~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.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~Commissions and trailer fees

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

Interchange income, net

The Company has entered into agreements with payment networks 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.

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

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.

109

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

~~Income~~Asset and wealth management fees

Asset and wealth management fees includes fee income generated from ~~finance leases~~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 ~~part of interest income over~~earned and charged to the ~~term~~customer on a quarterly basis. The fee for the discretionary and nondiscretionary contracts is based on a percentage of the ~~lease using~~average assets included in 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.~~customer’s account.

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 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 ~~acceptable techniques~~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 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.

Cash, ~~and~~ 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. ~~As of December 31, 2015, the~~The Company has maintained balances in various operating and money market accounts in excess of federally insured limits.

Cash deposited to support securitization transactions, lockbox collections, and the related required reserve accounts ~~are~~is recorded in the Company's Consolidated Balance Sheet as ~~of December 31, 2015 as~~ restricted cash. Excess cash flows generated by ~~the~~ 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~~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

~~Investments that are purchased principally for the purpose of economically hedging the MSR~~Investment in ~~the near term~~debt securities are classified as either AFS, HTM, trading, or other investments. Investments in equity securities ~~and carried~~are generally recorded at fair value with changes recorded in ~~fair value recorded as a component~~earnings. Management determines the appropriate classification at the time of ~~the Mortgage banking income, net, line of the Consolidated Statements of Operations. Securities~~purchase.

Debt securities expected to be held for an indefinite period of time are classified as ~~available for sale~~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.

~~132~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~110

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

~~Available-for-sale~~Debt securities purchased which the Company has the positive intent and ability to hold until maturity are classified as HTM securities. HTM securities are ~~reviewed quarterly~~reported at cost and adjusted for ~~possible OTTI.~~ 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 other comprehensive income (“OCI”) and in the carrying value of the HTM securities. Such amounts are amortized over the remaining lives of the securities. In 2018, the Company transferred securities with a $1.2 billion carrying value and $1.2 billion fair value 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. There were no transfers from AFS to HTM during the year ended December 31, 2017.

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 ~~recognized through~~recorded within accumulated ~~other comprehensive income.~~OCI.

Realized gains and losses on sales of ~~investments~~investment securities are recognized on the trade date and included in earnings within ~~Net gain~~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 ~~contractual~~estimated life of the security using the interest method.

~~Trading~~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 ~~Federal Home Loan Bank ("FHLB")~~FHLB of Pittsburgh and the Federal Reserve Bank ("FRB"). Although FHLB and FRB stock ~~is an~~are equity ~~interest~~interests in the FHLB and FRB, respectively, ~~it does not have~~neither has a readily determinable fair value, because ~~its~~ ownership is restricted and ~~it is~~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 isand 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 43 to the Consolidated Financial Statements for ~~detail~~details on the Company's investments.

~~Loans held for investment~~LHFI

~~Loans held for investment~~LHFI include commercial and consumer loans (including RICs) originated by the Company as well as ~~retail installment contracts ("RICs") and personal unsecured~~ loans acquired ~~in connection with~~by the ~~Change in Control and originated for investment by SC after the Change in Control and~~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.~~discount from the contractual principal amount. RICs also include receivables originated through a direct lending program and loan portfolios purchased from other lenders. ~~Personal unsecured loans include both revolving and amortizing term finance receivables acquired individually and also include private label revolving lines of credit.~~

Originated ~~Loans held for investment~~LHFI

Originated ~~loans held for investment~~LHFI are reported net of cumulative charge offs, unamortized loan origination fees and costs, and unamortized discounts and ~~premiums and unearned income.~~premiums. Interest on loans is credited to income as it is earned. ~~Loan~~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 ~~generally~~ 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 ~~quarterly~~monthly basis. ~~Premiums and discounts associated with RICs are deferred and amortized as adjustments~~The Company estimates future principal prepayments specific to ~~interest income generally utilizing the interest method using estimated prepayment speeds,~~pools of homogeneous loans, which are ~~updated~~based on ~~a quarterly basis. Interest income is generally not recognized on loans when~~ the ~~loan payment is 90 days or more delinquent for commercial loans~~vintage, credit quality at origination and consumer loans and more than 60 days delinquent for RICs or sooner if management believes the loan has become impaired. Credit cards continue to accrue interest until they become 180 days past due, at which point they are charged off.

~~When loans held for investment are re-designated as loans held for sale ("LHFS"), any specific and allocated allowance for credit losses ("ACL") is charged-off to reduce the basis~~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 ~~extent that~~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 ~~fair value is lower than the loan's recorded investment.~~weighted average prepayment rates ranged from 5.7% to 10.8% at December 31, 2018 and 6.1% to 10.4% at December 31, 2017.

~~133~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~111

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

The Company’s ~~loans held for investment,~~LHFI, including ~~RIC~~RICs and personal unsecured loans originated by SC since the ~~Change~~change in ~~Control,~~control of SC in the first quarter of 2014 (the "Change in Control"), are carried at amortized cost, net of ~~allowance for loan and lease losses.~~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~~costs.

Dealer discounts - dealer discounts to the principal balance of the loan generally occur in circumstances in which the contractual interest rate inon 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. 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.

~~Provisions~~See LHFS subsection below for ~~credit losses~~accounting treatment when an HFI loan is re-designated an LHFS.

Purchased LHFI

Purchased loans 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 held for investment 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~~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 and personal unsecured loans 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 ~~versus originated loans. See~~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~~“Allowance for Loan~~ time of the acquisition). All of SC’s performing RICs and ~~Lease Losses for Purchased Loans”~~ ~~section below.~~personal unsecured loans that were HFI were recorded by the Company at a discount.

~~Allowance~~Subsequent to the Change in Control, the purchase discounts on the retail installment loans are accreted over the remaining expected lives of the loans to their par values 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.

The Company irrevocably elected to account for RICs 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 RICs 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 RICs which the Company has elected to account for at fair value but 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.

ALLL for Loan ~~and Lease~~ Losses ~~for Originated Loans~~ and Reserve for Unfunded Lending Commitments

The ~~allowance for loan and lease losses for originated loans~~ALLL and reserve for ~~Unfunded Lending Commitments~~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 ~~inherent~~ 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 ~~allowance for loan and lease losses~~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.

112

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

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 monitors the condition of borrowers and assesses both internal and external factors in determining whether any relationships have deteriorated considering factors such as historical loss experience, trends in delinquency and non-performing loans ("NPLs"), changes in risk composition and underwriting standards, experience and ability of staff and regional and national economic conditions and trends.

~~134~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~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.

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.

~~NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)~~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~~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") ratio, and credit scores. The Bank evaluates the consumer portfolios throughout their life ~~cycle~~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.

113

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

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 ~~RIC~~RICs and personal unsecured loans, the Company estimates the ~~allowance for loan and lease losses~~ALLL at a level considered adequate to cover probable credit losses ~~inherent~~ 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.

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.

For the commercial loan portfolio segment, 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 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.

Consumer loans (excluding auto loans and credit cards) and any portion of a consumer loan secured by a real estate mortgage not adequately secured are generally charged off when deemed to be uncollectible or delinquent 180 days or more (120 days for closed-end consumer loans not secured by real estate), whichever comes first, unless it can be clearly demonstrated that repayment will occur regardless of the 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. Auto loans are charged off 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. 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.

~~135~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

RICs acquired individually are charged off when the account becomes 120 days past due if the Company has not repossessed the related vehicle. The Company charges off accounts in repossession when the automobile is repossessed and is legally available for disposition. A charge-off represents the difference between the estimated net sales proceeds and the outstanding amount of the delinquent contract. Accounts in repossession that have been charged off and are pending liquidation are removed from RIC and the related repossessed automobiles are included in other assets in the Company’s Consolidated Balance Sheets. Personal revolving and term loans are charged off when the account becomes 180 and 120 days past due, respectively.

The Company reserves for certain incurred, but undetected, losses within the loan portfolio. This is due to several factors such as, but not limited to, 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.

In addition to the ~~allowance for loan and lease losses,~~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, ~~and~~ 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.

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” section below.

When a loan in any portfolio or class has been determined to be impaired (e.g. ~~as discussed above,~~, 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, except that,~~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 ~~same~~ 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 ~~with~~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.

~~136~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~114

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

~~See the“Allowance for Loan and Lease Losses for Purchased Loans”~~ ~~section below and Note 5 to the Consolidated Financial Statements for detail on the Company's purchased loans and related allowance.~~

~~Purchased Loans held for investment~~

Purchased loans are 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 and personal unsecured loans loans purchased in the Change in Control were initially recognized at fair value, and no allowance for loan and lease losses 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 RIC and personal unsecured loans that are held for investment were recorded by the Company at a discount.

Subsequent to the Change in Control, the purchase discounts on the retail installment loans are accreted over the remaining expected lives of the loans to their par values using the retrospective effective interest method, which considers the impact of estimated prepayments that is updated on a quarterly basis. The purchase discount on the personal unsecured loans (given their revolving nature) are amortized on a straight-line basis in accordance with ASC 310-20.

The Company irrevocably elected to account for RIC 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 RIC and recognizes the fair value adjustments of these loans as part of other non-interest income in the Company’s Consolidated Statement of Operations. For certain of the retail installment contracts which the Company has elected to account for at fair value but are not considered non-accruals, the Company separately recognizes interest income from the total fair value adjustment. No allowance for loan and lease losses is recognized for loans that the Company has elected to account for at fair value.

~~Allowance for Loan and Lease Losses for Purchased Loans~~

The Company assesses the collectability of the recorded investment in the retail installment contracts and personal unsecured loans on a collective basis quarterly and determines the allowance for loan and lease losses 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 result 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 criteria.

~~137~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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 a non-accrual status when they become 90 days or more ~~past due. RIC are placed on non-accrual status when they become more than 60 days~~ past due. 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 ~~returned~~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. 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, 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.

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 ~~but are not limited to,~~ 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 ~~and~~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, RIC and personal unsecured~~ 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;~~due, and other loans ~~(closed end), automobile loans and retail installment contracts~~(closed-end) are charged-off when they become 120 days past due. Auto loans are charged-off 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 receiving a bankruptcy notice 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.

RICs 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 status and the related repossessed automobiles are included in Other assets in the Company's Consolidated Balance Sheets.

115

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

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 involving a concession that would otherwise not be granted to the borrower. 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 defined as six months for a monthly amortizing loan). ~~RIC TDRs are generally placed on non-accrual status until they become 60 days or less past due.~~ 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

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 recreational vehicle ("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; 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 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.

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.

116

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

The primary modification program for the Company’s residential mortgage and home equity portfolios is a proprietary program designed to keep customers in their homes and, when appropriate, prevent them from entering into foreclosure. The program is available to all customers facing a financial hardship regardless of their delinquency status. The main goal of the modification program is to review the customer’s entire financial condition to ensure that the proposed modified payment solution is affordable according to a specific debt-to-income ("DTI") ratio range. The main modification benefits of the program allow for term extensions, interest rate reductions, and/or deferment of principal. The Company reviews each customer on a case-by-case basis to determine which benefit or combination of benefits will be offered to achieve the target DTI range.

Consumer TDRs in the residential mortgage and home equity portfolios are generally placed on non-accrual status until the Company believes repayment under the revised terms is reasonably assured and a sustained period of repayment performance has been achieved (typically six months for a monthly amortizing loan). Any loan that has remained current for the six months immediately prior to modification will remain on accrual status after the modification is implemented. The TDR classification will remain on the loan until it is paid in full or liquidated. In addition to those identified as TDRs above, accounting guidance also requires loans discharged under Chapter 7 bankruptcy to be 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.

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

~~138~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

The Company considers all of its ~~loans identified as~~ TDRs ~~as well as~~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 ~~retail installment contracts~~RICs that have been modified at least once, deferred for a period of 90 days or more, or deferred at least twice, as TDRs.

~~For loans that are individually assessed for impairment, the~~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. ~~For~~Some impaired loans ~~that~~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.

117

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

Additional discussions related to the Company’s loan and lease loss ~~provision~~provisions is ~~provided~~included in the “~~Allowance~~ALLL for Loan ~~and Lease~~ Losses ~~for Originated Loans~~ and Reserve for Unfunded Lending Commitments” section above.

~~Loans Held for Sale~~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 banking~~Miscellaneous income, net. For residential mortgages ~~where~~for which the FVO is selected, direct loan origination costs and fees are recorded in ~~Mortgage banking~~Miscellaneous 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 ~~held for investment,~~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 value through a ~~charge off~~charge-off to ~~allowance for loan and lease losses.~~the ALLL. 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

The Company provides financing for various types of equipment, aircraft, energy and power systems, and automobiles through a variety of lease arrangements.

~~Prior to~~The Company’s investments in leases that are accounted for as direct financing leases are carried at the ~~Change~~aggregate of lease payments plus estimated residual value of the leased property less unearned income, and are reported as part of LHFI in ~~Control, leased~~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 ~~were~~are carried at amortized cost net of accumulated depreciation and any impairment charges and ~~are~~ presented as ~~Leased Vehicles,~~Operating lease assets, net in the Company’s Consolidated Balance Sheets. AsLeased assets acquired in a ~~result of~~business combination such as the Change in Control ~~the assets acquired were adjusted to~~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 ~~Statement~~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 ~~general~~systemic and material decline in used vehicle values ~~indicate~~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.

~~139~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~118

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

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 loans held for investment 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 constant effective yield method.

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 ~~Lease~~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, 2018, 2017, or 2016.

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 3050 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) ~~Standard~~The standard depreciable period for software is three years. However, for certain software implementation projects, a ~~five-year~~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.

~~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 ~~ownership~~ 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 "Equity method investments (loss)/income, net." 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 "Equity method investments (loss)/income, net." Distributions received from the income of an investee on cost method investments are included in "Equity method investments (loss)/income, net."Other miscellaneous expenses." Investments accounted for under the equity ~~method or cost~~ method of accounting above are included in the caption ~~"Equity method investments"~~"Other Assets" on the Consolidated Balance Sheets.

~~See Note 8 to the Consolidated Financial Statements for a related discussion of the Company's equity investments in securitization trusts and entities.~~

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~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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 ~~during the fourth quarter,~~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.

~~Under ASC 350, Intangibles - Goodwill and Other, an~~An entity's goodwill impairment quantitative analysis is required to be completed ~~in two steps~~ 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 ~~the two-step process may be bypassed. It~~no further analysis is ~~worth noting that an~~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 ~~first step of the~~quantitative goodwill impairment test.

The ~~first step required by ASC 350~~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, ~~there~~the impairment is ~~an indication that impairment exists and a second step must be performed to measure the amount of impairment, if any, for that reporting unit.~~

~~When required, the second step of testing involves calculating the implied fair value of each of the affected reporting units. The implied fair value of goodwill is determined in the same manner~~measured as ~~the amount of goodwill that is recognized in a business combination, which is~~ the excess of ~~the~~carrying value over fair value of the reporting unit determined in step one over the fair value of the net assets and identifiable intangibles as if the reporting unit were being acquired. If the implied fair value of goodwill is in excess of the reporting unit's allocated goodwill amount, then no impairment charge is required. If the amount of goodwill allocated to the reporting unit exceeds the implied fair value of the goodwill, an impairment charged is recognized for the excess.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.

Goodwill impairment testing involves management judgment, requiring an assessment of whether the carrying value of the reporting unit can be supported by its fair value using widely accepted valuation techniques, such as the market approach (e.g., earnings and price-to-book value multiples of comparable public companies) and/or the income approach (e.g., discounted cash flow method). These 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.

119

The stock price of SC has declined significantly since December 31, 2015, and it is reasonably possible we may be required to record impairment of our remaining $1.0 billion of goodwill, as well as $38 million of intangible assets not subject to amortization, in periods subsequent to December 31, 2015. 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

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

The Company's intangible assets consist of assets purchased or acquired through business combinations, including ~~trade names,~~tradenames and dealer ~~networks, and core deposit intangibles.~~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.

~~141~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

Indefinite-lived intangible assets are not amortized on a recurring basis, but rather are subject to annual impairment testing as prescribed in ASC 350. The Company performs the impairment analysis during the fourth quarter, or whenever events or changes in business circumstances indicate that an indefinite-lived intangible asset may be impaired. If the estimated fair value is less than the carrying amount of intangible assets with indefinite lives, an impairment charge would be recognized to reduce the asset to its estimated fair value.

The Company recognized $768.8 million of intangible assets when it obtained a controlling financial interest in SC, which was accounted for as a business combination. Refer to Note 3 to the Consolidated Financial Statements for additional details related to the intangible assets. The Company recorded an impairment charge of $28.5 million and $3.5 million relating to the trade name within amortization of intangible assets for the year ended December 31, 2014 and 2015, respectively.

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~~MSRs' fair value, opinions of value from independent third parties ("Brokers") are obtained. Brokers provide a range of values based upon their own ~~DCF~~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 of the Brokers' ranges, management will assess whether a valuation adjustment is warranted. ~~The residential~~Residential MSRs value is considered to represent a reasonable estimate of fair value.

See Note 1016 to the 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.

Other Real Estate Owned ("(“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 ~~RIC~~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 ~~allowance for loan and lease losses~~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, ~~less~~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 and totaled $211.7 million and $201.4 million at December 31, 2015 and December 31, 2014, respectively.~~Sheets.

~~142~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~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.~~activities, and often sells commercial loan customers derivative products to hedge interest rate risk associated with loans made 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.

120

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

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 ~~certain~~ 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 ~~other comprehensive income~~OCI within stockholder's equity in the accompanying Consolidated Balance Sheets. Amounts are reclassified from accumulated ~~other comprehensive income~~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 ~~other comprehensive income~~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 ~~designated~~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 effective~~Changes 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 1514 to the Consolidated Financial Statements for further discussion.

Income Taxes

~~143~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)~~ 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. The critical assumptions used in the Company's deferred tax asset valuation allowance analysis were as follows: (a) the expectations 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 book income to tax income differences, based on the analysis of historical differences and the historical timing of the reversal of temporary differences; (d) the ability to carry back losses to recoup taxes previously paid; (e) estimates of tax credits to be earned on current investments, based on the Company's evaluation of the credits applicable to each investment; (f) experience with operating loss and tax credit carry-forwards not expiring unused; (g) estimates of applicable state tax rates based on current/most recent enacted tax rates and state apportionment calculations; (h) tax planning strategies and (i) current tax laws. Significant judgment is required to assess future earnings trends and the timing of reversals of temporary differences.

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 the Company. 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 regards to the realizability of its deferred tax asset.

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. ~~and~~, 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.

121

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

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 ~~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 taxing authority, assuming full knowledge of the position and all relevant facts. See Note 1615 to the Consolidated Financial Statements for details on the Company's income taxes.

~~Asset Securitizations~~Sales of RICs and Leases

The Company, through SC, transfers ~~RIC~~RICs into newly formed Trusts which then issue one or more classes of notes payable backed by the ~~RIC.~~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)~~("SPEs") and, generally, through holding a residual interest in the SPE. These transactions are structured without recourse. The Trusts are considered VIEs under ~~U.S.~~ 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,~~Consolidated Financial Statements, and the associated ~~RIC,~~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~~interest are treated as sales of the associated ~~retail installment contracts.~~RICs. While these Trusts are included in our ~~consolidated financial statements, these Trusts~~Consolidated Financial Statements, they are separate legal entities; thus, the finance receivables and other assets sold to these Trusts are legally owned by ~~these~~the Trusts, are available only to satisfy the notes payable related to the securitized ~~retail installment contracts,~~RICs, and are not available to ~~our~~the Company's 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 87 to these Consolidated Financial Statements.

~~144~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

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

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, ~~adjusted for expected forfeitures,~~ which is charged to earnings over the requisite service period ~~(e.g.~~(i.e., the vesting period). ~~Additionally,~~The impact of the ~~Company estimates the number~~forfeiture of awards ~~for which it~~ is ~~probable that service will be rendered and adjusts compensation cost accordingly. Estimated~~recognized as forfeitures ~~are subsequently adjusted to reflect actual forfeitures.~~occur. Amounts in the Consolidated Statements of Operations associated with the ~~Bank's~~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 ~~non-controlling interest~~NCI and the portion relating to any remaining ~~post business~~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.~~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.

122

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

Subsequent Events

The Company evaluated events from the date of the Consolidated Financial Statements on December 31, 2018 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, 2018 other than the transactions disclosed in Note 11 and Note 23 of these Consolidated Financial Statements.

NOTE 2. RECENT ACCOUNTING DEVELOPMENTS

~~In May 2014, the FASB issued ASU 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~, superseding the revenue recognition requirements in ASC 605. This ASU requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment includes a five-step process to assist an entity in achieving the main principle(s) of revenue recognition under ASC 605. In August 2015, the FASB issued ASU 2015-14, which formalized the deferral of the effective date of the amendment for a period of one-year from the original effective date. Following the issuance of ASU 2015-14, the amendment will be effective for the Company for the first annual period ending beginning after December 15, 2017. In March 2016, the FASB also issued ASU 2016-08, an amendment to the guidance in ASU 2014-09 which revises the structure of the indicators to provide indicators of when the entity is the principal or agent in a revenue transaction, and eliminated two of the indicators (“the entity’s consideration is in the form of a commission” and “the entity is not exposed to credit risk”) in making that determination. This amendment also clarifies that each indicator may be more or less relevant to the assessment depending on the terms and conditions of the contract. The amendments, collectively, should be applied retrospectively to each prior reporting period presented or as a cumulative effect adjustment as of the date of adoption. Early adoption of the guidance is not permitted. The Company is currently evaluating the impact of adopting this ASU on its financial position, results of operations and disclosures.

~~In June 2014, the FASB issued ASU 2014-12,~~ ~~Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period (Topic 718)~~. This ASU requires that a performance target that affects vesting, and could be achieved after the requisite service period, be treated as a performance condition. Application of existing guidance in ASC 718 as it relates to awards with performance conditions that affect vesting should continue to be used to account for such awards. The amendment will be effective for the Company for the first reporting period ending after December 15, 2015. Adoption of this amendment should be applied on a prospective basis to awards that are granted or modified on or after the effective date. There also is an option to apply the amendments on a modified retrospective basis for performance targets outstanding on or after the beginning of the first annual period presented as of the adoption date. Early adoption is permitted. The Company does not expect the adoption of this ASU to have an impact on its financial position, result of operations, or disclosures.

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~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)~~

~~In August 2014, the FASB also issued ASU 2014-15,~~ ~~Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Subtopic 205-40).~~ This ASU requires management to perform an assessment of going concern and provides specific guidance on when and how to assess or disclose going concern uncertainties. The new standard also defines terms used in the evaluation of going concern, such as "substantial doubt." Following its application, the Company will be required to perform assessments at each annual and interim period, provide an assessment period of one year from the issuance date, and make disclosures in certain circumstances in which substantial doubt is identified. The amendment will be effective for the Company for the first reporting period ending after December 15, 2016. Earlier application is permitted. The Company does not expect the adoption of this ASU to have an impact on its financial position, result of operations, or disclosures.

~~In January 2015, the FASB issued ASU 2015-01,~~ ~~Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.~~ This ASU eliminates the concept of extraordinary items from GAAP, which previously required the separate classification, presentation, and disclosure of extraordinary events and transactions. The amendment will be effective for the Company for the first reporting period ending after December 15, 2015, with early adoption permitted if the guidance is applied from the beginning of the fiscal year of adoption. Adoption of the amendment by the Company can be either on a prospective or retrospective basis. The Company plans to apply this amendment effective for reporting periods beginning after December 15, 2015 and will apply it prospectively, as the Company has not reported any extraordinary items in the three prior fiscal years. The Company does not expect the adoption of this ASU to have an impact on its financial position, results of operations, or disclosures.

~~In February 2015, the FASB issued ASU 2015-02,~~ ~~Consolidation (Topic 820): Amendments to the Consolidation Analysis.~~ This ASU changes the analysis that a reporting entity must perform to determine whether it should consolidate certain types of legal entities. The amendment will be effective for the Company for the first reporting period beginning after December 15, 2015, with early adoption permitted if the guidance is applied from the beginning of the fiscal year of adoption. Adoption of the amendment by the Company may be on a retrospective or modified retrospective basis. The Company does not expect the adoption of this ASU to have an impact on its financial position, results of operations, or disclosures.

~~In May 2015, the FASB issued ASU 2015-7,~~ ~~Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent) (a consensus of the Emerging Issues Task Force).~~ This ASU removes the requirement to categorize investments fair valued using the net asset value per share practical expedient within the fair value hierarchy. It also modifies disclosure requirements to include only investments for which the entity elects to use the practical expedient rather than the prior guidance which required disclosures for all investments eligible to use the practical expedient. This amendment will be effective for the Company for the first reporting period beginning after December 15, 2015, with early adoption permitted. Adoption of the amendment by the Company must be on a retrospective basis for all periods presented. The Company does not expect the adoption of this ASU to have an impact on its financial position, results of operations, or disclosures.

~~In September 2015, the FASB issued ASU 2015-16,~~ ~~Business Combinations (Topic 805): Simplifying the Accounting for Measurement Period Adjustments.~~ This amendment eliminates the requirement to account for adjustments to provisional amounts recognized in a business combination retrospectively. Instead, the acquirer will recognize the adjustments to provisional amounts during the period in which the adjustments are determined, including the effect on earnings of any amounts the acquirer would have recorded in previous periods if the accounting had been completed at the acquisition date. This amendment will be effective for the Company for the first reporting period beginning after December 15, 2015, with earlier adoption permitted for financial statements that have not been issued. Adoption of the amendment by the Company must be on a prospective basis to adjustments to provisional amounts that occur after the effective date. The Company does not expect the adoption of this ASU will have an impact on its financial position, results of operations, or disclosures.

~~In November 2015, the FASB issued ASU 2015-17,~~ ~~Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.~~ This amendment eliminates the requirement to separate deferred income tax liabilities into current and non-current classification in a classified balance sheet. It further requires that all deferred income taxes be classified as non-current in a classified balance sheet. This amendment will be effective for the Company for the first reporting period beginning after December 15, 2016, with earlier adoption permitted as of the beginning of an interim or annual reporting period. Adoption of this amendment may be applied prospectively or retrospectively. The Company does not classify its deferred income tax liabilities into current and non-current in its Consolidated Balance Sheet. As a result, there is no impact of the adoption of this ASU to the Company.

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~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)~~

~~In January 2016, the FASB issued ASU 2016-01,~~ ~~Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities.~~ This amendment requires that equity investments, except those accounted for under the equity method of accounting or which result in consolidation of the investee, to be measured at fair value with changes in the fair value being recorded in net income. However, equity investments that do not have readily determinable fair values will be measured at cost less impairment, if any, plus the effect of changes resulting from observable price transactions in orderly transactions or for the identical or similar investment of the same issuer. The amendment also simplifies the impairment assessment of equity instruments that do not have readily determinable fair values, eliminates the requirement to disclose methods and assumptions used to estimate fair value of instruments measured at their amortized cost on the balance sheet, requires that the disclosed fair values of financial instruments represent "exit price," requires entities to separately present in other comprehensive income the portion of the total change in fair value of a liability resulting from instrument-specific credit risk when the fair value option has been elected for that liability, requires separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or in the accompanying notes, and clarifies that an entity should evaluate the need for a valuation allowance on its deferred tax asset related to its available-for-sale securities in combination with its other deferred tax assets. This amendment will be effective for the Company for the first reporting period beginning after December 15, 2017, with earlier adoption permitted by public entities on a limited basis. Adoption of the amendment must be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption, except for amendments related to equity instruments that do not have readily determinable fair values which should be applied prospectively. The Company is in the process of evaluating the impacts of the adoption of this ASU.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The ~~guidance in~~primary effect of this ~~update supersedes~~ASU is the ~~current lease accounting guidance for both the lessees and lessors under ASC 840, Leases. The new guidance requires~~requirement of lessees to ~~evaluate whether~~recognize a lease is a finance lease using criteria that are 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 assetright of-use-asset and a lease liability for all operating leases with a term of greater than 12 ~~months regardless of their classification. Leases with~~months. The right-of-use-asset and lease liability are then derecognized in a ~~term of 12 months or less will be accounted~~manner that effectively yields a straight-line lease expense over the lease term. Lessee accounting requirements for ~~similar to today’s guidance~~finance leases (previously described as capital leases) and lessor accounting requirements for operating, ~~leases. The new guidance will require lessors to account for leases using an approach that is substantially similar to the existing guidance for~~ sales-type, and direct financing leases (sales-type and direct financing leases were both previously referred to as capital leases) are largely unchanged. This ASU is effective on January 1, 2019, with early adoption permitted.

We adopted the standard as of January 1, 2019, resulting in the recognition of right of use assets of approximately $664.1 million and liabilities of approximately $705.6 million for our operating ~~leases.~~leases where the Company is the lessee. In addition, and as a result of the standard, the Company recorded a cumulative net increase to opening Retained earnings of $18.7 million. We do not believe the standard will materially affect our Consolidated Statements of Operations or SCF.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This ~~new~~guidance significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For AFS debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the OTTI model. The standard also simplifies the accounting model for purchased credit-impaired debt securities and loans. The guidance will be effective for the Company for the first reporting period beginning after December 15, ~~2018, with earlier adoption permitted. Adoption~~2019, including interim periods within that year. The Company does not intend to adopt the this ASU early and is currently evaluating the impact the new guidance will have on its financial position, results of operations and cash flows; however, it is expected that the new current expected credit loss model will alter the assumptions used in calculating the Company's ACL, given the change to estimated losses for the estimated life of the ~~amendment must be applied on a modified retrospective approach. The Company is~~financial asset, and will likely result in material changes to the ~~process of evaluating the impacts of the adoption of this ASU.~~Company's ACL and related decrease to capital ratios.

In ~~March 2016,~~August 2018, the FASB issued ASU ~~2016-05,~~2018-13, ~~Derivatives~~Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement, which modifies the disclosure requirements for fair value measurements. This ASU removes the requirement to disclose: the amount of and ~~Hedging (Topic 815): Effect~~reasons for transfers between Level 1 and Level 2 of ~~Derivative Contract Novations on Existing Hedge Accounting Relationships.~~ the fair value hierarchy, the policy for timin~~The~~g of transfers between levels; and the valuation processes for Level 3 fair value measurements. This ASU requires disclosure of changes in unrealized gains and losses for the period included in OCI (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This new guidance ~~clarifies~~will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect the new guidance will have on its Consolidated Financial Statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a ~~change in~~service contract with the ~~counterparties~~requirements for capitalizing implementation costs incurred to a derivative contract, i.e., a novation, in and of itself, does not require the de-designation of a hedging relationship. An entity will, however, still need to evaluate whether it is probable that the counterparty will perform under the contract as part of its ongoing effectiveness assessment for hedge accounting.develop or obtain internal-use software. This new guidance will be effective for ~~the Company~~public companies for ~~the first reporting period~~fiscal years beginning after December 15, ~~2016, with earlier~~2019 and interim periods within those fiscal years. Early adoption is permitted. ~~Adoption of~~The Company is currently evaluating the effect the new guidance ~~can be applied~~will have on ~~a modified retrospective or prospective basis. The Company is in the process of evaluating the impacts of the adoption of this ASU.~~its Consolidated Financial Statements and related disclosures.

~~Also in March 2016, the FASB issued ASU 2016-06,~~ ~~Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments~~. The new guidance clarifies that an exercise contingency does not need to be evaluated to determine whether it relates to interest rates and credit risk in an embedded derivative analysis of hybrid financial instruments. In other words, a contingent put or call option embedded in a debt instrument would be evaluated for possible separate accounting as a derivative instrument without regard to the nature of the exercise contingency. However, as required under existing guidance, companies will still need to evaluate other relevant embedded derivative guidance, such as whether the payoff from the contingent put or call option is adjusted based on changes in an index other than interest rates or credit risk, and whether the debt involves a substantial premium or discount. The new guidance will be effective for the Company for the first reporting period beginning after December 15, 2016, with earlier adoption permitted. The new guidance is required to be adopted on a modified retrospective basis to all existing and future debt instruments. The Company is in the process of evaluating the impacts of the adoption of this ASU.

~~147~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~123

NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)

~~Additionally, in March 2016,~~In October 2018, the FASB issued ASU ~~2016-07,~~2018-16, Derivatives and Hedging (Topic 815), ~~Investments-Equity Method and Joint Ventures (Topic 323)~~Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes. . The new guidance eliminates the requirement to apply the equity method of accounting retrospectively when a reporting entity obtains significant influence over a previously held investment. Instead, the equity method of accounting should be applied prospectively from the date significant influence is obtained. Investors should add the cost of acquiring the additional interest in the investee (if any) to the current basis of their previously held interest. The new standard also provides specific guidance for available-for-sale securities that become eligible for the equity method of accounting. In those cases, any unrealized gain or loss recorded within accumulated other comprehensive income should be recognized in earnings at the date the investment initially qualifies for theThis ASU permits use of the ~~equity method~~Overnight Indexed Swap (“OIS”) rate based on the Secured Overnight Financing Rate as an eligible benchmark interest rate for purposes of ~~accounting.~~applying hedge accounting under Topic 815. This ~~new guidance will be effective for~~update was adopted January 1, 2019, and the Company ~~for the first reporting period beginning after December 15, 2016, with earlier adoption permitted. Adoption of~~does not expect the new guidance ~~can be applied only~~to have a ~~prospective basis for investments~~material on its Consolidated Financial Statements or related disclosures.

In addition to those ~~qualify for~~described in detail above, the ~~equity method of accounting after the effective date. The~~ Company is in the process of evaluating the ~~impacts~~following ASUs, but does not expect them to have a material impact on the Company's financial position, results of operations, or disclosures:

ASU's Effective in 2019:

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 ~~adoption~~Indefinite Deferral for Mandatorily Redeemable Financial Instruments of ~~this ASU.~~Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception

~~In March 2016, the FASB issued~~ ASU ~~2016-09,~~2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting

ASU 2018-17, ~~. The new guidance simplifies certain aspects related~~Consolidation (Topic 810): Targeted Improvements to ~~income taxes, statement of cash flows, and forfeitures when accounting~~Related Party Guidance for share-based payment transactions. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2016, with earlier adoption permitted. Certain of the amendments related to timing of the recognition of tax benefits and tax withholding requirements should be applied using a modified retrospective transition method. Amendments related to the presentation of the statement of cash flows should be applied retrospectively. All other provisions may be applied on a prospective or modified retrospective basis. The Company is in the process of evaluating the impacts of the adoption of this ASU.Variable Interest Entities

NOTE 3. ~~BUSINESS COMBINATIONS (As Restated)~~

~~General~~

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 these Consolidated Financial Statements gives effect to the Company’s consolidation of SC as a result of the Change in Control.

~~Consolidated Assets acquired and Liabilities assumed~~

The Company did not incur any material transaction-related expenses in connection with the Change in Control, and no cash, equity interests, or other forms of consideration were transferred from the Company in connection with the Change in Control. As a result, the Company measured goodwill by reference to the fair value of SC's equity as implied by the IPO price. The following table summarizes these equity related interests in SC which constitute the purchase price and the identified assets acquired and liabilities assumed:

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~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 3. BUSINESS COMBINATIONS (As Restated) (continued)~~

January 28, 2014

(in thousands)
Fair value of noncontrolling interest in SC $ 3,273,265
Fair value of SC employee vested stock options 210,181
Fair value of SHUSA remaining ownership interest in SC 5,063,881
Fair value of equity-related interests in SC $ 8,547,327

Recognized amounts of identifiable assets acquired and liabilities assumed:

Cash and cash equivalents $ 11,075
Restricted cash 1,704,906
Loan receivables - held for sale 990,137
Loan receivables - retail installment contracts 19,870,790
Loan receivables from dealers 102,689
Loan receivables - unsecured 1,009,896
Premises and equipment 74,998
Leased vehicles, net 2,486,929
Intangibles 768,750
Miscellaneous receivables and other assets 1,061,351
Deferred tax asset 7,210
Borrowings and other debt obligations (24,497,607 )
Accounts payable and accrued liabilities (570,852 )
Total identifiable net assets 3,020,272

Goodwill $ 5,527,055

The fair value of the non-controlling interest ("NCI") of $3.3 billion and the fair value of the Company's remaining ownership interest in SC of $5.1 billion were determined on the basis of the market price of SC Common Stock on the Change in Control date.

The Company recognized SC’s stock option awards that were outstanding as of the IPO date at fair value, which in aggregate amounted to $369.3 million. The portion of the total fair value of the stock option awards that is attributable to pre-business combination service amounting to $210.2 million represented an NCI in SC as of the IPO date, while $159.1 million of the total amount pertains to the post-business combination portion, which will be recognized as stock compensation expense over the remaining vesting period of the awards in the Company’s post-business combination consolidated financial statements. Of this total $159.1 million, $82.6 million was immediately recognized as stock compensation expense as a result of the acceleration of the vesting of certain of the stock option awards upon the closing of the IPO. The fair value of stock option awards was estimated using the Black-Scholes option valuation model. The Company also recognized SC's restricted stock awards that were outstanding as of the IPO date at fair value. These shares of restricted stock were granted to certain SC executives on December 28, 2013 and had an aggregate fair value of approximately $12.0 million as of the IPO date. The grant date fair value was determined based on SC's per share prices as of the IPO closing date.

The fair value of the assets acquired includes finance receivables. SHUSA estimated the fair value of loans acquired from SC by utilizing a methodology in which similar loans were aggregated into pools. Cash flows for each pool were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value based on a market rate for similar loans. There was no carryover of SC's allowance for loan and lease losses associated with the loans SHUSA acquired as the loans were initially recorded at fair value.

~~149~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 3. BUSINESS COMBINATIONS (As Restated) (continued)~~

January 28, 2014
(in thousands)
Fair value of loan receivables ⁽¹⁾
$ 19,870,790
Gross contractual amount of loan receivables ⁽¹⁾
31,410,699
Estimate of contractual cash flows not expected to be collected at acquisition ⁽¹⁾
4,301,586

(1) Fair value of receivables does not include amounts related to the loan receivables - unsecured and loan receivables from dealers due to the short-term and revolving nature of the receivables.

The loans purchased in the Change in Control were recognized at fair value, which was at a discount to the unpaid principal balance ("UPB") of the loans. 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 unaccreted discount on these loans available to absorb the credit losses in the purchased portfolio when determining the ACL. This policy does not apply to purchases of loan portfolios acquired with evidence of credit deterioration, on which we elected to apply the FVO, or to the RICs originated after the Change in Control.

January 28, 2014
(in thousands)
UPB ⁽¹⁾
$ 20,343,356
UPB - FVO ⁽²⁾
2,611,446
Total UPB 22,954,802
Purchase Marks ⁽³⁾
(3,084,012 )
Total 19,870,790


⁽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 the receivables.~~


⁽²⁾	~~The Company elected to account for these loans under the FVO.~~


⁽³⁾	~~Includes purchase marks of $741.1 million related to purchased loan portfolios on which we elected to apply the FVO.~~

Goodwill recognized in connection with the Change in Control is attributable to SC's workforce as well as the experience, proven track record, and strong capabilities of its senior management team. The goodwill associated with the Change in Control was allocated to the SC segment and is not deductible for tax purposes.

January 28, 2014
Fair Value Weighted Average Amortization Period
(dollars in thousands)
Intangibles subject to amortization:
Dealer networks $ 580,000
17.5 years (a)
Chrysler relationship 138,750
9.2 years

Intangibles not subject to amortization:

Trade name 50,000
indefinite lived
Total Intangibles $ 768,750

(a) The amortization periods of the dealer network range between 7 and 20 years.

~~150~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 3. BUSINESS COMBINATIONS (As Restated) (continued)~~

~~Gain on Change in Control~~

~~The Company recognized a pre-tax gain of $2.4 billion in connection with the Change in Control in Non-interest income in the Consolidated Statement of Operations.~~

January 28, 2014

(in thousands)

Gain attributable to SC shares sold $ 137,536
Gain attributable to the remaining equity interest 2,280,027
Total pre-tax gain $ 2,417,563

In connection with the closing of the IPO on January 28, 2014, the Company sold 13,895,243 shares of SC Common Stock, which generated proceeds of $320.1 million and a realized gain on sale of $137.5 million.

~~Proforma Financial Information (Unaudited)~~

The results of SC were included in the Company's results beginning January 28, 2014. The following table summarizes the actual amounts of Total revenue, net of Total interest expense and Net income including Noncontrolling Interest of SC included in the Consolidated Financial Statements for the year ended December 31, 2014 and the supplemental pro forma consolidated Total revenue, net of total interest expense and Net income including noncontrolling interest of SHUSA entity for the year ended December 31, 2014 as if the Change in Control had occurred on January 1, 2013. These results include the impact of amortizing certain purchase accounting adjustments such as intangible assets as well as fair value adjustments to loans and issued debt. These pro forma results are presented for illustrative purposes and are not intended to represent or be indicative of the actual consolidated results of operations of SHUSA that would have been achieved had the Change in Control occurred at January 1, 2013, nor are they intended to represent or be indicative of future results of operations.

SC Amounts Included in Results for the Supplemental Pro Forma Combined (b)
Year Ended December 31, 2014 Year Ended December 31, 2014

Total Revenue, Net of Total Interest Expense^(a)
$ 5,626,316
$ 8,402,844
Net Income including Noncontrolling Interest 1,125,538
947,745

(a) Total Revenue, Net of Total Interest Expense is calculated as the sum of Total Interest Income and Total Non-Interest Income, less Total Interest Expense.
(b) Includes the impact of recording provision for loan and lease losses necessary to bring the RIC and personal unsecured loans to their expected carrying values considering the required allowance for loan and lease losses on their recorded investment amounts.

These amounts have been calculated after applying SHUSA's accounting policies and adjusting the results of SC to reflect additional depreciation and amortization that would have been charged assuming the fair value adjustments to loans, debt, premises and equipment had been applied from January 1, 2013 with the consequential tax effects.

~~151~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 4.~~ INVESTMENT SECURITIES

~~Investments Available-for-sale~~

Summary of Investment in Debt Securities ~~Summary~~ - ~~Available-for-sale~~AFS and HTM

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



	December 31, 2018									December 31, 2017
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
U.S. Treasury securities	$	1,815,914	$	560	$	(11,729	)	$	1,804,745	$	1,006,219	$	—	$	(8,107	)	$	998,112
Corporate debt securities	160,164		12		(62		)	160,114		11,639		21		—			11,660
Asset-backed securities (“ABS”)	435,464		3,517		(2,144		)	436,837		501,575		6,901		(1,314		)	507,162
Equity securities ⁽¹⁾	—		—		—			—		11,428		—		(614		)	10,814
State and municipal securities	16		—		—			16		23		—		—			23
Mortgage-backed securities (“MBS”):
Government National Mortgage Association ("GNMA") - Residential	2,829,075		861		(85,675		)	2,744,261		4,745,998		3,531		(62,524		)	4,687,005
GNMA - Commercial	954,651		1,250		(19,515		)	936,386		1,377,449		179		(19,917		)	1,357,711
Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA") - Residential	5,687,221		267		(188,515		)	5,498,973		6,958,433		1,093		(141,393		)	6,818,133
FHLMC and FNMA - Commercial	51,808		384		(537		)	51,655		23,003		—		(440		)	22,563
Total investments in debt securities AFS	$	11,934,313	$	6,851	$	(308,177	)	$	11,632,987	$	14,635,767	$	11,725	$	(234,309	)	$	14,413,183

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

124

NOTE 3. INVESTMENT SECURITIES (continued)

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

December 31, 2015

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Loss

Fair
Value
(in thousands)
U.S. Treasury securities $ 3,192,411
$ 1,658
$ (5,681 ) $ 3,188,388
Corporate debt securities 1,476,801
10,021
(11,248 ) 1,475,574
Asset-backed securities ("ABS") 1,763,178
7,826
(1,494 ) 1,769,510
Equity securities 10,894
1
(408 ) 10,487
State and municipal securities 748,696
19,616
(432 ) 767,880
Mortgage-backed securities ("MBS"):
U.S. government agencies - Residential 4,033,041
10,225
(36,513 ) 4,006,753
U.S. government agencies - Commercial 1,006,161
3,347
(7,153 ) 1,002,355
FHLMC and FNMA - Residential debt securities ⁽¹⁾
8,636,745
10,556
(153,128 ) 8,494,173
FHLMC and FNMA - Commercial debt securities 138,094
723
(2,487 ) 136,330
Non-agency securities 45
—
—
45
Total investment securities available-for-sale $ 21,006,066
$ 63,973
$ (218,544 ) $ 20,851,495

~~(1) Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA")~~

December 31, 2014

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Loss

Fair
Value
(in thousands)
U.S. Treasury securities $ 1,692,838
$ 2,985
$ (56 ) $ 1,695,767
Corporate debt securities 2,159,681
29,630
(6,910 ) 2,182,401
Asset-backed securities 2,707,207
17,787
(4,591 ) 2,720,403
Equity securities 10,619
3
(279 ) 10,343
State and municipal securities 1,790,776
35,071
(2,385 ) 1,823,462
Mortgage-backed securities:
U.S. government agencies - Residential 2,151,111
1,626
(33,811 ) 2,118,926
U.S government agencies - Commercial 472,611
183
(7,186 ) 465,608
FHLMC and FNMA - Residential debt securities 4,971,045
12,817
(129,990 ) 4,853,872
FHLMC and FNMA - Commercial debt securities 23,929
157
(171 ) 23,915
Non-agency securities 12,842
539
—
13,381
Total investment securities available-for-sale $ 15,992,659
$ 100,798
$ (185,379 ) $ 15,908,078



	December 31, 2018									December 31, 2017
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
GNMA - Residential	$	1,718,687	$	1,806	$	(54,184	)	$	1,666,309	$	1,447,669	$	722	$	(26,150	)	$	1,422,241
GNMA - Commercial	1,031,993		1,426		(23,679		)	1,009,740		352,139		325		(767		)	351,697
Total investments in debt securities HTM	$	2,750,680	$	3,232	$	(77,863	)	$	2,676,049	$	1,799,808	$	1,047	$	(26,917	)	$	1,773,938

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

In 2015 and 2014, SHUSA sold $395.2 million and $2.1 billion of qualifying residential loans to FHLMC in return for $416.7 million and $2.1 billion of mortgage-backed securities ("MBS") issued by FHLMC resulting in a net realized gain on sale of $22.0 million and $49.8 million, respectively, which is included in the Mortgage banking income, net line of the Company's Consolidated Statements of Operations.

~~152~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 4. INVESTMENT SECURITIES (continued)~~

Subsequent to year end, during the first quarter of 2016, as part of its management of the investment portfolio, the Company sold $2.9 billion of U.S. Treasury securities and purchased these securities with agency MBS. The Company recognized a gain of $6.7 million on the sale of the U.S Treasury securities.

As of December 31, ~~2015~~2018 and ~~2014,~~2017, the Company had investment securities ~~available-for-sale~~ with an estimated ~~fair~~carrying value of ~~$3.5~~$6.6 billion and ~~$3.5~~$5.9 billion,, respectively, pledged as collateral, which was comprised of the following: ~~$2.9~~$3.0 billion and ~~$2.6~~$3.0 billion, respectively, were pledged as collateral for the Company's borrowing capacity with the FRB; $2.7 billion and $2.3 billion, respectively, were pledged to secure public fund deposits; ~~$117.6~~$78.0 million and ~~$301.6~~$243.8 million,, respectively, were pledged atto various independent parties ~~("Brokers")~~ to secure repurchase agreements, support hedging relationships, and for recourse on loan sales; ~~and $395.8~~$423.3 million and ~~$560.6~~zero, respectively, were pledged to deposits with clearing organizations; and $415.1 million, and $387.9 million, respectively, were pledged to secure the Company's customer overnight sweep product.

At December 31, ~~2015~~2018 and ~~2014,~~December 31, 2017, the Company had ~~$65.1~~$40.2 million and ~~$67.3~~$47.0 million, respectively, of accrued interest related to investment securities which is included in the ~~Accrued interest receivable~~Other assets line of the Company's Consolidated Balance ~~Sheet.~~Sheets.

The Company's state and municipal bond portfolio primarily consists of general obligation bonds of states, cities, counties and school districts. The portfolio had a weighted average underlying credit risk rating of AA+ as of ~~December 31, 2015~~. The largest geographic concentrations of state and local municipal bonds are in Connecticut, Massachusetts, and Washington, which represented 12.1%, 14.7%, and 21.5% respectively, of the total portfolio. No other state comprised more than 10% of the total portfolio.

Contractual Maturity of Debt Securities

Contractual maturities of the Company’s AFS debt securities ~~available-for-sale~~ at December 31, ~~2015 are~~2018 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 Treasury and government agency	$	735,379		$	1,069,366		$	—		$	—		$	1,804,745		1.78	%
Corporate debt securities	160,101			—			13			—			160,114			3.33	%
ABS	251,958			75,225			17,681			91,973			436,837			3.70	%
State and municipal securities	—			16			—			—			16			7.49	%
MBS:
GNMA - Residential	—			2,625			69,463			2,672,173			2,744,261			2.63	%
GNMA - Commercial	—			—			—			936,386			936,386			2.74	%
FHLMC and FNMA - Residential	—			6,089			191,423			5,301,461			5,498,973			2.51	%
FHLMC and FNMA - Commercial	—			7,364			24,169			20,122			51,655			2.98	%
Total fair value	$	1,147,438		$	1,160,685		$	302,749		$	9,022,115		$	11,632,987		2.50	%
Weighted Average Yield	2.52		%	1.90		%	2.24		%	2.59		%	2.50		%
Total amortized cost	$	1,145,692		$	1,170,312		$	309,158		$	9,309,151		$	11,934,313


(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.

125

NOTE 3. INVESTMENT SECURITIES (continued)

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

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⁾
(in thousands)
U.S Treasury securities $ 500,550
$ 2,687,838
$ —
$ —
$ 3,188,388
0.97 %
Corporate debt securities 65,465
1,410,109
—
—
1,475,574
2.28 %
Asset backed securities 203,802
1,354,216
39,949
171,543
1,769,510
1.41 %
State and municipal securities —
5
190,926
576,949
767,880
2.74 %
Mortgage-backed securities:
U.S. government agencies - Residential —
6,308
213
4,000,232
4,006,753
1.71 %
U.S government agencies - Commercial —
—
—
1,002,355
1,002,355
2.24 %
FHLMC and FNMA - Residential debt securities —
5,916
270,989
8,217,268
8,494,173
2.01 %
FHLMC and FNMA - Commercial debt securities —
7,755
25,348
103,227
136,330
2.90 %
Non-agencies —
45
—
—
45
3.35 %
Total fair value $ 769,817
$ 5,472,192
$ 527,425
$ 14,071,574
$ 20,841,008
1.81 %
Weighted Average Yield 1.09 % 1.43 % 1.94 % 1.99 % 1.81 %
Total amortized cost $ 773,150
$ 5,466,760
$ 525,590
$ 14,229,672
$ 20,995,172



(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	$	—		$	—		$	—		$	1,666,309		$	1,666,309		2.56	%
GNMA - Commercial	—			—			—			1,009,740			1,009,740			2.61	%
Total fair value	$	—		$	—		$	—		$	2,676,049		$	2,676,049		2.58	%
Weighted average yield	—		%	—		%	—		%	2.58		%	2.58		%
Total amortized cost	$	—		$	—		$	—		$	2,750,680		$	2,750,680

~~(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 of 35.0%.~~


(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.

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

~~153~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 4. INVESTMENT SECURITIES (continued)~~

Gross Unrealized Loss and Fair Value of Debt Securities ~~Available-for-Sale~~AFS and HTM

The following tables present the aggregate amount of unrealized losses as of December 31, ~~2015~~2018 and ~~2014~~December 31, 2017 on securities in the Company’s ~~available-for-sale~~AFS investment ~~portfolio~~portfolios classified according to the amount of time ~~that~~ those securities have been in a continuous loss position:

December 31, 2015
Less than 12 months 12 months or longer Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(in thousands)
U.S. Treasury securities $ 2,243,343
$ (5,681 ) $ —
$ —
$ 2,243,343
$ (5,681 )
Corporate debt securities 775,366
(5,269 ) 152,486
(5,979 ) 927,852
(11,248 )
Asset-backed securities 300,869
(1,083 ) 35,126
(411 ) 335,995
(1,494 )
Equity securities 596
(7 ) 9,748
(401 ) 10,344
(408 )
State and municipal securities 15,665
(119 ) 26,024
(313 ) 41,689
(432 )
Mortgage-backed securities:
U.S. government agencies - Residential 1,670,150
(11,164 ) 954,916
(25,349 ) 2,625,066
(36,513 )
U.S government agencies - Commercial 367,706
(3,382 ) 114,038
(3,771 ) 481,744
(7,153 )
FHLMC and FNMA - Residential debt securities 4,650,327
(38,013 ) 2,127,962
(115,115 ) 6,778,289
(153,128 )
FHLMC and FNMA - Commercial debt securities 115,347
(2,487 ) —
—
115,347
(2,487 )
Total $ 10,139,369
$ (67,205 ) $ 3,420,300
$ (151,339 ) $ 13,559,669
$ (218,544 )



	December 31, 2018										December 31, 2017
	Less than 12 months					12 months or longer					Less than 12 months					12 months or longer
(in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury securities	$	288,660	$	(315	)	$	914,212	$	(11,414	)	$	998,112	$	(8,107	)	$	—	$	—
Corporate debt securities	152,247		(62		)	13		—			—		—			—		—
ABS	31,888		(249		)	77,766		(1,895		)	8,013		(125		)	103,559		(1,189		)
Equity securities⁽¹⁾	—		—			—		—			335		(2		)	10,398		(612		)
MBS:
GNMA - Residential	102,418		(2,014		)	2,521,278		(83,661		)	1,236,716		(8,600		)	2,583,955		(53,924		)
GNMA - Commercial	199,495		(2,982		)	622,989		(16,533		)	1,022,452		(11,492		)	251,209		(8,425		)
FHLMC and FNMA - Residential	237,050		(5,728		)	5,236,028		(182,787		)	3,429,678		(32,899		)	3,017,533		(108,494		)
FHLMC and FNMA - Commercial	—		—			21,819		(537		)	6,948		(103		)	15,614		(337		)
Total investments in debt securities AFS	$	1,011,758	$	(11,350	)	$	9,394,105	$	(296,827	)	$	6,702,254	$	(61,328	)	$	5,982,268	$	(172,981	)

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

The following tables present the aggregate amount of unrealized losses as of December 31, 2018 and December 31, 2017 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, 2014
Less than 12 months 12 months or longer Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
(in thousands)
U.S. Treasury securities $ 298,914
$ (56 ) $ —
$ —
$ 298,914
$ (56 )
Corporate debt securities 538,108
(3,262 ) 214,852
(3,648 ) 752,960
(6,910 )
Asset-backed securities 632,936
(1,437 ) 424,333
(3,154 ) 1,057,269
(4,591 )
Equity securities 55
—
9,879
(279 ) 9,934
(279 )
State and municipal securities 45,128
(90 ) 192,091
(2,295 ) 237,219
(2,385 )
Mortgage-backed securities:
U.S. government agencies - Residential 415,731
(2,693 ) 1,348,908
(31,118 ) 1,764,639
(33,811 )
U.S. government agencies - Commercial 281,258
(2,459 ) 136,269
(4,727 ) 417,527
(7,186 )
FHLMC and FNMA - Residential debt securities 399,176
(2,019 ) 2,607,695
(127,971 ) 3,006,871
(129,990 )
FHLMC and FNMA - Commercial debt securities 11,269
(171 ) —
—
11,269
(171 )
Total $ 2,622,575
$ (12,187 ) $ 4,934,027
$ (173,192 ) $ 7,556,602
$ (185,379 )



	December 31, 2018										December 31, 2017
	Less than 12 months					12 months or longer					Less than 12 months					12 months or longer
(in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
MBS:
GNMA - Residential	$	205,573	$	(4,810	)	$	1,295,554	$	(49,374	)	$	434,322	$	(6,419	)	$	739,612	$	(19,731	)
GNMA - Commercial	221,250		(5,572		)	629,847		(18,107		)	118,951		(767		)	—		—
Total investments in debt securities HTM	$	426,823	$	(10,382	)	$	1,925,401	$	(67,481	)	$	553,273	$	(7,186	)	$	739,612	$	(19,731	)

~~154~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~126

NOTE 4.3. INVESTMENT SECURITIES (continued)

OTTI

Management evaluates all investment securities in an unrealized loss position for OTTI on ~~at least~~ a quarterly basis. ~~Individual securities are further assessed for OTTI as deemed necessary.~~ 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~~Fair Isaac Corporation ("FICO") scores and weighted average ~~loan-to-value ("LTV")~~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.

~~During the second quarter of 2015, the~~The Company ~~began implementing a strategy~~did not record any material OTTI related to improve the Bank's liquidity by selling non-high-quality liquid assets and reinvesting the funds into high-quality liquid assets ("HQLA"). HQLA are low risk assets that can easily and immediately be converted into cash at little or no loss of value such as cash orits investment securities guaranteed by a sovereign entity. At June 30, 2015, nine securities with totaling a book value of $377.0 million in an unrealized loss position had not yet been sold. Because the Company could no longer assert that it did not have the intent to sell these securities, the Company determined that the impairment was other-than-temporary. As a result, these securities were written down to fair value, resulting in a $1.1 million OTTI charge. These securities were sold during the third quarter of 2015 for ~~an additional loss of $1.0 million. No additional OTTI was recorded in earnings during~~ the years ended December 31, ~~2015~~2018, 2017 or 2014. In 2013, the Company recorded $63.6 million of OTTI in the Consolidated Statement of Operations on certain available-for-sale securities with a book value $2.5 billion that management designated for sale as a result of rising market interest rates. All of the securities designated for sale were sold in the third quarter of 2013, which at the time of sale had a book value of $2.3 billion. The Company incurred an additional loss on the sale of these securities during the third quarter of 2013 of $23.5 million.2016.

Management has concluded that the unrealized losses on its debt ~~and equity~~ securities for which it has not recognized OTTI (which were comprised of ~~497~~975 individual securities at December 31, ~~2015)~~2018) are temporary in nature since (1) they reflect the increase in interest rates, which lowers the current fair value of the securities, (2) they are not related to the underlying credit quality of the issuers, ~~(2)~~(3) the entire contractual principal and interest due on these securities is currently expected to be recoverable, ~~(3)~~(4) the Company does not intend to sell these investments at a loss and ~~(4)~~(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 Investment Securities

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


		Year Ended December 31,									Year Ended December 31,
		2015			2014			2013
	(in thousands)
Proceeds from the sales of available-for-sale securities		$	2,809,779		$	341,513		$	8,050,028
(in thousands)											2018			2017			2016
Proceeds from the sales of AFS securities											$	1,262,409		$	3,256,378		$	6,755,299

Gross realized gains		$	23,786		$	28,473		$	115,540		$	5,517		$	22,224		$	61,344
Gross realized losses		(5,692		)	(1,239		)	(42,456		)	(12,234		)	(24,668		)	(3,797		)
OTTI		(1,092		)	—			(63,630		)	—			—			(44		)
Net realized gains		$	17,002		$	27,234		$	9,454
Net realized gains/(losses) ⁽¹⁾											$	(6,717	)	$	(2,444	)	$	57,503

~~155~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 4. INVESTMENT SECURITIES (continued)~~


(1)	Includes net realized gain/(losses) on trading securities of $(1.4) million, $(4.2) million and $(0.3) million for the years ended December 31, 2018, 2017 and 2016, respectively.

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

~~The Company recognized $17.0 million, $27.2 million, and $9.5 million for~~Other Investments

Other Investments consisted of the ~~years ended December 31, 2015, 2014 and 2013, respectively,~~following as of:



(in thousands)	December 31, 2018		December 31, 2017
FHLB of Pittsburgh and FRB stock	$	631,239	$	516,693
Low Income Housing Tax Credit investments ("LIHTC")	163,113		88,170
Equity securities not held for trading ⁽¹⁾	10,995		—
CDs with a maturity greater than 90 days	—		54,000
Trading securities	10		1
Total	$	805,357	$	658,864

(1) Reflects the reclassification of the Company's investments in ~~gains on sale of investment~~equity securities to Other investments as a result of ~~overall balance sheet and interest rate risk management. The net gain realized for~~ the ~~year ended December 31, 2015 was primarily comprised~~adoption of ~~the sale~~ASU 2016-01 as of state and municipal securities with a book value of $421.5 million for a gain of $12.1 million and the sale of corporate debt securities with a book value of $566.2 million for a gain of $6.7 million, offset by the sale of ABS with a book value of $683.9 million for a loss of $0.2 million and the OTTI charge of $1.1 million. The net gain realized for the year ended December 31, 2014 was primarily comprised of the sale of state and municipal securities with a book value of $89.0 million for a gain of $5.2 million, the sale of corporate debt securities with a book value of $219.6 million for a gain of $4.8 million, and the sale of MBS with a book value of $579.4 million for a gain of $13.1 million. The net gain realized in 2013 primarily included the sale of CMOs with a book value of $4.1 billion for a gain of $69.0 million and the sale of corporate debt securities with a book value of $905.7 million for a gain of $34.7 million, offset by the OTTI charge of $63.6 million, and the sale of MBS, including CMOs, with a book value of $2.3 billion for a loss of $24.2 million.January 1, 2018.

Nontaxable interest and dividend income earned on investment securities was $34.1 million, $66.7 million, and $71.6 million for the years ended December 31, 2015, 2014 and 2013, respectively. Tax expenses related to net realized gains and losses from sales of investment securities for the years ended December 31, 2015, 2014 and 2013 were $6.7 million, $971.7 million, and $3.8 million, respectively.

127

~~Trading Securities~~

NOTE 3. INVESTMENT SECURITIES (continued)

The Company did not hold any trading securities at December 31, 2015, compared to $833.9 million held at December 31, 2014. Gains and losses on trading securities are recorded within Mortgage banking income, net, in the Company's Consolidated Statement of Operations as the Company utilized trading securities to economically hedge the MSR portfolio. The realized activity of trading gains and losses related to trading securities are as follows:

Year Ended December 31,
2015 2014 2013
(in thousands)
Net gains recognized during the period on trading securities $ 6,391
$ 9,325
$ —
Less: Net gains recognized during the period on trading securities sold during the period 6,391
3,782
—
Unrealized gains during the reporting period on trading securities still held at the reporting date $ —
$ 5,543
$ —

~~As of December 31, 2014, the Company had trading securities with an estimated fair value of $51.8 million pledged as collateral to secure the Bank's customer overnight sweep product.~~

~~Other Investments~~

Other investments primarily include the Company's investment in the stock of the FHLB of Pittsburgh and the ~~FRB with aggregate carrying amounts of $997.9 million and~~ ~~$817.0 million~~ ~~as of~~ ~~December 31, 2015~~ ~~and~~ ~~2014, respectively. 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 ~~FHLBs~~the FHLB or to another member institution. Accordingly, these stocks are carried at cost. During the ~~year~~years ended December 31, ~~2015~~,2018, the Company purchased ~~$501.5~~$267.5 million of FHLB stock at par and redeemed ~~$325.6~~$153.3 million of FHLB stock at par. ~~The Company also purchased $5.0 million of FRB stock at par during the year ended December 31, 2015.~~ There was no gain or loss associated with these redemptions. During the years ended December 31, 2018, the Company purchased $0.2 million of FRB stock at par.

Other investments also includes ~~$26.4~~LIHTC investments, time deposits with a maturity of greater than 90 days held at non-affiliated financial institutions, trading securities, and $11.0 million of ~~Low Income Housing Tax Credit ("LIHTC") investments~~equity securities. Equity securities are measured at fair value as of December 31, ~~2015.~~2018, with changes in fair value recognized in net income, and consist primarily of Community Reinvestment Act (“CRA") mutual fund investments reclassified as a result of the 2018 adoption of ASU 2016-01, discussed further in Note 1. They were included in Investments AFS at December 31, 2017. The Company's LIHTC investments are accounted for using the proportional amortization method.

~~The~~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.

~~156~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

NOTE 5.4. LOANS AND ALLOWANCE FOR CREDIT LOSSES ~~(As Restated)~~

Overall

The Company's loans are reported at their outstanding principal balances net of any ~~unearned income,~~ cumulative charge-offs, unamortized deferred fees and costs and unamortized premiums or ~~discounts .~~discounts. The Company maintains an ACL to provide for losses inherent in its portfolios. Certain loans are pledged as collateral for borrowings, securitizations, or ~~special purpose entities ("SPEs").~~SPEs. These loans totaled ~~$59.3~~$49.5 billion at December 31, ~~2015~~2018 and ~~$51.7~~$50.9 billion at December 31, ~~2014.~~2017.

Loans that the Company intends to sell are classified as LHFS. The LHFS portfolio balance at December 31, ~~2015~~2018 was ~~$3.2~~$1.3 billion, compared to ~~$260.3 million~~$2.5 billion at December 31, ~~2014.~~2017. LHFS in the residential mortgage portfolio are reported at either estimated fair ~~value. All other LHFS are accounted for at~~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 1916 to the Consolidated Financial Statements. ~~During the third quarter of 2015, the Company determined that it no longer intended to hold certain~~Loans under SC’s personal lending ~~assets at SC for investment. The Company adjusted the credit loss allowance associated with SC's personal loan portfolio to value the portfolio at the lower of cost or market,~~platform have been classified as HFS and ~~the adjusted credit loss allowance at September 30, 2015 was released through the provision for credit losses. Subsequent~~ adjustments to lower of cost or market ~~have been and will continue to be offset against non-interest income. Future loan originations and purchases under SC’s personal lending platform will also be classified as held for sale.~~are recorded through Miscellaneous income, net on the Consolidated Statements of Operations. As of December 31, ~~2015,~~2018 and 2017, the carrying value of the ~~held for sale~~ personal unsecured ~~loan~~HFS portfolio was ~~$2.0~~$1.1 billion.

On February 1, 2016, SC completed the sale of assets from the personal unsecured held-for-sale portfolio to a third party. As of December 31, 2015, the balance of the loans associated with this sale was $900 million.

In 2015, the Company sold $395.2 million of qualifying residential loans to the FHLMC in return for $416.7 million of MBS issued by the FHLMC compared to the $2.1 billion of qualifying residential loans sold to the FHLMC in return for $2.1 billion of MBS issued by the FHLMC in 2014. These sales resulted in a net realized gain on sale of $22.0 million and $49.8 million, in 2015 and 2014, respectively, which are included in Mortgage banking income, net line of the Company's Consolidated Statement of Operations.

During the third quarter of 2015, the Company repurchased a portfolio of performing multifamily loans from FNMA for $1.4 billion. In 2014, the Company repurchased $898.5 million of performing loans previously sold to FNMA.

Interest ~~income~~ on loans is ~~accrued based on~~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 ~~rate~~method. Loan origination costs and ~~the principal amount outstanding, except for those loans classified as non-accrual.~~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, ~~2015~~2018 and December 31, ~~2014,~~2017, accrued interest receivable on the Company's loans was ~~$521.1~~$524.0 million and ~~$492.7~~$529.9 million, respectively.

~~157~~During the year ended December 31, 2018, the Company sold substantially all of its mortgage warehouse facilities, which had a book value of $499.2 million for net proceeds of $515.8 million. The $16.7 million gain on sale was recognized within Miscellaneous income, net on the Condensed Consolidated Statements of Operations.

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~128

NOTE 5.4. LOANS AND ALLOWANCE FOR CREDIT LOSSES ~~(As Restated)~~ (continued)

Loan and Lease Portfolio Composition

The following ~~table~~ presents the composition of the gross loans ~~held for investment~~and leases HFI by ~~type of loan~~portfolio and by ~~fixed and variable rates at the dates indicated:~~rate type:


	December 31, 2015				December 31, 2014				December 31, 2018				December 31, 2017
	Amount		Percent		Amount		Percent

	(dollars in thousands)
Commercial loans held for investment:
Commercial real estate loans	$	8,722,917	11.0	%	$	8,739,233	11.5	%
Commercial and industrial loans	19,787,834		24.9	%	17,092,828		22.5	%
(dollars in thousands)									Amount		Percent		Amount		Percent
Commercial LHFI:
Commercial real estate ("CRE") loans									$	8,704,481	10.0	%	$	9,279,225	11.5	%
Commercial and industrial ("C&I") loans									15,738,158		18.1	%	14,438,311		17.9	%
Multifamily loans	9,438,463		11.9	%	8,705,890		11.5	%	8,309,115		9.5	%	8,274,435		10.1	%
Other commercial⁽²⁾	2,676,506		3.4	%	2,084,232		2.7	%	7,630,004		8.8	%	7,174,739		8.9	%
Total commercial loans held for investment	40,625,720		51.2	%	36,622,183		48.2	%
Total commercial LHFI									40,381,758		46.4	%	39,166,710		48.4	%
Consumer loans secured by real estate:
Residential mortgages	6,230,995		7.8	%	6,773,575		8.9	%	9,884,462		11.4	%	8,846,765		11.0	%
Home equity loans and lines of credit	6,151,232		7.7	%	6,211,298		8.2	%	5,465,670		6.3	%	5,907,733		7.3	%
Total consumer loans secured by real estate	12,382,227		15.5	%	12,984,873		17.1	%	15,350,132		17.7	%	14,754,498		18.3	%
Consumer loans not secured by real estate:
RICs and auto loans - originated	18,539,588		23.4	%	9,935,503		13.1	%
RICs - purchased	6,108,210		7.7	%	12,449,526		16.4	%
RICs and auto loans - originated ⁽⁴⁾									28,532,085		32.8	%	23,131,253		28.6	%
RICs and auto loans - purchased									803,135		0.9	%	1,834,868		2.3	%
Personal unsecured loans	685,467		0.9	%	2,696,820		3.5	%	1,531,708		1.8	%	1,285,677		1.6	%
Other consumer⁽³⁾	1,032,580		1.3	%	1,306,562		1.7	%	447,050		0.4	%	617,675		0.8	%
Total consumer loans	38,748,072		48.8	%	39,373,284		51.8	%	46,664,110		53.6	%	41,623,971		51.6	%
Total loans held for investment⁽¹⁾	$	79,373,792	100.0	%	$	75,995,467	100.0	%
Total loans held for investment:
Total LHFI⁽¹⁾									$	87,045,868	100.0	%	$	80,790,681	100.0	%
Total LHFI:
Fixed rate	$	46,721,562	58.9	%	$	45,109,343	59.4	%	$	56,696,491	65.1	%	$	50,703,619	62.8	%
Variable rate	32,652,230		41.1	%	30,886,124		40.6	%	30,349,377		34.9	%	30,087,062		37.2	%
Total loans held for investment⁽¹⁾	$	79,373,792	100.0	%	$	75,995,467	100.0	%
Total LHFI⁽¹⁾									$	87,045,868	100.0	%	$	80,790,681	100.0	%

(1)Total ~~loans held for investment~~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 ~~$26.3 million as of December 31, 2015~~$1.4 billion and ~~a net decrease in loan balances of $1.5~~$1.3 billion as of December 31, ~~2014,~~2018 and December 31, 2017, respectively.

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

(3)Other consumer primarily includes ~~recreational vehicles~~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 alternate~~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 ~~three commercial real estate lines~~CRE line of business ~~distinctions include “Corporate banking,” which~~ includes commercial and industrial owner-occupied real estate ~~“Middle market real estate,” which represents the portfolio of~~and specialized lending for investment real ~~estate, including financing~~estate. 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 communities~~development and ~~“Santander real estate capital”, which is the commercial real estate portfolio~~determination 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 industrial~~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 business.

~~158~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (As Restated) (continued)~~

The following table reconciles the Company's recorded investment classified by its major loan classifications to its commercial loan classifications utilized in its determination of the allowance for loan and lease losses and other credit quality disclosures at ~~December 31, 2015~~ ~~and~~ ~~December 31, 2014, respectively:~~

Commercial Portfolio Segment⁽²⁾

Major Loan Classifications⁽¹⁾
December 31, 2015 December 31, 2014
(in thousands)
Commercial loans held for investment:
Commercial real estate:
Corporate Banking $ 2,949,089
$ 3,218,150
Middle Market Real Estate 4,223,359
3,743,099
Santander Real Estate Capital 1,550,469
1,777,984
Total commercial real estate 8,722,917
8,739,233
Commercial and industrial ⁽³⁾
19,787,834
17,092,828
Multifamily 9,438,463
8,705,890
Other commercial 2,676,506
2,084,232
Total commercial loans held for investment $ 40,625,720
$ 36,622,183


~~(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 allowance for loan and lease losses in accordance with ASC 310-10.~~


~~(3)~~	~~Commercial and industrial loans excluded $86.4 million and $19.1 million of LHFS at December 31, 2015 and December 31, 2014, respectively.~~

The Company's portfolio ~~segments~~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”~~credit" include all organic home equity contracts and purchased home equity portfolios. ~~"RIC~~"RICs and auto loans" includes the Company's direct automobile loan portfolios, but excludes RV and marine ~~retail installment contracts.~~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~~to 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, 2015 December 31, 2014
(in thousands)
Consumer loans secured by real estate:
Residential mortgages⁽³⁾
$ 6,230,995
$ 6,773,575
Home equity loans and lines of credit 6,151,232
6,211,298
Total consumer loans secured by real estate 12,382,227
12,984,873
Consumer loans not secured by real estate:
RICs and auto loans - originated ⁽⁴⁾
18,539,588
9,935,503
RICs - purchased ⁽⁴⁾
6,108,210
12,449,526
Personal unsecured loans⁽⁵⁾
685,467
2,696,820
Other consumer 1,032,580
1,306,562
Total consumer loans held for investment $ 38,748,072
$ 39,373,284


~~(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 allowance for loan and lease losses in accordance with ASC 310-10.~~


~~(3)~~	~~Residential mortgages exclude $236.8 million and $195.7 million of LHFS at~~ ~~December 31, 2015~~ ~~and December 31, 2014, respectively.~~


~~(4)~~	~~Retail installment contracts and auto loans exclude~~ ~~$905.7 million~~ ~~and~~ ~~$45.4 million~~ ~~of LHFS at~~ ~~December 31, 2015~~ ~~and December 31, 2014, respectively.~~


~~(5)~~	~~Personal unsecured loans exclude~~ ~~$2.0 billion~~ ~~of LHFS at December 31, 2015. There were no personal unsecured loans HFS at December 31, 2014.~~

~~159~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~129

NOTE 5.4. LOANS AND ALLOWANCE FOR CREDIT LOSSES ~~(As Restated)~~ (continued)

The ~~RICs~~RIC and auto loan portfolio is comprised of: (1) RICs originated by SC prior to the ~~Change~~first quarter 2014 consolidation and change in ~~Control,~~control of SC (the “Change in Control"), (2) RICs originated by SC after the Change in Control, and (3) auto loans originated by SBNA. The composition of the portfolio segment is as follows:


(in thousands)								December 31, 2018			December 31, 2017
		December 31, 2015			December 31, 2014

		(in thousands)
RICs - Purchased:
UPB ⁽¹⁾		$	6,709,748		$	13,366,188
RICs - Purchased HFI:
Unpaid principal balance ("UPB") ⁽¹⁾								$	844,582		$	1,929,548
UPB - FVO⁽²⁾		140,995			716,923			9,678			24,926
Total UPB		6,850,743			14,083,111			854,260			1,954,474
Purchase Marks ⁽³⁾		(742,533		)	(1,633,585		)
Total RICs - Purchased		6,108,210			12,449,526
Purchase marks ⁽³⁾								(51,125		)	(119,606		)
Total RICs - Purchased HFI								803,135			1,834,868

RICs - Originated:
RICs - Originated HFI:
UPB⁽¹⁾		19,069,801			10,273,931			27,049,875			23,423,031
Net discount		(548,057		)	(367,369		)	(135,489		)	(309,920		)
Total RICs - Originated	Total RICs - Originated	18,521,744			9,906,562			26,914,386			23,113,111
SBNA auto loans		17,844			28,941			1,617,699			18,142
Total RICs originated		18,539,588			9,935,503
Total RICs and auto loans		$	24,647,798		$	22,385,029
Total RICs - originated post-Change in Control								28,532,085			23,131,253
Total RICs and auto loans HFI								$	29,335,220		$	24,966,121

~~(1)~~


(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 $2.1 million and $5.5 million 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 $33.1 million and $130.2 million related to purchased~~ loan portfolios on which we elected to apply the FVO at December 31, 2018 and December 31, 2017, respectively.

During the years ended December 31, ~~2015~~2018 and 2017, SC originated $7.9 billion and $6.7 billion, respectively, in Chrysler Capital loans (which excludes the SBNA originations program), which represented 46% and 47%, respectively, of the Company's total RIC originations (UPB). As of December 31, 2018 and December 31, ~~2014, respectively.~~ 2017, the Company's carrying value of its auto RIC portfolio consisted of $9.0 billion and $8.2 billion, respectively, of Chrysler Capital loans (excluding the SBNA originations program), which represented 36% and 37%, respectively, of the Company's auto RIC portfolio.

ACL Rollforward by Portfolio Segment

The activity in the ACL by portfolio segment for the years ended December 31, ~~2015, 2014,~~2018, 2017, and ~~2013~~2016 was as follows:

Year Ended December 31, 2015

Commercial Consumer Unallocated Total
(in thousands)
Allowance for loan and lease losses, beginning of period $ 401,553

$ 1,267,025

$ 33,024

$ 1,701,602
Provision for loan and lease losses 138,482

3,847,414

12,304

3,998,200
Other⁽¹⁾
—

(27,117 )
—

(27,117 )
Charge-offs (165,682 )
(4,434,574 )
—

(4,600,256 )
Recoveries 61,364

2,026,918

—

2,088,282
Charge-offs, net of recoveries (104,318 )
(2,407,656 )
—

(2,511,974 )
Allowance for loan and lease losses, end of period $ 435,717

$ 2,679,666

$ 45,328

$ 3,160,711
Reserve for unfunded lending commitments, beginning of period $ 132,641
$ —
$ —
$ 132,641
Provision for unfunded lending commitments 14,756
—
—
14,756
Loss on unfunded lending commitments —
—
—
—
Reserve for unfunded lending commitments, end of period 147,397
—
—
147,397
Total allowance for credit losses, end of period $ 583,114
$ 2,679,666
$ 45,328
$ 3,308,108
Ending balance, individually evaluated for impairment⁽²⁾
$ 48,511
$ 895,580
$ —
$ 944,091
Ending balance, collectively evaluated for impairment 387,206
1,784,086
45,328
2,216,620

Financing receivables:
Ending balance $ 40,712,120
$ 41,844,954
$ —
$ 82,557,074
Ending balance, evaluated under the fair value option or lower of cost or fair value 86,399
3,425,538
—
3,511,937
Ending balance, individually evaluated for impairment⁽²⁾
403,653
4,203,657
—
4,607,310
Ending balance, collectively evaluated for impairment 40,222,068
34,215,759
—
74,437,827

~~(1) The "Other" amount represents~~




	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 ⁽²⁾	$	103,835		$	5,276		$	—	$	109,111
(Release of) / Provision for reserve for 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:
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) Includes an immaterial reallocation between Commercial and Consumer for the impact on the allowance for loan and lease losses in connection with SC classifying approximately $1.0 billion of retail installment contracts ("RICs") as held-for-sale during the first quarter of 2015.

~~(2) Consists of loans in TDR status~~

period ending December 31, 2018.

~~160~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~130

NOTE 5.4. LOANS AND ALLOWANCE FOR CREDIT LOSSES ~~(As Restated)~~ (continued)


	Year Ended December 31, 2014
												Year Ended December 31, 2017
	Commercial			Consumer			Unallocated		Total
	(in thousands)
Allowance for loan and lease losses, beginning of period	$	443,074		$	363,647		$	27,616	$	834,337
(in thousands)												Commercial			Consumer			Unallocated		Total
ALLL, beginning of period												$	449,837		$	3,317,604		$	47,023	$	3,814,464
Provision for loan and lease losses	27,818			2,462,017			5,408		2,495,243			99,606			2,670,950			—		2,770,556
Other⁽¹⁾	—			(61,220		)	—		(61,220		)	356			5,283			—		5,639
Charge-offs	(109,718		)	(2,664,747		)	—		(2,774,465		)	(144,002		)	(4,891,383		)	—		(5,035,385		)
Recoveries	40,379			1,167,328			—		1,207,707			37,999			2,401,614			—		2,439,613
Charge-offs, net of recoveries	(69,339		)	(1,497,419		)	—		(1,566,758		)	(106,003		)	(2,489,769		)	—		(2,595,772		)
Allowance for loan and lease losses, end of period	$	401,553		$	1,267,025		$	33,024	$	1,701,602
ALLL, end of period												$	443,796		$	3,504,068		$	47,023	$	3,994,887

Reserve for unfunded lending commitments, beginning of period	$	220,000		$	—		$	—	$	220,000		$	116,866		$	5,552		$	—	$	122,418
Provision for unfunded lending commitments	(82,000		)	—			—		(82,000		)
Release of unfunded lending commitments												(10,336		)	(276		)	—		(10,612		)
Loss on unfunded lending commitments	(5,359		)	—			—		(5,359		)	(2,695		)	—			—		(2,695		)
Reserve for unfunded lending commitments, end of period	132,641			—			—		132,641			103,835			5,276			—		109,111
Total allowance for credit losses, end of period	$	534,194		$	1,267,025		$	33,024	$	1,834,243
Total ACL, end of period												$	547,631		$	3,509,344		$	47,023	$	4,103,998
Ending balance, individually evaluated for impairment⁽²⁾	$	80,701		$	55,399		$	—	$	136,100		$	102,326		$	1,824,640		$	—	$	1,926,966
Ending balance, collectively evaluated for impairment	320,852			1,211,626			33,024		1,565,502			341,470			1,679,428			47,023		2,067,921

Financing receivables:
Ending balance	$	36,641,277		$	39,614,442		$	—	$	76,255,719		$	39,315,888		$	43,997,279		$	—	$	83,313,167
Ending balance, evaluated under the fair value option or lower of cost or fair value⁽¹⁾	19,094			1,087,069			—		1,106,163
Ending balance, evaluated under the FVO or lower of cost or fair value												149,177			2,420,155			—		2,569,332
Ending balance, individually evaluated for impairment⁽²⁾	494,565			2,124,184			—		2,618,749			593,585			6,652,949			—		7,246,534
Ending balance, collectively evaluated for impairment	36,127,618			36,403,189			—		72,530,807			38,573,126			34,924,175			—		73,497,301


(1)	~~The "Other" amount represents~~Includes transfers in for the impact on the allowance for loan and lease losses in connection with the sale of approximately $484.2 million of troubled debt restructurings ("TDRs") and non-performing loans ("NPLs") classified as held-for-sale during the year.period ending September 30, 2017.


(2)	Consists of loans in TDR ~~status~~status.

~~161~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~

~~NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (As Restated) (continued)~~

Year Ended December 31, 2013
Commercial Consumer Unallocated Total
(in thousands)
Allowance for loan and lease losses, beginning of period $ 580,931
$ 407,259
$ 25,279
$ 1,013,469
Provision for / (Release of) loan and lease losses (67,472 ) 101,985
2,337
36,850
Charge-offs (123,517 ) (191,687 ) —
(315,204 )
Recoveries 53,132
46,090
—
99,222
Charge-offs, net of recoveries (70,385 ) (145,597 ) —
(215,982 )
Allowance for loan and lease losses, end of period $ 443,074
$ 363,647
$ 27,616
$ 834,337

Reserve for unfunded lending commitments, beginning of period $ 210,000
$ —
$ —
$ 210,000
Provision for unfunded lending commitments 10,000
—
—
10,000
Reserve for unfunded lending commitments, end of period 220,000
—
—
220,000
Total allowance for credit losses, end of period $ 663,074
$ 363,647
$ 27,616
$ 1,054,337
Ending balance, individually evaluated for impairment⁽²⁾
$ 90,594
$ 135,202
—
$ 225,796
Ending balance, collectively evaluated for impairment $ 352,480
$ 228,445
$ 27,616
$ 608,541

Financing receivables: ��
Ending balance $ 32,169,154
$ 17,881,472
$ —
$ 50,050,626
Ending balance, evaluated under the fair value option or lower of cost or fair value⁽¹⁾
17,932
111,017
—
$ 128,949
Ending balance, individually evaluated for impairment⁽²⁾
479,343
753,809
—
$ 1,233,152
Ending balance, collectively evaluated for impairment 31,671,879
17,016,646
—
$ 48,688,525

~~(1) Represents LHFS and those loans for which the Company has elected the fair value option.~~

~~(2) Consumer loans individually evaluated for impairment consists of loans in TDR status.~~




	Year Ended December 31, 2016
(in thousands)	Commercial			Consumer			Unallocated			Total
ALLL, beginning of period	$	456,812		$	2,742,088		$	47,245		$	3,246,145
Provision for loan losses	152,112			2,852,730			(222		)	3,004,620
Charge-offs	(245,399		)	(4,720,135		)	—			(4,965,534		)
Recoveries	86,312			2,442,921			—			2,529,233
Charge-offs, net of recoveries	(159,087		)	(2,277,214		)	—			(2,436,301		)
ALLL, end of period	$	449,837		$	3,317,604		$	47,023		$	3,814,464

Reserve for unfunded lending commitments, beginning of period	$	143,461		$	5,560		$	—		$	149,021
Provision for unfunded lending commitments	(24,887		)	(8		)	—			(24,895		)
Loss on unfunded lending commitments	(1,708		)	—			—			(1,708		)
Reserve for unfunded lending commitments, end of period	116,866			5,552			—			122,418
Total ACL end of period	$	566,703		$	3,323,156		$	47,023		$	3,936,882

Ending balance, individually evaluated for impairment⁽²⁾	$	98,596		$	1,520,375		$	—		$	1,618,971
Ending balance, collectively evaluated for impairment	351,241			1,797,229			47,023			2,195,493

Financing receivables:
Ending balance	$	44,561,193		$	43,844,900		$	—		$	88,406,093
Ending balance, evaluated under the FVO or lower of cost or fair value⁽¹⁾	121,065			2,482,595			—			2,603,660
Ending balance, individually evaluated for impairment⁽²⁾	666,386			5,795,366			—			6,461,752
Ending balance, collectively evaluated for impairment	43,773,742			35,566,939			—			79,340,681

The following table presents the activity in the ~~Allowance~~allowance for loan losses for the ~~Retail Installment Contracts~~RICs acquired ~~("Purchased")~~ in the Change in Control and those originated by SC subsequent to the Change in Control.

Year Ended December 31, 2015
Purchased Originated Total
(in thousands)
Allowance for loan and lease losses, beginning of period $ 963
$ 709,024
$ 709,987
Provision for / (Release of) loan and lease losses 1,106,462
2,313,825
3,420,287
Other (27,117 ) —
(27,117 )
Charge-offs (1,516,951 ) (2,035,878 ) (3,552,829 )
Recoveries 1,027,450
905,018
1,932,468
Charge-offs, net of recoveries (489,501 ) (1,130,860 ) (1,620,361 )
Allowance for loan and lease losses, end of period $ 590,807
$ 1,891,989
$ 2,482,796

~~162~~

~~SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES~~

~~NOTES TO CONSOLIDATED FINANCIAL STATEMENTS~~131

NOTE 5.4. LOANS AND ALLOWANCE FOR CREDIT LOSSES ~~(As Restated)~~ (continued)


	Year Ended December 31, 2014									Year Ended
	Purchased			Originated			Total			December 31, 2018
	(in thousands)
Allowance for loan and lease losses, beginning of period	$	—		$	—		$	—
Provision for / (Release of) loan and lease losses	799,208			982,506			1,781,714
(in thousands)										Purchased			Originated			Total
ALLL, beginning of period										$	384,167		$	2,862,355		$	3,246,522
(Release of) / Provision for loan and lease losses										(53,551		)	2,278,155			2,224,604
Charge-offs	(1,732,218		)	(420,500		)	(2,152,718		)	(319,069		)	(4,508,583		)	(4,827,652		)
Recoveries	933,973			147,018			1,080,991			182,195			2,360,649			2,542,844
Charge-offs, net of recoveries	(798,245		)	(273,482		)	(1,071,727		)	(136,874		)	(2,147,934		)	(2,284,808		)
Allowance for loan and lease losses, end of period	$	963		$	709,024		$	709,987
ALLL, end of period										$	193,742		$	2,992,576		$	3,186,318



	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 losses	181,698			2,332,160			2,513,858
Charge-offs	(606,898		)	(4,128,249		)	(4,735,147		)
Recoveries	250,275			2,120,317			2,370,592
Charge-offs, net of recoveries	(356,623		)	(2,007,932		)	(2,364,555		)
ALLL, end of period	$	384,167		$	2,862,355		$	3,246,522



	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 losses	309,664			2,459,588			2,769,252
Charge-offs	(1,024,882		)	(3,539,153		)	(4,564,035		)
Recoveries	683,503			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

Refer to Note 20 for discussion of contingencies and possible losses related to the impact of hurricane activity in regions where the Company has lending activities.

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:


	December 31, 2015		December 31, 2014
(in thousands)					December 31, 2018		December 31, 2017
	(in thousands)
Non-accrual loans:
Commercial:
Commercial real estate:
Corporate banking	$	71,979	$	90,579
Middle market commercial real estate	37,745		71,398
Santander real estate capital	3,454		5,803
Commercial and industrial	85,745		54,567
CRE					$	88,500	$	139,236
C&I					189,827		230,481
Multifamily	9,162		9,639		13,530		11,348
Other commercial	2,982		4,136		72,841		83,468
Total commercial loans	211,067		236,122		364,698		464,533
Consumer:
Residential mortgages	173,780		231,316		216,815		265,436
Home equity loans and lines of credit	127,171		142,026		115,813		134,162
RICs and auto loans - originated	701,785		227,132		1,455,406		1,257,122
RICs - purchased	417,276		755,590		89,916		256,617
Personal unsecured loans	895		14,007		3,602		2,366
Other consumer	23,125		22,095		9,187		10,657
Total consumer loans	1,444,032		1,392,166		1,890,739		1,926,360
Total non-accrual loans	1,655,099		1,628,288		2,255,437		2,390,893

Other real estate owned ("OREO")	38,959		65,051
OREO					107,868		130,777
Repossessed vehicles	172,375		126,309		224,046		210,692
Foreclosed and other repossessed assets	374		11,375		1,844		2,190
Total OREO and other repossessed assets	211,708		202,735		333,758		343,659
Total non-performing assets	$	1,866,807	$	1,831,023	$	2,589,195	$	2,734,552

~~Changes in Internal Control over Financial Reporting~~

198

During the fourth quarter of 2015, the Company implemented a new consolidation general ledger system, which provided increased capabilities for automation of the consolidation process. The implementation of this new system was determined to strengthen the Company’s internal control over financial reporting.

Other than as described above, there were no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, its internal control over financial reporting.

~~260~~

~~Table of Contents~~

~~Report of Independent Registered Public Accounting Firm~~

~~The Board of Directors and Shareholder of~~

~~Santander Holdings USA, Inc.~~

~~We have audited Santander Holdings USA, Inc. and subsidiaries’ (the “Company’s”) internal control over financial reporting of as of December 31, 2015, based on criteria established in~~ ~~Internal Control - Integrated Framework (2013)~~ issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting (as revised). Our responsibility is to express an opinion on the Company's internal control over financial reporting 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 effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on that risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel 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 (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) 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 (3) 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 the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

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 company’s annual or interim financial statements will not be prevented or detected on a timely basis. The following material weaknesses have been identified and included in management's assessment: the Company did not maintain effective internal controls related to the Control Environment, Risk Assessment, Control Activities and Monitoring including Santander Consumer USA Holdings Inc. and its subsidiaries Internal Control Environment, Application of Effective Interest Method for Accretion, Methodology to Estimate Credit Loss Allowance, Loans Modified as TDRs, Development, Approval, and Monitoring of Models Used to Estimate the Credit Loss Allowance, Identification, Governance and Monitoring of Models Used to Estimate Accretion, Review of New, Unusual or Significant Transactions, and Review of Financial Statement Disclosures; Impact of Purchase Accounting on TDR Loan accounting; Goodwill; and the previously reported Material Weakness related to the Company's process to prepare and review the Statement of Cash Flows and Notes to the Consolidated Financial Statements. These material weaknesses were considered in determining the nature, timing, and extent of audit tests applied in our audit of the consolidated financial statements as of and for the year ended December 31, 2015, of the Company and this report does not affect our report on such financial statements.

In our opinion, because of the effect of the material weaknesses identified above on the achievement of the objectives of the control criteria, the Company has not maintained effective internal control over financial reporting as of December 31, 2015, based on the criteria established in ~~Internal Control - Integrated Framework (2013)~~ ~~issued by the Committee of Sponsoring Organizations of the Treadway Commission.~~

~~261~~

~~Table of Contents~~

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2015, of the Company and our report dated April 14, 2016 (December 7, 2016 as to the effects of the change in reportable segments discussed in Note 24 to the consolidated financial statements and restatement discussed in Note 25 to the consolidated financial statements) expressed an unqualified opinion on those financial statements.

~~/s/ Deloitte & Touche LLP~~

~~Boston, Massachusetts~~

~~April 14, 2016 (December 7, 2016 as to the effects of the additional material weaknesses described in Management’s Annual Report on Internal Control over Financial Reporting (as revised))~~

~~262~~

Table of Contents

ITEM 9B - OTHER INFORMATION

~~Auditor independence matter~~None.

The Company’s independent registered public accounting firm, Deloitte & Touche LLP (“Deloitte”), recently advised the Company’s Audit Committee that it had identified an auditor independence matter.

Securities and Exchange Commission Regulation S-X Rule 2-01 (c) (1) (ii) (A) states “An accountant is not independent if, at any point during the audit and professional engagement period, the accountant has a direct financial interest or a material indirect financial interest in the accountant’s audit client, such as…Loans/debtor-creditor relationship. Any loan (including any margin loan) to or from an audit client, or an audit client's officers, directors, or record or beneficial owners of more than ten percent of the audit client's equity securities…” An affiliated entity of Deloitte located outside of the United States entered into a lending relationship with an affiliate of the Company in December 2015. The lending relationship was not with an entity that is included in the financial statements of the Company. The borrowing was repaid in October 2016.

Deloitte advised the Audit Committee that the lending relationship did not impair its objectivity, integrity, and impartiality with respect to its planning and execution of the 2015 audit and its associated reviews of the 2015 quarters. After considering the facts and circumstances, the Audit Committee concurred with Deloitte’s conclusion that this matter did not impair its objectivity, integrity, and impartiality with respect to its planning and execution of the 2015 audit and its associated reviews of the 2015 quarters.

~~263~~

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PART III

ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Our Board has established the following standing Board level committees of SHUSA: Audit Committee, Compensation and Talent Management Committee (“Compensation Committee”), Nominations and Executive Committee (“Nominations Committee”), and Joint SHUSA and Combined U.S. Operations of Santander Risk Committee (“SHUSA/US Risk Committee”). Certain information relating to the directors of SHUSA as of the filing date of ~~the original Annual Report on~~this Form 10-K ~~filing~~ is set forth below.

Directors of SHUSA

Jose Doncel - Age 57. Mr. Doncel was appointed to SHUSA’s Board in July 2016, SBNA’s Board in June 2016, and SC’s Board in December 2015. He serves as the Chairman of Banco de Albacete, S.A., Administración de Bancos Latinoamericanos Santander, S.L., Grupo Empresarial Santander, S.L., Santander Investment I, S.A., Ablasa Participaciones, S.L. and Finsantusa, S.L., and a member of the Boards of Santander Holding Internacional, S.A., Santusa Holding, S.L., Ingenieria de Software Bancario, S.L., Geoban, S.A., Santander Global Technology and Banco Popular Espanol S.A. Mr. Doncel has served as a senior executive of Santander and certain predecessor companies since 1993, currently as Senior Executive Vice President and Director of the Accounting 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 2014 and Director of the Retail Banking Management Control Area from April 2013 to June 2013. Prior to his time with Santander, Mr. Doncel worked for Arthur Andersen Auditores, S.A., Division of Financial Institutions. Mr. Doncel holds a degree in Economic and Business Studies from Universidad Complutense de Madrid. He brings extensive banking industry leadership experience to the Board as a result of his Board and professional experience.

Stephen A. Ferriss - Age ~~70.~~73. Mr. Ferriss was appointed to SHUSA’s Board in 2012 and is a member of its Audit and Compensation Committees. In 2018, he was appointed to BSI's Board and 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 ~~Committees,~~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 has served as Vice Chairman of the Board since 2015. He is Chairman of its Risk Committee and a member of ~~SC’s~~its Audit, Compensation and Executive Committees. From 2012 to 2015, Mr. Ferriss isserved 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, he was Chairman of the Nominations Committee and senior independent director of Management Consulting Group PLC, London, a publicly traded company on the London Stock Exchange, and served as Chairman of its Audit Committee from 2008 to 2011. From ~~2012 until 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~~ 2007 to 2013, he served on the Board of Iberchem in Madrid, Spain. From 1999 to 2002, Mr. Ferriss served as President and Chief Executive Officer of Santander Central Hispano Investment ~~Services,~~Securities, Inc. Prior to his ~~time at~~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 ~~spent~~served in various leadership positions for 19 years 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 professional experience.

Alan Fishman - Age ~~69.~~72. Mr. Fishman was appointed to SHUSA’s and the Bank’s Boards in ~~May~~ 2015. He is a member of SHUSA’s Audit and SHUSA/US Risk Committees and he is the Bank's Lead Independent Director, ~~where he~~and serves as the Chairman of the Bank's Audit Committee and a member of the ~~Bank Secrecy Act/Anti-Money Laundering Oversight, Compliance, Executive,~~Nominations and Risk Committees. Mr. Fishman was appointed to the SIS Board in 2017 where he serves as Chairman of the Board. Since 2008, heMr. 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 served as Chairman of the Board of Beech Street Capital, and for a brief time in 2008, served as Chief Executive Officer of Washington Mutual, Inc. Prior to serving with Washington Mutual, ~~Inc.,~~ he served as Chairman of Meridian Capital Group and as President of Sovereign Bancorp. From 2001 to 2006, heMr. Fishman served as President and Chief Executive Officer of Independence Community Bank until its sale to Sovereign Bank in 2006. Previously, Mr. Fishman served as President and Chief Executive Officer 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, ~~serving~~having served as Chairman of the Brooklyn Academy of Music from 2002 to 2016, Chairman of the Brooklyn Navy Yard from 2002 to 2014, and currently as Chairman of the Brooklyn Community Foundation. He received a B.A. from Brown University and an M.A. ~~degree~~ from Columbia University. Mr. Fishman brings extensive leadership experience and financial services industry expertise to the Board.

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Juan Guitard- Age ~~56.~~59. Mr. Guitard was appointed to SHUSA’s Board in 2014 and is a member of its Compensation 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. Mr. 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.

Thomas S. Johnson - Age ~~75.~~78. Mr. Johnson was appointed to SHUSA’s ~~Board in May 2015~~ and the Bank’s ~~Board~~Boards in ~~June~~ 2015. He serves as SHUSA’s Lead Independent Director, Chairman of its Audit Committee, and a member of its ~~Executive~~Nominations and SHUSA/US Risk Committees. He serves as a member of the Bank’s Audit ~~Bank Secrecy Act/Anti-Money Laundering Oversight, Compliance,~~ and Risk Committees. ~~Since 1991, he has served~~Mr. Johnson serves on the Boards of the Institute of International Education, the Inner-City Scholarship Fund, the National 9/11 Memorial, the Board of ~~Alleghany~~the Norton Museum of Art and Museum Foundation, and the Lower Manhattan Development Corporation. From 1993 to 2004, he served as Chairman and ~~Chief Executive Officer~~CEO 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’s career in banking started in 1969 at Chemical Bank and Chemical Banking Corporation, where he became President and Director in 1983. In addition,

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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. 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 ~~an A.B.~~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 54. Ms. Keating was appointed to SHUSA’s and the Bank’s Boards in April 2015. She serves as Chair of SHUSA’s Compensation Committee and is a member of its Audit and Executive Committees. She also serves as a member of the Bank’s Bank Secrecy Act/Anti-Money Laundering Oversight, Compensation, Compliance, and Risk Committees. Since January 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 at JPMorgan 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 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.

~~Jason Kulas~~ - Age 45. Mr. Kulas was appointed to SHUSA’s Board in October 2015, and he has served as Director and Chief Executive Officer of SC since July 2015. In addition, he was reappointed as President of SC in February 2016. He is also a director of the nonprofit Santander Consumer USA Inc. Foundation. He previously served as a member of SC’s Board from 2007 to 2012, and his prior executive roles at SC included serving as President from 2013 to 2015 and Chief Financial Officer from 2007 to 2015. Prior to joining SC, Mr. Kulas served as Managing Director in Investment Banking for JPMorgan Securities, Inc., where he worked from 1995 to 2007. Prior to his role at JPMorgan Securities, he was an analyst for Dun & Bradstreet and an adjunct professor at Texas Christian University. He received a B.A. from Southern Methodist University and an M.B.A. from Texas Christian University. Mr. Kulas brings valuable investment, financial services, and consumer finance experience to the Board.

Javier Maldonado - Age ~~53.~~56. Mr. Maldonado ~~was appointed to SHUSA’s Board in April 2015, and~~ has served as ~~its~~ Vice Chairman of SHUSA’s Board since ~~October 2015. He~~2015, and he is a member of ~~SHUSA’s Executive~~the Nominations and SHUSA/US Risk Committees. He was appointed to SC’s Board in ~~July~~ 2015 and is a member of its Compensation, ~~Committee~~Nominations, and ~~its~~ Regulatory and Compliance Oversight ~~Committee.~~Committees. He was appointed to the Bank’s Board in ~~June~~ 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 the Compensation ~~and Nomination~~ Committee, and serves as a Director of ~~Banco Santander Puerto Rico~~BSPR and ~~Santander Investment Securities, Inc.~~SIS. He served as Acting Chairman of SIS' Board from April 2016 to April 2017. Mr. Maldonado has served on the Board of Alawwal Bank (formerly known as theSaudi 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. 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.

Victor Matarranz - Age ~~40.~~42. Mr. Matarranz was appointed to SHUSA’s ~~Board in July 2015~~ and the Bank’s Boards in 2015 and to BSI's Board in ~~June 2015.~~2018. He is a member of SHUSA’s Compensation and ~~Executive~~Nominations Committees and a member of the Bank’s Compensation Committee. He is Chairman of Santander Asset Management Holdings Ltd. since 2017 and is a Board Member of Zurich Santander Insurance America S.L. since 2019. He has been a member of the Portal Universia SA Board from 2015 to 2018 and he served on the Santander Fintech Board from 2014 to 2017. Since September 2014, heMr. Matarranz has served as aGroup Senior Executive Vice President of Santander, and in September 2017 he was appointed as Head of Santander's Wealth Management division, including the Private Banking, Asset Management and Insurance businesses of Santander. From September 2014 to September 2017, he served as Head of Group Strategy ~~at Santander. He is also~~and Chief of Staff to ~~the Group~~Santander's Executive Chairman. From 2012 to 2014, Mr. Matarranz ~~worked at Santander UK, where he was~~served as the Director of Strategy ~~the~~and Chief of Staff to the Chief Executive Officer, and a member of the Executive ~~Committee.~~Committee for Santander UK. From 2004 to 2012, he worked at McKinsey & Company in Madrid, where he served as a partner, working primarily in the 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 57. Mr. Olaizola was appointed to SHUSA’s and the Bank’s Boards in 2015. He serves as a member of the SHUSA/US Risk Committee of SHUSA's Board and the Risk Committee of the Bank's Board. From April 2018 to the present he has held a directorship at Sistema de Tarjetas y Medios de Pago, S.A. (Spanish Cards and Payments Board) and, additionally, of Santander Seguros and Reaseguros (Insurance Spain). He has served as a Director of Santander Insurance Services UK Ltd from 2014-2017 and as a member of the advisory board of Fintech Investments from 2012 to 2017. In addition, he is a former director of VISA Europe, where he served from 2010 to 2013 and from 2015 to 2016. Since January 2018, Mr. Olaizola has served as Chief Operating Officer of Santander Spain and is leading the Banco Popular integration. From 2005-2017, Mr. Olaizola served as Chief

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~~Juan Olaizola~~ - Age 53. Mr. Olaizola was appointed to SHUSA’s Board in August 2015 and the Bank’s Board in July 2015. He serves as a member of the Risk Committee of each Board. Since 2013, he has served as a Director of Santander Insurance Services UK Ltd and, since 2014, as a member of the advisory board of Fintech Investments. In addition, since 2015, he has served as a Director of VISA Europe, where he was previously a Director from 2010 to 2013. 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 ~~53.~~56. Mr. Powell has served as Santander's U.S. Country Head, President and CEO since February 2015. He was appointed ~~as Director, President~~to each of the Boards of SHUSA and ~~Chief Executive Officer of SHUSA~~the Bank in March 2015 and to SC's Board in September 2016. Additionally, since September 2017, Mr. Powell has served as ~~Director,~~Senior Executive Vice President of the Bank; he served as President and ~~Chief Executive Officer~~CEO of the Bank from March 2015 until his appointment as SC’s President and CEO in ~~July 2015. He~~2017. Mr. Powell is a member of SHUSA’s ~~and~~Nominations Committee, the Bank’s Nominations Committee, and SC's Executive ~~Committees. Previously, from 2013~~Committee. Prior to ~~2014,~~joining the Company, Mr. Powell was Executive Chairman of National Flood Services Inc. From 2002 ~~until~~to 2012, he was employed at JPMorgan Chase & Co. and its predecessor Bank One Corporation. During ~~this~~that 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~~CEO of Consumer Banking from January 2007 to May 2010, Head of ~~its~~the 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. 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. Mr. Powell is Chairman of the Santander Consumer USA Foundation, and a director of the Financial Services Roundtable and the Boys and Girls Club of Boston as well as 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.Mr. Powell brings extensive experience in retail banking, risk management and consumer and auto lending to ~~SHUSA's~~the Board. ~~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.~~

~~Timothy Ryan~~Henri-Paul Rousseau - Age 70. Mr. Rousseau was appointed to SHUSA’s Board in March 2017 and the Bank’s Board in 2015. He serves as a member of the SHUSA/US Risk and Compensation Committee and as Chairman of the Bank’s Risk Committee and as a member of its Audit, Compensation, and Nominations Committees. Mr. Rousseau served as Vice President of Power Corporation International from January 2018 through July 2018. He is a visiting professor at the Paris School of Economics for the academic year September 2018 through August 2019. In December 2018, he received the Order of Canada. From 2009 until his retirement effective as of January 2018, Mr. Rousseau served as Vice-Chairman of the Boards of Power Corporation of Canada and Power Financial Corporation, while also serving on the Boards of Great-West Lifeco Inc. and IGM Financial Inc. and those of their respective subsidiaries. Mr. Rousseau is a member of the Board of Noovelia, Inc. and has served as Chairman of the Board of the Tremplin Sante Foundation since 2015. From 2011 until July 2018, Mr. Rousseau served as the Chairman of the Board of Montreal Heart Institute Foundation, having served on its Board since 1995, and served the Orchestra Symphonique de Montreal Foundation as Co-Chair of its Finance Committee from 2010 through 2014. 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, Mr. Rousseau brings extensive experience in financial services industry management to the Board.

T. Timothy Ryan, Jr. - Age 73. Mr. Ryan was appointed to SHUSA’s and the Bank's Boards in 2014 and serves as Chairman of each, as well as of their Nominations and Compensation Committees. He was appointed to BSI's Board in July 2016 and ~~their respective~~serves as Chairman of its Board's Compensation and Executive Committees and is a member of its Audit and Risk Committees. Mr. Ryan served as ~~the Vice Chairman for Regulatory Affairs at JPMorgan Chase & Co. from April 2014 until his retirement in October 2014, and he was~~ Global Head of Regulatory Strategy and Policy of JPMorgan Chase & Co. from February 2013 to ~~April 2014.~~January 2015. From December 2008 to ~~2012,~~February 2013, he was President and Chief Executive Officer of the Securities Industry and Financial Markets Association ("SIFMA") and ~~Chief Executive Officer~~CEO of the Global Financial Markets Association, ~~(“SIFMA”),~~ SIFMA's global affiliate. Prior to 2008, Mr. Ryan was Vice Chairman, Financial Institutions and Governments, at JPMorgan Chase. ~~Prior to~~Before joining JPMorgan Chase in 1993, Mr. Ryan served as the ~~Director~~director of the ~~OTS,~~Office of Thrift Supervision, a ~~Director~~director of the Resolution Trust Corporation and a ~~Director~~director 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, ~~Committee.~~Executive, and Risk Committees. He also served as a director of Markit Ltd. in 2014 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 to the Board.~~management.

~~Wolfgang Schoellkopf~~ - Age 83. Mr. Schoellkopf was appointed to SHUSA’s and the Bank’s Boards in 2009, and serves as Chairman of SHUSA’s Risk Committee and as a member of SHUSA’s Audit and Executive Committees. He was appointed to SC’s Board in January 2015 and serves as Chairman of its Risk Committee and a member of its Audit and Executive Committees. Since 2010, he has served on the Board of The Bank of N.T. Butterfield & Sons, Ltd. in Bermuda, where he is a member of that Board’s Risk Committee and Chairman of the Compensation Committee. From 1998 until 2014, he served on the Board of Sallie Mae Corporation, a leading provider of student loans, and as lead independent director, Chairman of the Finance Committee from 2007 to 2012, and Chairman of its Compensation Committee from 2011 to 2014. From 2004 to 2008, Mr. Schoellkopf served as the Managing Partner of Lykos Capital Management, LLC, a private equity management company. From 2000 to 2002, he served as the General Manager of Bank Austria Group's U.S. operations. From 1990 to 1997, he served as Vice Chairman and the Chief Financial Officer of First Fidelity Bank. From 1963 to 1988, he worked at Chase Manhattan Bank, including serving as Executive Vice President and Treasurer. Mr. Schoellkopf studied Economics at the University of California (Berkeley), University of Munich and at Cornell University, and he taught economics at Cornell University and Princeton University. In his professional positions, as well as his previous service as Chief Financial Officer of First Fidelity Bank, Mr. Schoellkopf has served a leadership role in the banking industry, including significant investment and international experience, which enables him to assist the Board in overseeing all aspects of SHUSA and the Bank's financial operations.

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Richard Spillenkothen - Age ~~66.~~69. Mr. Spillenkothen was appointed to SHUSA’s and the Bank’s Boards in ~~June~~ 2015. He serves as Chairman of the SHUSA/US Risk Committee, and a member of its Nominations and Compensation Committees. Additionally, Mr. Spillenkothen serves as a member of ~~SHUSA’s Compensation~~the Bank’s Audit and Risk ~~Committees, and~~Committees. Mr. Spillenkothen served as the Chairman of the ~~Bank’s Bank Secrecy Act/Anti-Money Laundering Oversight, Compliance, and~~SBNA Risk ~~Committees and a member of the Audit and Executive Committees.~~Committee from 2015 to September 2016. From 2007 to 2011, he served as a consultant and advisor at Deloitte & Touche LLP.

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From 1976 to 2006, heMr. Spillenkothen worked for the ~~Board of Governors of the~~ Federal Reserve, ~~System,~~ where he served as Director of the Federal ~~Reserve Board’s~~Reserve’s Division of Banking Supervision and Regulation. In this capacity, he was the senior Federal Reserve ~~Board~~ 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 ~~bank~~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. ~~From 2013 until 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.~~ 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 ~~until~~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. He received an A.B. from Harvard University and an M.B.A. from the University of Chicago. Mr. Spillenkothen brings extensive experience as a former regulator and a deep understanding of the U.S. banking market, regulatory environment, and financial services industry management to the Board.

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 ~~the original Annual Report on~~this Form 10-K ~~filing~~ is set forth below:

~~Kenneth Goldman~~Mahesh Aditya - Age ~~46.~~56. Mr. ~~Goldman~~Aditya has served as Chief Risk Officer of SHUSA since May 2018 and Senior Executive Vice President since May 2017. Additionally, since April 2018, Mr. Aditya has served as the Bank's Chief Risk Officer, and is a member of each of SHUSA's and SBNA's CEO Executive Committees. From May 2017 to May 2018, Mr. Aditya served as SHUSA's Chief ~~Accounting Officer and Executive Vice President since August 2010. From 2010 until 2015, he was the Bank's Chief Accounting Officer for the Bank.~~Operating Officer. Prior to joining SHUSA, Mr. Aditya served as Chief Risk Officer for Visa, Inc. from ~~2006~~June 2014 to ~~2010,~~February 2017. Prior to that, he ~~was~~served as Retail Bank/Mortgage Chief ~~Financial~~Risk Officer for JPMorgan Chase from April 2011 to June 2014. Mr. Aditya received a Bachelor of Engineering from BMS College of Engineering and ~~Executive Vice President~~an M.B.A. from the Faculty of Advanta Bank Corp, and, from 2002 to 2006, he was Audit Director and Senior Vice President of MBNA America Bank. From 1991 to 2002, Mr. Goldman worked at Arthur Andersen, where he began his career. Mr. Goldman has a B.S. in Accounting from Lehigh University and is a licensed CPA, a member of the Pennsylvania Institute of Certified Public Accountants, a Certified Internal Auditor, and a member of the Institute of Internal Auditors.Management Studies.

~~Brian Gunn~~Madhukar Dayal - Age ~~43.~~54. Mr. ~~Gunn~~Dayal has served as Chief ~~Risk~~Financial Officer and Senior Executive Vice President of SHUSA since ~~June 2015~~April 2016, and he is a member of SHUSA’s CEO Executive Committee. ~~In February~~Mr. Dayal has served as the Bank's CEO since August 2017, President since September 2017, and as a member of its CEO Executive Committee. Additionally, in September 2017, Mr. Dayal was appointed to the Bank Board and also serves on the Bank Board's Nominations and Executive Committee. Prior to joining SHUSA and the Bank, Mr. Dayal served as Chief Financial Officer for BNP Paribas USA Holdings, BancWest and Bank of the West from 2015 to March 2016, BancWest Corporation and Bank of the West from 2012 to 2015 and 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 Morgan Chase & Co., Brysam Global Partners, focused on building an international consumer banking franchise. Prior to that, he spent eight years with Citi in a variety of operations and finance roles in New York, California, South Korea and Brussels. Mr. Dayal earned a B.A. with honors in Accounting and Finance from Nottingham Trent University and is a member of the Chartered Institute of Management Accountants in London. Mr. Dayal serves as a member of the Executive Committee of the Board of Trustees for the Institute of International Banking and in 2017 was ~~named~~elected a Board member of the FHLB of Pittsburgh.

Daniel Griffiths - Age 50. Mr. Griffiths has served as Chief ~~Risk~~Technology Officer and Senior Executive Vice President of SHUSA and the ~~Bank. He was appointed to the Board of SC in December 2015~~Bank since June 2016, and ~~serves as~~is a member of ~~its Risk Committee. Prior to joining Santander, from~~each of SHUSA's and the Bank's CEO Executive Committees. From 2011 to ~~2015,~~2016, Mr. ~~Gunn served as the Chief Risk Officer of Ally Financial Services. Prior to that role, Mr. Gunn~~Griffiths was Chief ~~Risk~~Technology Officer ~~of Ally’s Global Automotive Services division. Before joining Ally,~~at TD Bank and, from 2008 to 2011, he ~~spent 10 years in a variety of risk management positions~~was Managing Director, Emerging Markets and Commodities, at ~~GE Money, including as Chief Risk Officer of GE Money Canada.~~Barclays Capital. Mr. ~~Gunn~~Griffiths received a B.S. in Computer Studies from ~~Providence College and an M.B.A. from Hofstra University.~~Polytechnic of Wales.

Michael Lipsitz - Age ~~51.~~54. Mr. Lipsitz has served as Chief Legal Officer and Senior Executive Vice President of SHUSA since August 2015 and of the Bank since April 2016, and is a member of each of SHUSA’s and the Bank’s CEO Executive ~~Committee.~~Committees. Prior to joining SHUSA, ~~he was~~Mr. Lipsitz served as Managing Director and General Counsel for Retail and Community Banking at JPMorgan Chase & Co. ~~Prior~~and, prior to that, ~~Mr. Lipsitz~~ held multiple senior and general counsel roles supporting consumer banking and lending, corporate and regulatory activities, and ~~M&A~~mergers and acquisitions at JPMorgan Chase & Co. and its predecessor companies. Mr. Lipsitz received a B.A. from Northwestern University and a ~~law degree~~J.D. from Loyola University Chicago School of Law.

~~Gerald Plush~~ - Age 57. Mr. Plush currently serves as the Chief Financial Officer of SHUSA, and is a member of SHUSA’s CEO Executive Committee. He was appointed to the Board of SC in April 2014, and serves on its Risk Committee. From December 2011 to September 2013, Mr. Plush was a member of the Board of Directors and President and Chief Operating Officer of Webster Bank, where he previously served as Vice Chairman and Chief Operating Officer in 2011, and as Chief Financial Officer and Chief Risk Officer. Before joining Webster Bank, from 1995 to 2006, Mr. Plush was with MBNA America in Wilmington, Delaware, serving most recently as Senior Executive Vice President and Managing Director for Corporate Development. Prior to that, he served as Chief Financial Officer of North America for MBNA. Mr. Plush has a B.S. in Accounting from St. Joseph’s University in Philadelphia, and is a Certified Public Accountant and a Certified Management Accountant.

Scott Powell - Age ~~53.~~56. For a description of Mr. Powell's business experience, please see "Directors of SHUSA" above.

Maria Veltre - Age 55. Maria Veltre has served as the Company’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 as Chief Marketing Officer at Fifth Third Bank from May 2013 to August 2016 as well as leadership positions at Citibank from 2006 to 2013, 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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~~Julio Somoza~~William Wolf - Age ~~44.~~53. Mr. ~~Somoza~~Wolf has served as ~~the Managing Director of Technology and Operations~~Chief Human Resources Officer and Senior Executive Vice President of SHUSA and the Bank since ~~2013~~February 2016, and is a member of each of SHUSA’s and the Bank’s CEO Executive ~~Committee. From 2013~~Committees. Prior to ~~2014, he served as Managing Director of Technology and Operations for the Bank. Mr. Somoza previously was the Chief Internal Auditor of~~joining SHUSA and the Bank, he was Managing Director, Global Head of Talent Acquisition and Development, for Credit Suisse from 2011 to 2013, and served as the Director of Market Risk and Global Business for Santander from 2008 to 2011, Director of Internal Audit for Santander’s New York branch from 2005 to 2008, and prior to that, served in positions in the Internal Audit Departments of Banco Santander Central Hispano in New York and Madrid. He has a B.S. in Business Administration from Universidad Computense de Madrid.

~~Christel Sulpizio~~ - Age 50. Ms. Sulpizio has served as Director of Change Management and Senior Executive Vice President of SHUSA since July 2015 and is a member of SHUSA’s CEO Executive Committee. Prior to joining Santander, she was Chief Operating Officer of Business Banking at Citizens Financial Group, a post she had held since 2014. From 2011 to 2013, Ms. Sulpizio was Chief Information Officer of the commercial bank of Citizens Bank. Prior to serving at Citizens Bank, she worked in senior project management and operations management roles for JPMorgan Chase & Co., Bank One Corporation, and First USA. She2016. Mr. Wolf received a ~~B.S.~~B.A. from ~~St. Joseph’s University.~~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~~each person who is an officer or director of SHUSA, or who directly or indirectly is the beneficial owner of more than ten percent ~~or more~~ of ~~SHUSA's common stock or~~ any class of SHUSA's ~~preferred stock,~~equity securities, to file in ~~their~~his or her personal ~~capacities~~capacity an initial ~~statements~~statement of beneficial ownership, statements of changes in beneficial ownership and annual statements of beneficial ownership with the SEC. SEC ~~with respect~~regulations provide that any person required to ~~their ownership of securities of SHUSA. Persons filing~~file such beneficial ownership statements ~~are~~must send or deliver a copy to SHUSA and require that SHUSA disclose in this Form 10-K any known failure of those persons to timely file the required ~~by SEC regulation to furnish SHUSA with copies of all such~~beneficial ownership 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 any copies of such beneficial ownership statements ~~received by~~furnished to it and on written representations from SHUSA's directors and officers, SHUSA ~~believes that all~~has not identified any failure to timely file such statements ~~were timely filed in 2015. Since~~with the SEC. Following Santander's acquisition of SHUSA ~~none~~in January 2009, SHUSA’s common stock was removed from listing with the New York Stock Exchange (the “NYSE”), as Santander became the sole holder of 100% of SHUSA’s common stock and remains the sole holder as of the ~~filers~~date of this filing. Since Santander’s acquisition, no person subject to the beneficial ownership reporting rules of Section 16(a) of the Exchange Act has owned any of SHUSA's ~~common stock or shares of any class of SHUSA's preferred stock.~~equity securities.

Code of Ethics

SHUSA adopted a Code of Ethics that applies to the ~~Chief Executive Officer~~CEO and senior financial officers ~~(including~~of the Company including the Chief Financial Officer, Treasurer, and Chief Accounting Officer ~~of SHUSA~~ and ~~the Bank).~~Controller. SHUSA undertakes to provide to any person without charge, upon request, a copy of such Code of Ethics by writing ~~to the Investor Relations Department,~~to: Chief Legal Officer, Santander Holdings USA, Inc., 75 State Street, Boston, Massachusetts 02109.

Procedures for Nominations to the SHUSA Board

~~As noted elsewhere in this Form 10-K, on~~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 ~~security holders~~shareholders to recommend nominees to SHUSA's Board.

~~Matters Relating to the~~ Audit Committee of the Board

SHUSA has a separately-designated standing Audit Committee established by and among the Board. Mr. Johnson ~~was appointed Chairman of the Audit Committee in May 2015. Mr. Ferriss served~~serves as Chairman of ~~the~~SHUSA's Audit Committee, ~~from 2012 to May 2015,~~ and ~~Mr. Schoellkopf served~~Messrs. Ferriss and Fishman serve as ~~Chairman of~~ the ~~Audit Committee from 2010 to 2012. Mr. Ferriss, Mr. Fishman, Ms. Keating, and Mr. Schoellkopf are also members of the Audit Committee.~~other members. The Board ~~of Directors~~ has determined that Messrs. Ferriss, Fishman, and Johnson are independent and ~~Schoellkopf and Ms. Keating~~ qualify as audit committee financial experts ~~for purposes of the SEC's rules.~~under SEC 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.~~” Santander Holdings USA, Inc.~~" SHUSA (who we refer to in this Item as ~~“we,” “us,” “or “our”~~"we," "us," or "our") is a wholly owned subsidiary of ~~Banco Santander S.A. (which we~~Santander. We also refer to in this Item to our wholly owned subsidiary, Santander Bank, N.A. as ~~“Santander Group”).~~"SBNA" and our majority owned subsidiary Santander Consumer USA Holdings Inc. as "SC." This Compensation Discussion and Analysis explains our role and the role of Santander ~~Group~~ in setting the compensation of the named executive officers.

For ~~2015,~~2018, our named executive officers were:

Scott Powell, our President and ~~Chief Executive Officer;~~CEO;

~~Gerald Plush,~~Madhukar Dayal, our Chief Financial Officer and Principal Financial Officer;

~~Brian Gunn,~~Daniel Griffiths, our Chief Technology Officer;

William Wolf, our Chief Human Resources Officer;

Mahesh Aditya, our Chief Risk Officer; and

~~Michael Lipsitz, our Chief Legal Officer;~~

~~Julio Somoza, our Head of Technology~~Brian Gunn, Special Advisor and ~~Operations;~~

~~Román Blanco,~~ our former ~~President and~~ Chief ~~Executive Officer; and~~

~~Guillermo Sabater, our former co‑Principal Financial Officer and Comptroller.~~Risk Officer.

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This section of the Compensation Discussion and Analysis provides information with respect to our named executive officers:

the general philosophy and objectives underlying 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,

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 ~~Group~~ and we 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 ~~long‑term~~short-term and long-term business objectives;

link pay toand performance, while appropriately balancing risk and financial results and complying with ~~directives from our regulators;~~regulatory requirements;

align, to an appropriate extent, the interests of management with those of Santander ~~Group~~ and its shareholders; and

~~use~~leverage our compensation practices to support our core values and strategic mission and vision.

~~We aim~~Santander aims to provide a total compensation package that is comparable to that of similar financial institutions in the country in which the executive officer is ~~located.~~located, the United States in our case. Within this framework, Santander ~~Group~~ considers both total compensation and ~~each~~the individual ~~component~~components (i.e., salary and incentives) of each named executive officer’s compensation package independently. ~~Other~~Any other perquisites are also considered independently of total compensation. When setting each ~~of the~~ named executive officer’s compensation for ~~2015,~~2018, we took into account market competitive pay, historical pay within Santander, our budget, level of duties and responsibilities, experience and expertise, individual performance, and historical track record within the organization for each individual.

~~This section of the Compensation Discussion and Analysis provides information with respect to our named executive officers:~~

~~the general philosophy and objectives behind their compensation,~~

~~ours and Santander Group’s roles and involvement in the analysis and decisions regarding their compensation,~~

~~the general process of determining their compensation,~~

~~each component of their compensation, and~~

~~the rationale behind the components of their compensation.~~

~~Since we are a wholly owned subsidiary of Santander Group and do not hold public shareholder meetings, we do not conduct shareholder advisory votes.~~

Responsibility for determining the compensation of our named executive officers resides both at our level as well as the Santander ~~Group~~ level. We set forth the various parties involved in determining executive compensation and their specific responsibilities below.

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The Parties Involved in Determining Executive Compensation

Both Wewe and Santander ~~Group~~ have ~~the~~ responsibility for overseeing and determining the compensation of our named executive officers. We are involved in setting the compensation of all our employees. Santander ~~Group~~ is involved in overseeing its senior level employees ~~which include~~globally, including the named executive officers. We set forth the various parties, including both Board committees and ~~Management~~management committees, involved in contributing to and determining executive compensation and their specific responsibilities below.

The Role of Our ~~Board~~and SC's Compensation ~~Committee~~and Talent Management Committees (which we refer to in this Item 11 as "BCTMC" and "SC BCTMC", respectively)

As of the date of the filing of this Annual Report on Form 10‑K, our Compensation Committee included Stephen Ferriss, Juan Guitard, Victor Matarranz, Richard Spillenkothen, and Catherine Keating, who is the Committee chair.

Our ~~Compensation Committee~~BCTMC has the responsibility of, among other things:

at least annually, reviewing and approving the terms of our compensation programs, including the Executive Bonus Program, in which our named executive officers participate, in accordance with all applicable guidelines that Santander ~~Group~~ establishes with respect to variable compensation;

reviewing and approving the annual corporate goals and objectives ~~with respect to our Chief Executive Officer’s compensation,~~of the President and CEO, evaluating the ~~Chief Executive Officer’s~~President and CEO’s performance in light of these corporate goals, and ~~determining~~approving the base and ~~approving the~~variable compensation of our ~~Chief~~President and CEO, as proposed by the Santander Executive ~~Officer~~Chairman and CEO and validated by the Santander Remuneration Committee. The BCTMC provides valuable input based on ~~this~~the Board's evaluation of the CEO's performance and the Company's performance, in accordance with all applicable guidelines that Santander ~~Group~~ establishes with respect to variable compensation;

monitoring the performance and regularly approving the design and function of the incentive compensation programs, including the Executive Bonus Program, to assess whether the overall design and performance of such programs are consistent with Santander ~~Group~~ guidelines, are safe and ~~our safety and soundness~~sound, and do not encourage employees, including our named executive officers, to take excessive risk;

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reviewing and approving the overall goals and purpose of our incentive compensation programs and providing guidance to our Board and management so that the ~~Boards'~~Board's policies and procedures are appropriately carried out in a manner that achieves appropriate balance between risk and reward and is consistent with ensuring safety and soundness;

approving amounts paid under the ~~incentive compensation programs~~Executive Bonus Program according to Santander ~~Group~~ guidelines ~~including the Executive Bonus Program;~~and applicable regulations;

overseeing the administration of our qualified retirement plan and other employee benefit plans ~~under~~in which all eligible employees can participate, including the named executive officers, as well as certain other deferred compensation plans in which our named ~~eligible~~executive officers are eligible to participate;

evaluating the applicability of any malus and clawback provisions ~~applicable~~ to our senior executive officers, including the named executive officers;

at least annually, reviewing and recommending any changes to our director compensation program;

reviewing and discussing with management the Compensation Discussion and Analysis required to be included in ~~our annual reports to shareholders, including~~ this Annual Report on Form ~~10‑K;~~10-K; and

approving the Board Compensation and Talent Management Committee Report for inclusion in ~~our filings with the SEC, including~~ this Annual Report on Form ~~10‑K.~~10-K.

Our ~~Board Compensation Committee~~BCTMC met ~~eight~~nine times in ~~2015.~~2018.

Because Mr. Powell provides services to both us and to SC, our BCTMC, and the SC BCTMC, agreed to allocate Mr. Powell's 2018 total compensation at 37% to us and 63% to SC. We jointly decided on these allocations to reflect the percentage of time that Mr. Powell spent working for and with respect to each organization based on time allocation tracking.

The Role of ~~Santander Group’s Risk on Remuneration Corporate~~Santander’s Human Resources Committee

~~Santander Group’s Risk on Remuneration Corporate Committee has~~Santander’s Human Resources Committee's responsibilities include the ~~authority~~design and ~~responsibility to, among other things, ensure that~~the calculation of the applicable funding level of the Executive Bonus Program and oversight of performance management and compensation, including consideration of all present and future risks that ~~might affect~~may impact the bonus process ~~are considered. Specifically the Committee reviews all risk aspects that affect metrics used in calculating bonus pools~~ as well as the application of malus and clawback related clauses, when applicable. Santander's Human Resources Committee also reviews and ~~malus-related clauses to deferred payments. Findings are presented to Santander Group’s Remuneration Committee~~validates the compensation proposals for our named executive officers, except for our President and CEO.

The Role of ~~Santander Group’s Corporate Evaluation and Bonus Committee~~

Santander Group’s Evaluation and Bonus Committee has the authority and responsibility to oversee the performance management reviews, and to prepare the bonus pools for management to present to Santander Group’s Remuneration Committee. The Evaluation and Bonus Committee also reviews the individual bonus awards for each of the named executive officer to be presented to the Remuneration Committee.

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~~The Role of Santander Group’s~~Santander`s Board Remuneration Committee

~~Santander Group’s~~Santander’s Board Remuneration Committee has the authority and responsibility to, among other things, review, revise, and then present to ~~Santander Group’s~~Santander’s Board of Directors the compensation of ~~Santander Group’s~~Santander’s senior executives, which include ~~each~~our President and CEO.

The Board Remuneration Committee also has the responsibility to review, revise and present to Santander's Board the key elements of the compensation of our named executive officers.

The Role of ~~Santander Group’s~~Santander’s Board of Directors

~~Santander Group’s~~Santander’s Board of Directors validates and approves the compensation of certain of ~~Santander Group’s~~our management, including our ~~named executive officers.~~President and CEO.

The Role of Our Management

Our Human Resources Committee ~~(which we merged with a committee formerly called the Compensation Risk Mitigation Committee)~~ oversees our incentive compensation programs (except for the Executive Bonus Program) and makes recommendations to our ~~Compensation Committee~~BCTMC with respect to ~~our incentive compensation~~these 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~~risk-taking and make recommendations to our ~~Compensation Committee in accordance with applicable laws.~~BCTMC regarding certain compensation matters. The members of the Human Resources Committee include the heads of our ~~risk compliance, legal, finance, technology~~Risk, Legal, Finance, Change Management, Communications, Office of the CEO and ~~operations, as well as human resources departments. The~~ Human Resources ~~Committee met eight times in 2015.~~Departments. In addition, the head of our Internal Audit Department participates as a non-voting member.

Our management also played a role in other parts of the compensation process with respect to the named executive officers in ~~2015.~~2018. Our ~~Chief Executive Officer~~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 ~~rules~~requirements set forth by Santander, ~~Group.~~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, salary and bonuses for the named executive officers to our ~~Compensation Committee~~BCTMC and to the applicable committees at ~~Santander Group.~~Santander.

None of the named executive officers determined or approved any portion of ~~their~~his own compensation for ~~2015.~~2018.

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The Role of Outside Independent Compensation Advisors

Santander, ~~Group’s~~SHUSA and its subsidiaries seek guidance and advice from a diversified mix of outside independent compensation advisors.

Santander’s Remuneration Committee engaged Willis Towers Watson to provide advice on the general policies and approaches with respect to the compensation of ~~Santander Group’s~~Santander’s worldwide employees. ~~For 2015, Willis Towers Watson provided benchmarking data for the Chief Executive Officer position.~~

In addition, Santander Group engaged Mercer ORC to assist it in determining possible salary adjustments for expatriate employees, including certain of the named executive officers, as we describe below. Mercer ORC provided data on the compensation of expatriate employees of other global financial institutions.

~~For 2015, at~~At 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.

The SC BCTMC has engaged Pay Governance to advise on compensation matters relevant to its business (e.g., peer benchmarking) and to the additional demands required of public companies.

As discussed under "Benchmarking" below, we also engaged Pay Governance to assist the BCTMC in setting 2018 compensation targets for our President and CEO.

Benchmarking

For 2018 target compensation review purposes, both Willis Towers Watson and McLagan Partners provided independently compiled benchmarking data for our President and CEO position, which Pay Governance summarized along with additional data extracted from publicly disclosed proxy statements. The peer group data set comprises 42 financial institutions as follows: Bank of 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).

For 2018 target compensation review purposes, McLagan Partners also provided benchmarking data for our named executive officers’ compensation and used the following peer group: Capital One, Ally Bank, Discover, CIT Bank, BB&T Corporation, BBVA Compass Bancshares, Inc., Citizens Financial Group, Inc., Comerica, Inc., Fifth Third Bank, Huntington Bancshares Incorporated, Keycorp, M&T Bank Corporation, MUFG Union Bank, Regions Financial Corporation, SunTrust Banks, Inc., The Toronto Dominion Bank, Bank of the West, and BMO Financial.

Lastly, we describe the peer group used in connection with specific measures leveraged within the Executive Bonus Program 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.

We use this data to periodically evaluate market trends, pay levels, and relative performance in executive compensation, but without any formulaic benchmarking.

Components of Executive Compensation

For ~~2015,~~2018, the compensation that we provided to our named executive officers consisted primarily of base salary and both ~~short~~short- and ~~long‑term~~long-term incentive opportunities, as we describe more fully below. In addition, the named executive officers are eligible for participation in ~~benefits~~benefit plans that we generally offer to all our employees, and we also provide the named executive officers with certain benefits and perquisites not available to the general employee population. Compensation that we provide our named executive officers who are expatriate employees is in accordance with Santander Group’s International Mobility Policy. In general, Santander Group’s objective in establishing its International Mobility Policy is to permit all expatriate employees, which include some of the named executive officers, to maintain on an equal basis at least the same standard of living that they were accustomed to in the employee’s originating country.

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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~~day-to-day performance. The base salaries of the named executive officers were generally set in accordance with each named executive officer’s employment agreement or letter ~~agreement~~considering market competitive pay, historical pay at Santander, our budget, level of duties and ~~Santander Group’s International Mobility Policy for expatriate executives of similar levels, if applicable.~~responsibilities, experience and expertise. While each ~~of the~~ named executive officer’s employment or letter ~~agreements provide~~provides for the possibility of increases in base salary, annual increases are not guaranteed. We review our named executive officers’ salary levels as a part of our annual ~~bonus~~compensation review process.

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Our Chief Human Resources Officer (and in the case of Mr. Wolf, our CEO) consulted with ~~Santander Group’s~~Santander’s Human Resources ~~department~~Department to ~~ensure~~confirm named executive officers’ salaries are competitive and take into account market ~~competitive pay,~~survey data of our peers, salary history ~~our budget, level~~at Santander, scope of duties and responsibilities, experience and expertise, individual performance, applicable regulatory requirements, and ~~historical track record within the organization. Santander Group’s~~our budget. Santander’s Human Resources Department consulted with the Santander Board Remuneration Committee and ~~Santander Group’s~~Santander’s Board of Directors in setting the base salary of ~~Messrs. Powell and Blanco. They also consulted with Santander Group’s Evaluation and Bonus Committee on Messrs. Plush, Gunn, Lipsitz, Somoza and Sabater. Our~~Mr. Powell. In 2018, we made the following changes to our named executive officers’ salaries remained the same in 2015 except for Mr. Plush, whose salary was increased on August 24, 2015, given the expansion of his duties and responsibilities, and Mr. Blanco, whose salary was reduced on October 19, 2015, via joint decision byofficer salaries:

In accordance with a letter agreement with Mr. Powell dated as of September 14, 2018, we increased Mr. Powell's annual base salary from $2.0 million to $3.0 million, effective January 1, 2018, to better align his total compensation relative to peers.

We increased Mr. Aditya's annual base salary from $1.0 million to $1.475 million to recognize his new role as our Chief Risk Officer, to ensure total compensation alignment to market and ~~Santander Group’s Chief Executive Officer, given~~compliance with Capital Requirements Directive (“CRD-IV”) pay ratio restrictions.

We increased Mr. Griffith's annual base salary effective June 2, 2018 from $1.0 million to $1.1 million to compensate for the ~~change in his duties and responsibilities.~~discontinuance of certain perquisites.

We did not adjust any other named executive officer's base salary for 2018.

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 ~~incentivize~~motivate participants to achieve and exceed these objectives at the Santander, ~~Group, 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 and, therefore, are subject to the compensation guidelines of the European Banking Authority and limits of the ~~European Union Capital Requirements Directive IV (CRD IV).~~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 as mandate that such awards be delivered in at least 50% shares ~~of Santander Group common stock/~~or other equity instruments, such as American Depositary Receipts (“ADRs”), with a mandatory one-year holding period upon delivery, and no more than 50% paid in cash.

For the 2018 performance year of the Executive Bonus Program (described below), the targeted incentive opportunity for each of the named executive officers was as follows:



Named Executive Officer	Target Bonus ($)
Scott Powell ⁽¹⁾	$4,250,000
Madhukar Dayal	$1,885,500
Daniel Griffiths	$1,660,500
William Wolf	$1,180,000
Mahesh Aditya	$1,025,000
Brian Gunn ⁽²⁾	$922,500

(1) Mr. Powell’s bonus target for 2018 was increased from $2.1M to $4.25M to better align his total compensation relative to peers.

(2) Mr. Gunn’s bonus target for 2018 was adjusted from $1.1M to $922,500 as part of his role change to Special Advisor.

Executive Bonus Program

Our incentive program, which we refer to as the "Executive Bonus Program," establishes both financial and ~~non‑financial~~non-financial measures to determine the ~~award~~bonus pool level from which we pay annual bonuses. ~~The~~We align the Executive Bonus Program ~~is aligned~~each year with ~~Santander Group’s~~Santander’s corporate bonus program for executives of similar levels across Santander. Each of the ~~Santander Group platform. We refer to this bonus award program as~~named executive officers participated in the ~~“Executive Bonus Program.”~~

~~On December 10, 2015, our Compensation Committee approved the 2015~~ Executive Bonus Program for 2018. The general structure of the ~~named executive officers~~Executive Bonus Program:

defers a portion of a participant’s award over a three- or five-year period, depending on the participant’s position within our organization, subject to the non-occurrence of certain events;

links a portion of such amount to Santander performance over a multi-year period; and

pays a portion of such award in cash and a portion in equity, in accordance with the rules and standards referenced above and set forth in more detail below.

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On February 13, 2018, 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), and Santander’s shareholders approved it at its annual meeting of shareholders on March 23, 2018. On March 6, 2018, we approved the preliminary design of the Executive Bonus Program scorecard. Santander’s Remuneration Committee and Board of Directors approved the final scorecard for the Executive Bonus Program, as ~~presented~~recommended by ~~the Human Resources Committee.~~ our BCTMC, on April 16, 2018 and April 23, 2018, respectively.

The Executive Bonus Program provides for ~~variance~~differences in the amount of final awards, higher or lower than their target bonus ~~amount~~amounts (which we describe below), in order to reinforce our pay for performance philosophy. ~~Each of the named executive officers participated in~~

Under the Executive Bonus Program, we determine an aggregate pool from which awards for ~~2015.~~

all participants are determined and paid. The ~~structure~~pool incorporates both ~~Santander Group~~quantitative (via a scorecard) and qualitative considerations as well as feedback from Santander ~~U.S. metrics~~ to ensure that the ~~plan~~Executive Bonus Program links ~~the~~our executives' pay ~~of its executives~~ to ~~performance and the pay of other executives of similar levels within the Santander Group platform.~~performance. Our ~~Compensation Committee~~BCTMC worked with Mr. Powell and ~~Santander Group’s~~Santander’s Human Resources Committee and the Board Remuneration Committee to validate that the proposed scorecard performance metrics aligned with overall business ~~goals and that the maximum bonus pool amount would be no more than 150% of the sum of target bonuses.~~goals. Our ~~Compensation Committee~~BCTMC 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 Program are determined in accordance with International Financial Reporting Standards ~~(“IFRS”)~~ because Santander ~~Group~~ 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, and in the case of Mr. Powell, also for SC. Our BCTMC, and in the case of Mr. Powell, the SC BCTMC, agreed to consider individual allocation of the final bonus pool funding level for these executives based on both our and SBNA's performance, and in the case of Mr. Powell, SC's performance, to align pay decisions to all applicable businesses' performance as well as certain principles set forth by our regulators.

~~Structure~~SHUSA Bonus Pool Scorecard Overview: The bonus pool funding is determined through a scorecard, which is primarily driven by a quantitative (mathematically informed) score, and is then adjusted by qualitative and discretionary measures. We develop the scorecard metrics ~~used~~ to measure our, our subsidiaries’ and our business units’ performance on an aggregate basis over the full year.

Together these make up our overall bonus pool funding level. As we describe in more detail below, the bonus pool funding was approved by Santander at 100.0% of aggregate target amounts for 2018. We determine the aggregate total of the bonus amounts, in U.S. dollars, available for distribution to our participating employees, including the named executive officers, by multiplying this bonus pool funding level by the sum of target incentives.

Below is a summary of how we calculated the bonus pool for ~~2015 included~~2018.



Part 1: Quantitative Score	95.3	%

1. Quantitative Score:The quantitative score is a mathematically derived score based on our achievement of pre-determined business goals (which we reflect in Table 1 below under the ~~following~~heading "Quantitative Metrics").

In collaboration with Santander, we pre-assign each metric with a weight and ~~correspond~~a goal. Then Santander calculates the percentage credit towards the quantitative score for each metric by multiplying its percentage weight by its percentage achievement. Finally, we add up all the percentages to derive the ~~visual below.~~ total quantitative score.

For ~~purposes of the Executive Bonus Program, “Santander U.S.” means us and~~2018, our subsidiaries as well as Banco Santander Puerto Rico; “net ordinary profit” (NOP) means net profits after taxes, adjusted positively or negatively for those transactions that, in the opinion of Santander Group’s board, involve an impact outside of the performance of those being evaluated, such as extraordinary profits, corporate transactions, accounting, or legal adjustments; and “RoRWA” means return on risk-weighted assets where assets or off-balance-sheet exposures, are weighted according to risk.total quantitative score was 95.3%.

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Table 1: SHUSA Bonus Pool Funding Scorecard

~~Part I: Calculations~~

~~20% determined~~



Scorecard Component (Part)	Quantitative Metrics	Weight		2018 Goal		Full Year Result ⁽¹⁾		% Achievement⁽²⁾		% Credit Towards Quantitative Score ("Weight" * "% Achievement")		Component (Part) Score (sum previous column)
Part 1: Quantitative Score	Customer Satisfaction (%)	2.5	%	22	%	20	%	87.5	%	2.2	%	95.3%
	Loyal Customers (#)	2.5	%	327,359		344,860		105.4	%	2.6	%
	Employee Engagement (%)	5	%	69	%	67	%	87.5	%	4.4	%
	Cost of Credit Ratio (Loan Loss Ratio) (%)	5	%	3.35	%	3.09	%	107.7	%	5.4	%
	Non-Performing Ratio (%)	5	%	2.97	%	3.07	%	96.6	%	4.8	%
	% Completion of Certain Regulatory Requirements	10	%	95	%	97	%	102.1	%	10.2	%
	Contribution to Santander's Capital ($ millions)	20	%	$556		$425		76.3	%	15.3	%
	Net Profit ($ millions)	27.5	%	$899		$908		101.0	%	27.8	%
	Return on Risk Weighted Assets (%)	22.5	%	0.98	%	0.98	%	100.5	%	22.6	%


(1)	Figures shown in the "Full Year Result" column are forecasts as of November 2018. We used these forecasts in determining the 2018 bonus pool. The full-year results were not materially different from the forecasts.


(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. Additionally, % achievement for each metric is capped at 150%, except for return on risk-weighted assets (“RoRWA”) and net profit, which have no cap on % achievement.



Part 2: Qualitative Adjustment	-1.4	%

2. Qualitative Adjustment: Santander's Remuneration Committee, in consultation with Santander's control functions may in their discretion add or subtract up to 25% to or from the quantitative score based ~~upon the Santander Group’s net operating profit for 2015 versus budget~~on qualitative factors, including:

•progress of ~~€7 billion; plus a 2015 vs. 2014 growth modifier which ensures consideration not only for performance against budget but year over year growth as well.~~our regulatory agenda

~~10% determined based upon the Santander Group’s RoRWA for 2015 versus budget~~•advancement of ~~1.32%.~~

20% determined based upon demonstrated regulatory progress, specifically execution of 2015 key capital and risk transformation deliverables which are the core work streams designed to strengthen the foundational elements in risk management, finance and technology to better manage our ~~businesses (the percent of critical milestones completed and completed action plans related to regulatory findings).~~

~~15% determined based upon full~~ integration and governance model

•management of our ~~intermediate holding company status under U.S. law, which requires that we (a financial institution controlled by a foreign entity) manage all of our subsidiaries under one holding company.~~

~~35% determined based upon our financial performance:~~

~~27.5% net operating profit for 2015 versus 2014 results of $1.28 billion~~

~~7.5% RoRWA for 2015 versus 2014 results of 1.43%~~Risk Appetite Statement

~~Part II: Discretionary Adjustments (see separate benchmarking section for full list~~Santander's Remuneration Committee applied a -1.4% qualitative adjustment to our quantitative score based on its assessment of ~~peer companies that we considered in making~~our progress against these ~~adjustments)~~qualitative factors.

Results benchmarking versus peers: adjustment that captures relative performance against a specific peer group at both the Santander Group and our level; this measure can modify the pool between -10% and +10%.

~~Clients benchmarking versus peers:~~

~~Customer satisfaction adjustment that captures the relative positioning of us against our market. This measure can modify the pool between -10% and +10%.~~

~~Loyal customers/engagement criteria was modified in Q3 2015 therefore the measurement was not considered.~~

Risk/Balance/Quality: Adjustment intends to ensure that all current and future risks that may have an impact on bonuses are taken into account at both the Santander Group and our level; this measure can modify the pool between -15% and +10% and includes:

~~40% = Risk (risk appetite, risk management, control environment).~~

~~15% = Internal Audit (rating, recommendations).~~

~~15% = Compliance (results of supervisor reviews, audit reports, involvement in corporate projects and daily management).~~

~~15% = Finance (qualitative assessment, finance plan performance, portfolio review).~~

~~15% = Accounting and Financial control (quality and recurrence of results).~~

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Part 3: Santander Multiplier	+3.0	%

3. Adjustment due to Santander Multiplier: The Santander Multiplier is an incremental adjustment that provides for a link between our results and overall Santander results. The adjustment is the difference between Santander’s global bonus pool funding level (108.7%) and our score after the qualitative adjustment (93.9%), multiplied by 20%. The adjustment resulting from the application of the Santander multiplier was +3.0%.

The evaluation of Santander's categories of quantitative metrics and qualitative factors, which results in the Santander bonus pool funding level of 108.7%, is as follows:

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Customers: the goals set for customer satisfaction and loyalty were met with a result of 105.5%, which was qualitatively adjusted upwards to 107.9% for the Group's overall progress on the implementation of conduct risk controls with customers.

~~Contribution~~Risks: the quantitative results obtained from the evaluated metrics, cost of credit and NPL ratio provided a result of 103.9%, which was qualitatively adjusted upwards to 105.1% for aspects related to the management of the risk appetite model.

Capital: Santander ~~Group~~exceeded the capital targets set for the year, providing a result of 101.9%, which was qualitatively adjusted upwards to 105.1% for aspects related to ~~equally weighted metrics that can modify~~ the ~~pool between -10% and +15% and includes:~~

~~25% = Employee engagement survey results for 2015.~~

~~25% = Employee engagement survey result changes from 2014 to 2015.~~

~~25% = Incentivized risk-weighted assets objective: the amount~~sustainability of the ~~additional reduction~~capital creation.

Profitability: Ordinary net profit result was 98.5%, and the RoRWA result was at 102.2%. Qualitative factors were evaluated, including comparison with comparable companies and the solidity and sustainability of ~~risk assets; which could be modified to zero if the net ordinary profit budget is not met.~~

~~25% = The Remuneration Committee may consider other adjustments for unusual~~results, and ~~unexpected circumstances.~~

~~Pool Calculations: The final pool is based on the sum~~no material qualitative modification was applied (-0.02%), resulting in a category achievement of ~~target incentives being multiplied by the results of the calculations that we set forth below. The results for 2015 included the following:~~

100.1%.



Part 4: Exceptional Adjustment by Santander's Remuneration Committee	+3.1	%

~~Santander Group’s Result: 30.9% (30% weighting)~~

Santander Group’s net profit for 2015, after group consolidation and charges and determined under IFRS standards, was €6.566 billion. This amount resulted in the achievement of approximately 94% of the net profit versus budget under the Executive Bonus Program, which resulted in a weighted pool funding of 18.8% for the net profit component. Next, because Santander Group's net operating profit exceeded 10% (12.9% growth from 2014 to 2015), the maximum weighted growth modifier of 1.5% was applied, making the Santander Group’s total net operating profit weighted result equal to 20.3%.


2.	~~Santander Group’s RoRWA was 100.7%, which resulted in a weighted pool funding of 10.1% for the risk‑weighted asset component.~~

~~PART II Group Adjustment: Determined~~4. Exceptional Adjustment by Santander's Remuneration Committee:Santander’s Remuneration Committee may, in its discretion, make an exceptional adjustment to ~~be 0.5%, which is a combination of two discretionary decisions outlined below:~~

~~Results benchmarking versus peers considered for each unit within~~the pool funding level. Santander ~~Group (including us) relative~~took into account various factors, including U.S contributions to ~~a peer group~~Santander's capital goal and ~~determined to be a 0% adjustment.~~

~~Risk / Balance / Quality Assessment considered all current~~profitability growth and ~~future risks for each unit within the Santander Group (including us) that may have~~in its discretion assigned an ~~impact on bonuses and drove an~~exceptional adjustment of ~~+1.5% (see our Part II U.S. results section).~~

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~~Our Result: 39.2% (70% weighting)~~


3.	~~Santander U.S.’s Demonstrated Regulatory Progress was 100% of target which resulted in a weighted pool funding of 20%; our Compensation Committee determined this in its complete discretion.~~


4.	Santander U.S.’s progress related to the integration and governance of the intermediate holding company resulted in the achievement of 90% of target which resulted in a weighted pool funding of 13.5%; this was determined in the full discretion of our Compensation Committee.


5.	Santander U.S.’s net profit for 2015, after group consolidation and charges was $998 million. This amount resulted in the achievement of 77.8% of the net profit versus 2014 under the Executive Bonus Program, which resulted in a weighted pool funding of 8.5% for the net profit component.

~~Santander U.S.’s RoRWA was 76.0%, which resulted in a weighted pool funding of 1.8% for the risk-weighted asset component.~~

~~PART II U.S. Adjustment: Determined by Santander Group’s Remuneration Committee, to be -4.6% of target, which was a combination of varying discretionary decisions outlined below:~~

~~Results benchmarking versus peers considered for each entity within our holding company relative to a peer group and resulted in a 1.9% adjustment.~~

~~Clients benchmarking versus peers considered customer satisfaction relative to our markets and resulted in a -1.2% adjustment.~~

Risk/Balance/Quality considered all current and future risks across the U.S. that impacted bonuses and resulted in an adjustment of -7.3% (derived by multiplying the five results below by the respective weightings and then adding the results together).

~~40% = Risk (risk appetite, risk management, control environment) = -8% result.~~

~~15% = Internal Audit (rating, recommendations) = -15% result.~~

~~15% = Compliance (results of supervisor reviews, audit reports, involvement in corporate projects and daily management) = -5% result.~~

~~15% = Finance (qualitative assessment, finance plan performance, portfolio review) = 3% result.~~

~~15% = Accounting and Financial control (quality and recurrence of results) = -10% result.~~

~~Contribution to the Santander Group related to equally weighted metrics:~~


•	~~25% = Employee engagement survey results for 2015: relative to other geographies we were below the 50~~^th ~~percentile and therefore the result = 0%~~+3.1%.

~~25% = Improvement in results of 2015 employee engagement survey versus 2014; results improved however relative to other countries and therefore the result = 0%.~~

~~25% = Incentivized RoRWA objective: level of attainment in the achievement of additional RoRWA and therefore the result = 0%.~~

~~25% = Other factors to be considered by Santander Group’s Remuneration Committee = 0%.~~

~~Result Summary~~Bonus Pool Calculation Result: ~~: The final pool~~Notwithstanding the analysis and calculation ~~was 70.1% (Santander Group's results~~above, Santander ultimately determined that our Executive Bonus Pool would equal an amount that could support bonuses paid at an aggregate level up to 107.7% of 30.9% + our results of 39.2%). Our Compensation Committee and the Remuneration Committee determined in their full discretion that, given the current banking environment, it would be in our best interest to pay new hires at 100% of their targets and, as a result, a fundingtargets. This level of ~~86% was appropriate for 2015.~~bonus payout is aligned with the original recommendation of our BCTMC to Santander based on our assessment of scorecard results and our overall performance.

~~Santander Group used different peer groups in benchmarking Santander U.S.’s performance for the purposes of calculating the Executive~~Setting Bonus Program pool funding, as follows: Ally Financial Inc., Consumer Portfolio Services, Inc., General Motors Financial Company, Inc.. (for Santander Consumer USA); Popular Inc., First Bancorp, Oriental Financial Group, Inc. Bancorp (for Banco Santander Puerto Rico); BNP Paribas, Credit Agricole, Insea, BBVA Compass Bancshares, Inc., Royal Bank of Scotland, HSBC Holdings (for Global Corporate Banking) PNC Financial Services Group, M&T Bank Corp., Citizens Financial Group Inc., TD Bank, BB&T Corporation, Capital One Financial Corp., Fifth Third Bancorp, US Bancorp, Key Bank Corp., Huntington Bancshares, Inc. and First Niagara Financial Group (for Santander Bank).

~~Setting~~ Targets: We assigned each of the named executive officers a target bonus amount at the beginning of ~~2015.~~2018, as disclosed in the Incentive Compensation section above. We determined the target bonus awards taking into account market competitive pay, historical pay ~~our budget,~~at Santander, level of duties and responsibilities, individual performance, ~~and~~ historical track record within the organization for each ~~individual.~~individual, impacts of regulatory changes, and our budget. We review these factors at least annually and the target bonus amounts for ~~2015~~2018 were subject to ~~management review as well as Compensation~~our BCTMC and Santander's Remuneration Committee ~~review as needed.~~review.

No final decision has been made as of the date of the filing of this Annual Report on Form 10‑K as to the structure of the Executive Bonus Program for 2016 and we have not finalized the bonus pool calculations for 2016, nor have we determined the target bonus opportunities for the named executive officers for 2016.

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Discretionary Pay for Performance Decisions: During the decision-making process, we used target bonus amounts to establish an initial starting point for the executive. Each named executive officer’s ~~initial~~target bonus ~~amount~~ was subject to a discretionary adjustment, either upwards or downwards, based on the SHUSA bonus pool ~~calculation~~funding 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~~evaluation, to determine an initial proposed bonus amounts. For the named executive officers who commenced employment in 2015, and who had pre-established targets in connection with their hiring, we used 100% of such target then considered our funding level and their individual performance.amount.

We conducted a detailed assessment of each named executive officer’s accomplishments versus ~~pre‑established~~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; and our customers and clients; as well as our employees and culture.

~~On December 10, 2015, our Compensation Committee approved the awards~~ We describe certain of these measures for each of the named executive officers. Our Board of Directors approved Mr. Powell’s bonus on December 10, 2015. Mr. Blanco did not receive a bonus for 2015. Santander Group’s Evaluation and Bonus Committee, in consultation with officers:

Mr. Powell ratified the final bonus amounts for Messrs. Plush, Gunn, Lipsitz, Somoza, and Sabater subject to the approval of Santander Group’s Remuneration Committee and the ultimate approval of Santander Group’s Board of Directors, which was on January 26, 2016.

~~Each executive officer’s target bonus amount was calculated and the accomplishments supporting the actual award payments as follows:~~

Name Target Final Bonus ($) Final Bonus as % of Target
Scott Powell⁽¹⁾
$1,500,000 $2,000,000 133%
Gerald Plush $1,200,000 $1,200,000 100%
Brian Gunn⁽¹⁾
$1,500,000 $1,600,000 107%
Michael Lipsitz⁽¹⁾
$950,000 $950,000 100%
Julio Somoza $660,000 $550,000 83%
Román Blanco $1,050,000 $— —%
Guillermo Sabater $370,000 $250,000 68%


~~(1)~~	~~Target bonus was minimum guaranteed under the terms of an applicable letter agreement.~~


~~(2)~~	~~Target full bonus was pro-rated to reflect only Mr. Sabater's performance with us.~~

Mr. Powell’s ~~2015~~2018 functional objectives included, but were not limited to:

Deliver budget financials, with a focus on net income, RoRWA, and return on tangible equity, which are all common financial measures in the banking industry.

Execute year one of Santander U.S. integration.

Complete risk framework implementation.

Continue to ~~developing a plan and begin making improvements~~make progress on outstanding regulatory ~~issues,~~issues.

Improve compliance, operational risk, including ~~the transformation~~data quality, cyber security, information security, internal controls, and ~~fundamentals of the~~ risk ~~finance,~~control self-assessments ("RCSAs") and technology functions, Comprehensive Capital Analysis and Review and enhanced liquidity standards; making significant progress in building an effective holding company; implementing policy and processes that integrate businesses into our framework; improving engagements and reduce attrition; beginning the roll-out of our defined risk culture plan; and continuingSC specific regulatory issues.

Continue to implement ~~our employee satisfaction~~a culture of risk management and compliance, and ensure Santander values (including, Simple, Personal and Fair) are embedded.

Improve engagement scores and senior management diversity.

Ensure integration with Santander and Santander initiatives. ~~Based on his performance and the addition of his responsibilities as CEO of Santander Bank, Mr. Powell was paid above his minimum guaranteed target bonus level.~~

Mr. Plush’s 2015 functional objectives included, but were not limited to, implementing an effective CFO infrastructure for us and our affiliates, including controls, teams, technology and data strategies (regulatory reporting); implementing the finance elements of enhanced prudential standards for us and our affiliates, including Comprehensive Capital Analysis and Review, and the Volker Rule; and implementing financial policies and processes, including, but not limited to cost allocation, pricing models, enhanced information systems and capital allocation to improve business profitability and meet regulatory requirements for us and our affiliates.

Based on his performance results for 2018, we paid Mr. ~~Plush was paid at~~Powell 100% of his target bonus level.

Mr. Gunn’s 2015 functional objectives included, but were not limited to, meeting all assigned deliverables related to outstanding regulatory issues, including the transformation and fundamentals of the risk, finance, and technology functions, Comprehensive Capital Analysis and Review, and enhanced liquidity standards. Based on his performance results, Mr. Gunn was paid above his minimum guaranteed target bonus level.

Mr. Lipsitz’s 2015 functional objectives included, but were not limited to, building and implementing effective legal infrastructure for us and our affiliates, including effective balance of internal and external resources; providing pro‑active legal support for the intermediate holding company, Comprehensive Capital Research and Analysis; implementing enhanced prudential standards and our Treasury financing initiatives; and providing pro‑active legal guidance for all regulatory responses. Based on his performance results, Mr. Lipsitz was paid at his minimum guaranteed target bonus level.

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Mr. ~~Somoza’s 2015~~Dayal

Mr. Dayal’s 2018 functional objectives included, but were not limited to:

Deliver 2018 budget commitments by line of business.

Optimize balance sheet to ~~implementing an effective technology~~enhance capital, liquidity, and ~~operations infrastructure for us~~profitability.

Ensure that we pass financial regulation tests such as the Comprehensive Capital Analysis and Review ("CCAR") and the DFA stress test.

Implement year one of strategic transformation in Commercial.

Grow Commercial deposits and loans.

CRA upgrade to Satisfactory.

Contribute to our ~~affiliates, including controls, teams~~culture of risk management and ~~governance;~~compliance and ~~executive data models~~ensure that we maintain our values.

Improve engagement scores and ~~data~~senior management ~~programs that allow the appropriate level of aggregation, for us~~diversity.

Ensure integration with Santander and our affiliates; executing committed deliverables to meet our US regulatory requirements; implementing IT and operations policies, processes, and solutions to improve systems performance, customer experience; and delivering business projects on time, on budget and with quality. Santander initiatives.

Based on his performance results for 2018, we paid Mr. ~~Somoza was paid below~~Dayal approximately 114% of his target bonus level.

Mr. ~~Blanco’s 2015~~Griffiths

Mr. Griffiths’ 2018 functional objectives included, but were not limited ~~to, improving our customer service, customer experience~~to:

Deliver the 2018 financial plan and ~~customer satisfaction; establishing a clear trend of sustainable growth~~efficiency target within Information Technology.

Continue information security remediation processes and materially reduce exposure in ~~total customers and in loyal customers. Improve financials and outline key milestones~~order to meet ~~competitive financial targets; working with us~~Sarbanes Oxley compliance requirements by Q1 2019.

Improve data quality and governance by continuing to ~~enhance earnings~~mature the Chief Data Officer organization and ~~define strategic plan (capital allocation, IT strategy, etc.); improving risk~~deploy a standard model across all IHC subsidiaries.

Leverage IHC project governance and ~~compliance management including implementing the requirements~~realize opportunities across core infrastructure, information security, and ~~commitments defined by intermediate holding company regulatory requirements~~corporate functions while eliminating duplicate and ~~us including focus on Comprehensive Capital Research and Analysis and enhanced prudential standards; improving~~redundant systems.

Improve engagement scores ~~managing attrition to be at peer’s level;~~ and ~~providing enhanced leadership~~senior management diversity.

Ensure integration with Santander and ~~talent at and for key positions.~~ Santander initiatives.

Based on his performance results for 2018, we paid Mr. ~~Blanco was not paid a~~Griffiths approximately 108% of his target bonus ~~for 2015 with respect to his service with us.~~level.

Mr. ~~Sabater’s 2015~~Wolf

Mr. Wolf’s 2018 functional objectives included, but were not limited ~~to, risk management objectives~~to:

Implement the Career Framework, a comprehensive re-set of titling, job families and roles.

Evolve employee communications, including ~~proactively reviewing external~~U.S. intranet landing page and ~~internal environment~~a new Human Resources ("HR") portal.

Develop and identification of issues or concerns related to potential gaps in existing processes, procedures, policies, frameworks, etc.; contributing to satisfactory results in audit reviews, compliance reviews, and regulatory examinations (internal/external); enhancing accounting processes and control environments; promotingbegin implementation of a ~~risk~~new compensation and benefits strategy.

Enhance governance over compliance training and increase quality and effectiveness.

Improve engagement scores across Santander U.S. and improve senior management culture by encouraging teams to embrace appropriate risk practices and supporting employees in fulfilling risk management responsibilities; improving management control reporting ensuring coordinated reporting todiversity.

Execute on HR function expectations for Santander ~~Group according to requirements; and improving risk and compliance management including implementing the requirements and commitments defined by the holding company.~~ U.S. integration.

Based on his performance results in 2018, we paid Mr. ~~Sabater was paid below~~Wolf approximately 108% of his ~~pro-rated~~ target bonus ~~level,~~level.

Mr. Aditya

Mr. Aditya's 2018 functional objectives included, but were not limited to:

Deliver credit and fraud loss and expense budget for Risk.

Accurate and timely production of month-end results and monthly review packages.

Stabilize Risk leadership, develop bench strength.

Addition of talent as needed.

Significantly improve U.S. risk management framework.

Improve collaboration with ~~respect~~Santander and SHUSA's subsidiaries.

Enhance and improve Board Risk Committee presentations with better coverage of risks and stronger oversight and accountability.

Improve engagement scores and senior management diversity.

Ensure integration with Santander and Santander initiatives.

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Based on his performance results for 2018, we paid Mr. Aditya approximately 100% of his target bonus level.

Mr. Gunn

Based on his performance results for 2018, considering his accomplishments and time in role as the Chief Risk Officer and as a Special Advisor, we paid Mr. Gunn 100% of his target bonus level.

BCTMC Review and Approval

On December 12, 2018, the BCTMC determined preliminary bonus awards under the Executive Bonus Program for the named executive officers (other than Mr. Powell, who is discussed below) subject to ~~his service with us.~~validation by Santander’s CEO and Santander's Board of Directors. On January 23, 2019, the BCTMC approved the final bonus awards for the named executive officers other than Mr. Powell. On January 29, 2019, Santander's Board of Directors also approved the final bonus awards for all of the named executive officers.

On January 28, 2019, Santander’s Board Remuneration Committee recommended Mr. Powell’s award to Santander’s Board of Directors and, on January 29, 2019, Santander’s Board of Directors validated and approved Mr. Powell’s award. Our and SC's Board of Directors approved Mr. Powell’s final bonus on February 15, 2019 and February 20, 2019, respectively.

Bonus Delivery: We ~~delivered~~paid current awards to the named executive officers under the Executive Bonus Program for ~~2015~~2018 as ~~a combination of~~ short-term and long-term incentive ~~awards.~~awards payable in a combination of cash and Santander ADRs, and in the case of Mr. Powell, a combination of cash, Santander ADRs, and SC common stock and Restricted Stock Units ("RSUs"). These amounts include payments made with respect to each of the named executive officer’s individual performance and the performance of Santander, ~~Group~~SC (in the case of Mr. Powell), and us, as applicable. ~~All named executive officers~~Amounts that we pay in equity as short-term incentive awards are ~~designated~~immediately vested and are in the form of Santander ADRs (and, in the case of Mr. Powell, SC Common Stock). Amounts that we pay in equity as ~~Identified Staff and~~long-term incentive awards are subject to vesting criteria, as we describe below, and are in the ~~compensation guidelines and limits~~form of restricted Santander ADRs (and, in the case of Mr. Powell, SC RSUs). Any payment made in shares of Santander ADRs or SC Common Stock under the Executive Bonus Program is subject to a one-year holding requirement from the grant date (in the case of immediately vested ADRs/SC shares) or vesting date, if any, of the ~~European Union Capital Requirements Directive IV (CRD IV).~~deferred ADRs/SC RSU shares.

Short-term/Immediate: Under the Executive Bonus Program, the named executive officers receive the short-term award 50% in cash and 50% in immediately vested Santander ~~common stock/~~ADRs, ~~(vested immediately). Any award made~~or in the case of Mr. Powell, 50% in cash and 50% in a combination of immediately-vested Santander ADRs and SC shares (with the division between Santander ADRs and SC shares determined based on the allocation of ~~Santander common stock/ADRs under the Executive Bonus Program is subject to a one-year holding requirement from the vesting date of the shares.~~Mr. Powell’s time in 2018 between us and SC).

Long-term/Deferred: Under the Executive Bonus Program, ~~the named executive officers~~participants are required to defer a portion of their ~~bonus.~~bonus depending on their position and/or targeted incentive levels within Santander. For 2018, Santander ~~Group classifies~~ considers:

Mr. Powell ~~as “Country Head”~~to be a "Category 1" executive, and therefore ~~he must defer~~60% of his overall bonus award is deferred for five years.

Mr. Dayal to be a "Category 2" executive, and therefore 50% of his overall bonus ~~award. Santander Group classifies~~ award is deferred for five years, and

Messrs. ~~Plush,~~Griffiths, Aditya, Wolf, and Gunn ~~Lipsitz, Somoza, and Sabater, as “Other Executives”~~to be "Category 3" executives and therefore ~~they each must defer~~ 40% of their respective overall bonus ~~awards. Mr. Blanco did not receive a bonus~~awards are deferred for ~~2015 so he did not defer any amounts under the Executive Bonus Program.~~three years.

~~Deferred~~

We deliver deferred amounts under the Executive Bonus Program ~~are delivered~~ 50% in cash and 50% in restricted Santander ~~Group common stock/ADRs.~~ADRs, and in the case of Mr. Powell, 50% in cash, 18% in restricted Santander ADRs, and approximately 32% in SC RSUs. The deferred amounts ~~are paid out in equal installments~~vest over three or five years, depending on the participant’s ~~level (see chart below)~~category (as described above) and the participant remaining employed through the applicable payment date (except in certain limited circumstances) ~~as long as~~. The deferred amounts are subject to our Policy on Malus and Clawback Requirements, including the requirement that none of the following ~~occurs:~~events have occurred due to the participant's actions during the period prior to each payment:

~~Santander Group’s poor financial performance;~~

~~the participant violates~~A significant failure with respect to our ~~internal rules, particularly those relating to risk;~~risk management or any control or support function;

aA material or negative (in each case as determined by our external auditors) restatement of ~~Santander Group’s~~our financial statements ~~when required by outside auditors, except when appropriate due to~~(other than any restatement undertaken as a result of a change in accounting ~~standards;~~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;

~~significant changes~~A material, negative change in ~~Santander Group’s financial~~our capitalization or our risk profile;

A material, unforeseen increase in our economic or regulatory capital requirements;

The participant or ~~in Santander Group’s risk profile.~~the participant’s business unit is subject to material regulatory sanctions;



~~Named Executive Officer~~	~~Percentage of Award Deferred~~	~~Deferral Period~~
~~Mr. Powell~~	~~50%~~	~~5 years~~
~~Other Named Executive Officers~~	~~40%~~	~~3 years~~

The participant is convicted of or indicted for a felony, or a lesser crime involving moral turpitude;

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~~Additional Long‑Term Incentive Compensation~~Any material misconduct by the participant, whether individually or as part of a group, particularly in connection with the marketing of unsuitable products;

Our ~~named executive officers are also eligible~~deficient financial performance;

A material error by the participant, including such activities by the participant that result in material losses to ~~participate~~us or an affiliate or material regulatory sanctions being imposed on us or on an affiliate;

A material downturn in ~~the Performance Shares Plan. The Performance Shares Plan, which Santander Group sponsors for certain eligible employees, consists of~~our, an affiliate’s or a ~~multi-year bonus plan under which Santander Group may award~~business unit’s financial performance as a participant a maximum number of shares of Santander Group common stock/ADRs. The shares are subject to certain pre-established time-based and performance-based requirements. Santander Group makes awards under the Performance Shares Plan in cycles, with one cycle ending each year.

Santander Group’s Board of Directors adopted the first cycle of the Performance Shares Plan on February 27, 2014, and Santander Group’s shareholders approved the first cycle at its annual meeting of shareholders on March 28, 2014. Our Compensation Committee approved the first cycle on September 25, 2014. The first cycle has the following features:

The first cycle is for a four-year period, consisting of 2014 through 2017. The potential delivery of the Approved Number of Shares to each participant will be deferred by thirds over a three-year period, and the corresponding shares will be delivered, in each case, in the month of June of the years 2016, 2017, and 2018 depending on the achievement of the total shareholder return (“TSR”) multi-year targets.

~~The value of the maximum number of shares that each participant is eligible to receive is 15%~~result of the participant’s ~~target~~inappropriate business management activities; or ~~reference bonus under~~

The participant’s detrimental conduct (as defined in the Executive Bonus ~~Program.~~ Program).

The ~~following percentages are applied to this amount to determine a final maximum amount based on ranking of Santander Group’s TSR compared to a peer group.~~

~~For purposes of determining the final amount, TSR is defined as the difference (expressed as a percentage) between the average weighted volume of the average weighted listing prices~~accrual of a ~~hypothetical investment in ordinary shares~~portion of ~~each of~~such deferred amounts is subject to the ~~members of a peer group and Santander Group in~~compliance with certain multi-year objectives, which we describe below, during the ~~fifteen trading days before~~2018-2020 period. At the end of ~~2014 and~~ the ~~value~~2020 fiscal year, Santander`s Board will set the maximum amount of each annual payment of the ~~same investment during~~deferred portion for each participant.

Multi-year objectives, metrics and compliance scales for deferred cash and Santander ADRs applicable to the ~~fifteen day period before the beginning of 2014. Santander will consider dividends and similar amounts received by shareholders~~Executive Bonus Program are as ~~if such amounts were invested in more shares of the same kind of stock.~~follows:

Santander Group chooses the peer group from among the world’s largest financial institutions, based on their market capitalization, geographic location, and the nature of their businesses. The peer group for the first cycle includes the following financial institutions: HSBC, BNP Paribas, Societe Generale, J.P. Morgan Chase & Co., Citigroup, BBVA, Nordea, Unicredito, Intesa SanPaolo, Itau-Unibanco, Bank of Nova Scotia, Deutsche Bank, Lloyds Bradesco, and UBS. Santander’s Board of Directors, or its delegee, may change the composition of the peer group in the event that unforeseen circumstances occur that affect one or more current peer group members.

•a)

Compliance with consolidated earnings per share ("EPS") growth target of Santander for 2020 versus 2017. The ~~TSR goals and~~coefficient corresponding to this target (the "EPS Coefficient") will be obtained from the associated possible percentages of the maximum amount that participants may earn under the first cycle are below. The 2015 results to determine the final maximum percentage amount was a TSR ranking of 4^th ~~driving 100% of the reference amount. As of the date of the filing of this Annual Report on Form 10‑K, no other calculations are complete.~~

following table:



~~Santander's Position in the TSR ranking~~2020 EPS growth (% against 2017)		~~Final Maximum Amount Percentage~~EPS Coefficient
~~1st to 8th~~≥ 25%		~~100%~~
~~9th to 12th~~		~~50%~~
~~13th to 16th~~		0%1


b)	Relative performance of total shareholder return ("TSR", as we define below) of Santander for the 2018-2020 period compared to the weighted TSRs of a peer group of 17 financial institutions, which we set forth below.

~~A participant vests~~

We define "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 ~~awarded under~~of the same class at the first ~~cycle ratably over different periods depending~~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 ~~Group’s achievement~~common stock corresponding to the 15 trading sessions prior to January 1, 2018 (for the calculation of ~~multi-year TSR targets versus~~ the ~~same~~initial value), and of the 15 trading sessions prior to January 1, 2021 (for the calculation of the final value).

The peer group ~~it uses to determine~~is the ~~maximum amount, as follow:~~following 17 financial institutions:



Financial Institutions
Banco Bilbao Vizcaya Argentaria SA	Itaú Unibanco Holding SA
JPMorgan Chase & Co.	Wells Fargo & Co
Bank of America Corp	Unicredit SpA
UBS Group AG	Standard Chartered PLC
Intesa San Paolo SpA	Citigroup Inc
HSBC Holdings PLC	ING Groep NV
Barclays PLC	Lloyds Banking Group PLC
BNP Paribas SA	Deutsche Bank AG
Société Générale SA

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:



~~Vesting Period~~TSR position of Santander		~~Percentage Vesting~~"TSR Coefficient"
~~2014 through 2015~~Exceeding the 66th percentile		~~33.3%~~1
~~2014 through 2016~~From the 33rd to the 66th percentiles		~~33.3%~~0-1
~~2014 through 2017~~Below the 33rd percentile		~~33.3%~~0

~~The associated possible percentages~~

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c)	Compliance with the fully-loaded CET1 ratio target of Santander Group for the financial year 2020. The coefficient corresponding to this target (the "CET1 Coefficient") will be obtained from the following table:



CET1 in 2019		CET1 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, 2020.

To determine the maximum amount of the deferred portion subject to objectives that, ~~participants may earn under~~if applicable, must be paid to each ~~vesting period in~~participant on the ~~first cycle are as follows:~~applicable payment date, the following formula will be applied to each one of the annual payments pending payment:

Final Annual Payment = Amount x ((1/3 x A) + (1/3 x B) + (1/3 x C))

where:

~~278~~"Amount" 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 2020 with respect to 2017.

"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 2018-2020 period with respect to the peer group.

"C" is the CET1 coefficient according to compliance with the CET1 target for 2020 described in paragraph (c) above.

For SC RSUs awarded to Mr. Powell, the performance metrics are weighted 50% towards Santander performance and 50% towards SC performance and follow a balanced "scorecard" approach.

The Santander goals are described above.

The SC goals relate equally to (1) SC attaining a specified level of EPS by December 31, 2020; (2) SC attaining certain capital ratio goals by December 31, 2020; (3) SC attaining a specified level of return on assets by December 31, 2020; and (4) SC attaining a specified level of expense ratio by December 31, 2020. Performance below target goals for any component will result in below-target payout for the component and performance below certain threshold goals will result in no payout for the component. No amount greater than the target award can be earned.

Special Regulatory Incentive Program ("SRIP")

During 2016, we developed a special regulatory incentive program, which we refer to as the "SRIP," for performance periods 2017, 2018 and 2019. The SRIP was approved by Santander’s Remuneration Committee on June 27, 2016. The SRIP is part of the Executive Bonus Program. 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 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.

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2018 Program:



~~Santander Groups Position in the TSR Rankings~~		~~Percentage of Shares Earned of Maximum Amount~~
~~1st to 4th~~		~~100.0%~~
~~5th~~		~~87.5%~~
~~6th~~		~~75%~~
~~7th~~		~~62.5%~~
~~8th~~		~~50.0%~~
~~9th to 16th~~		0%

~~In addition to~~Total target opportunity over the vesting requirements we describe above, in order for a participant to receive the shares under the first cycle, the participant must remain continuously employed at Santander Group or a subsidiary through June 30life of the ~~year following~~multi-year program was set at $2,000,000 for Mr. Powell and at $1,000,000 each for the ~~end~~other named executive officers.

For 2018, 35% of each participant’s total targeted opportunity was based on achieving certain regulatory and/or compliance criteria or goals.

We successfully achieved or met the ~~cycle, except~~criteria to satisfy achieving these goals for 2018, and therefore our BCTMC, the SC BCTMC in the ~~cases~~case of ~~retirement, involuntary termination, unilateral waiver by the participant for good cause (as provided under Spanish law), unfair dismissal, forced leave of absence, permanent disability, or death.~~

~~Payment of shares for~~Mr. Powell, and Santander's Remuneration Committee each ~~vesting period is also contingent on none of the following circumstances taking place during the applicable vesting period as a result of events occurring in 2014:~~

~~Santander Group’s poor financial performance;~~

~~the participant violates our internal rules, particularly those relating to risk;~~

~~a material restatement of Santander Group’s financial statements, when required by outside auditors, except when appropriate due to a change in accounting standards; or~~

~~significant changes in Santander Group’s financial capital or in Santander Group’s risk profile.~~

~~Awards of shares under the first cycle are subject to a one-year holding requirement from the payment date of the award.~~

~~Each of~~approved the named executive ~~officers participated in~~officers' actual award amounts for 2018 at 35% of their respective total target opportunity.

Any payments made under the ~~first cycle, except for Messrs. Powell, Gunn, and Lipsitz because it relates~~SRIP to ~~performance periods prior to their commencement of employment with us.~~

~~In 2015, Santander Group adopted the second cycle of the Performance Shares Plan, which we refer to as the “second cycle.” Under the second cycle, participants, who include the~~our named executive officers are ~~eligible~~subject to ~~receive Santander Group common stock/ADRs.~~

~~Santander Group’s Board of Directors adopted~~ the ~~second cycle of the Performance Shares Plan on February 23, 2015,~~same payment, deferral, and ~~Santander’s shareholders approved the second cycle at its annual meeting of shareholders on March 27, 2015. The second cycle has different features~~performance requirements as those applicable to ~~ensure alignment to Santander Group’s strategic objectives and market trends and therefore also has a different peer group. The second cycle includes following features:~~

~~The second cycle is for a four‑year period, consisting of 2015 through 2018.~~

~~The value of the maximum number of shares that each participant is eligible to receive is 20% of the participant’s target bonus~~payments made under the Executive Bonus ~~Program. We refer to this number as~~Program, which we describe above.

Total Results for 2018 Executive Bonus Program and SRIP

The following chart summarizes the ~~“reference value.”~~

~~Santander Group calculates an approved initial share value of shares under~~2018 Executive Bonus Program and SRIP awards for the ~~second cycle by applying two coefficients to the reference value based on Santander Group’s earnings per share and return on tangible equity (ROTE) achievements for 2015 in the following manner:~~named executive officers:



~~2015 Earnings Per Share~~ ~~(% with respect to budgeted 2015 Earnings Per Share)~~		~~2015 Earnings Per Share Coefficient~~
~~≥ 90%~~		1
~~> 75% but < 90%~~		~~0.75-1~~
~~≤ 75%~~		0



Name		Cash			Equity
Name		Immediate ($)	Deferred ($)	Total ($)	Immediate ($)	Deferred ($)	Total ($)
Mr. Powell	Bonus	$850,000	$1,275,000	$2,125,000	$850,000	$1,275,000	$2,125,000
Mr. Powell	SRIP	$140,000	$210,000	$350,000	$140,000	$210,000	$350,000
Mr. Dayal	Bonus	$537,500	$537,500	$1,075,000	$537,500	$537,500	$1,075,000
Mr. Dayal	SRIP	$87,500	$87,500	$175,000	$87,500	$87,500	$175,000
Mr. Griffiths	Bonus	$537,000	$358,000	$895,000	$537,000	$358,000	$895,000
Mr. Griffiths	SRIP	$105,000	$70,000	$175,000	$105,000	$70,000	$175,000
Mr. Wolf	Bonus	$382,500	$255,000	$637,500	$382,500	$255,000	$637,500
Mr. Wolf	SRIP	$105,000	$70,000	$175,000	$105,000	$70,000	$175,000
Mr. Aditya	Bonus	$322,800	$215,200	$538,000	$322,800	$215,200	$538,000
Mr. Aditya	SRIP	$105,000	$70,000	$175,000	$105,000	$70,000	$175,000
Mr. Gunn	Bonus	$276,750	$184,500	$461,250	$276,750	$184,500	$461,250
Mr. Gunn	SRIP	$105,000	$70,000	$175,000	$105,000	$70,000	$175,000



~~2015 ROTE~~ ~~(% with respect to budgeted 2015 ROTE)~~		~~2015 ROTE Coefficient~~
~~≥ 90%~~		1
~~> 75% but < 90%~~		~~0.75-1~~
~~≤ 75%~~		0

The total cash amount for each named executive officer, both immediate and deferred, is included in the 2018 "Bonus" column in the Summary Compensation Table.

As noted above, the equity awards are provided in immediate and deferred Santander ADRs and for Mr. Powell SC shares/RSUs. The number of ADRs is determined using the average weighted daily volume of the average weighted listing prices of shares of Santander on the Spanish Stock Exchange for the 15 trading sessions prior to the Friday (exclusive) of the previous week to January 29, 2019. Since the awards are established in a currency other than 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 29, 2019. For the SC shares/RSUs, the number of shares/RSUs is determined by using the closing price of a SC share on the NYSE on the grant date.

These equity awards were granted in early 2019 after the 2018 performance assessments, and under SEC rules will be reported as 2019 compensation based on their accounting grant date fair values.

Additional Long-Term Incentive Compensation

Santander ~~Group calculates~~discontinued use of any additional long-term incentive plan beginning with the ~~approved initial share value through~~2016 performance year. Santander merged the ~~following formula:~~targeted awards made under the long-term incentive plan in previous years with the targeted incentive awards granted under the Executive Bonus Program.

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~~Approved Initial Share Value = Reference Value x (0.5 x 2015 Earnings Per Share Coefficient + 0.5 x 2015 ROTE Coefficient)~~

Santander Group calculates the initial number of Santander shares that it will deliver to each participant in the second cycle by dividing the approved initial share value by the weighted average per daily volume of the weighted average listing prices of the Santander share over the last 15 trading sessions prior to January 26, 2016. If necessary, Santander Group converts this amount to euros using the average exchange rate over the last 15 trading sessions prior to January 26, 2016.

The 2015 results to determine the final maximum percentage amount was 84.6% scaled to 91% earnings per share compared to budget and 85.2% scaled to 92% ROTE compared to budget resulted in 91.5% of the reference amount. As of the date of the filing of this Annual Report on Form 10-K, no other calculations have been completed.

~~The shares are deferred over a three-year period subject to satisfaction of the conditions of the second cycle.~~

The number of shares that Santander delivers to participants may change from the initial number depending on the level of achievement of certain multiyear objectives as we describe below. We refer to this revised number of shares as the “accrued shares.” The multi-year objectives are as follows:


~~(A)~~	~~Increase in Santander Group earnings per share in the period of 2015 through 2017 in relation to a peer group of 17 financial institutions, as follows:~~



~~Position of the increase in the Santander Group 2015-2017 Earnings Per Share Versus Peers~~		~~2015-2017 Earnings Per Share Coefficient~~
~~From 1st to 5th~~		1
~~6th~~		~~0.875~~
~~7th~~		~~0.75~~
~~8th~~		~~0.625~~
~~9th~~		~~0.50~~
~~10th-18th~~		0

For purposes of determining the 2015-2017 earnings per share coefficient, the peer group consists of Wells Fargo, J.P. Morgan Chase & Co., HSBC, Bank of America, Citigroup, BNP Paribas, Lloyds, UBS, BBVA, Barclays, Standard Chartered, ING, Deutsche Bank, Société Générale, Intesa San Paolo, Itaú-Unibanco, and Unicredito. Santander Group may adjust the composition of the peer group in the event that unforeseen circumstances occur.

~~(B) Santander Group’s return on tangible equity (ROTE) in 2017:~~



~~ROTE in 2017 (%)~~		~~2017 ROTE Coefficient~~
~~≥ 12%~~		1
~~> 11% but < 12%~~		~~0.75-1~~
~~≤ 11%~~		0

~~(C) Employee satisfaction, measured by whether, in 2017, we are among the best financial institutions to work for.~~

~~Achievement scale at our country level:~~



~~Position among the best banks to work for in 2017~~		~~Employee Satisfaction Coefficient~~
~~1st to 3rd~~		1
~~4th or higher~~		0

~~No final decision has been made as of the filing of this Annual Report on Form 10-K as to the measure and the calculation of this coefficient.~~

~~(D) Customer satisfaction, measured by whether, in 2017, we are among the best financial institutions in the customer~~

~~satisfaction index.~~

~~Achievement scale at our country level:~~



~~Position among the best banks according to the customer satisfaction index in 2017~~		~~Customers Coefficient~~
~~1st to 3rd~~		1
~~4th or higher~~		0

~~No final decision has been made as of the filing of this Annual Report on Form 10‑K as to the measure and the calculation of this coefficient.~~

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~~(E) Customer loyalty, as determined by Santander Group’s Retail Division Head, measured by, as of December 31, 2017,~~

~~by Santander Group’s Retail Division Head, whether Santander Group meets its customer loyalty target.~~

Loyal individual customers
(% of budget for the market concerned) as of December 31, 2017 Retail Coefficient Loyal customers
(% of budget for the market concerned) Corporates Coefficient
≥ 100% 1 ≥ 100% 1
> 90% but < 100% 0.5-1 > 90% but < 100% 0.5-1
≤ 90% 0 ≤ 90% 0

~~No final decision has been made as of the filing of this Annual Report on Form 10‑K as to the measure and the calculation of this coefficient.~~

~~On the basis of the metrics and performance scales set out above, the accrued number of shares for each participant is determined using the following formula.~~

~~Accrued Number of Shares = Initial Number of Shares x (0.25 x A + 0.25 x B + 0.2 x C + 0.15 x D + 0.075 x E~~₁ ~~+ 0.075 x E~~₂)

In addition to the vesting requirements we describe above, in order for a participant to receive the shares under the second cycle, the participant must remain continuously employed at Santander Group or a subsidiary through June 30 of the year following the end of the cycle, except in the cases of retirement, involuntary termination, unilateral waiver by the participant for good cause (as provided under Spanish law), unfair dismissal, forced leave of absence, permanent disability, or death.

~~Awards of shares under the second cycle are subject to a one-year holding requirement from the payment date of the award.~~

~~Payment of shares is also contingent on none of the following circumstances taking place during the applicable vesting period as a result of events occurring in 2015:~~

~~Santander Group’s poor financial performance;~~

~~the participant violates our internal rules, particularly those relating to risk;~~

~~a material restatement of Santander Group’s financial statements, when required by outside auditors, except when appropriate due to a change in accounting standards; or~~

~~significant changes in Santander Group’s financial capital or in Santander Group’s risk profile.~~

~~Annual Discretionary Bonuses~~Executive Bonus Program

~~In certain cases, we award annual discretionary bonuses to the named executive officers to motivate and reward outstanding performance outside of our~~Our incentive ~~compensation~~ program, which we ~~described above. These awards permit us~~refer to ~~apply discretion in determining awards rather than applying a formulaic approach that may inadvertently reward inappropriate risk‑taking. None~~as the "Executive Bonus Program," establishes both financial and non-financial measures to determine the bonus pool level from which we pay annual bonuses. We align the Executive Bonus Program each year with Santander’s corporate bonus program for executives of similar levels across Santander. Each of the named executive officers ~~received discretionary bonuses outside~~participated in the Executive Bonus Program for ~~2015.~~

~~Sign‑On Bonuses and Retention Bonuses~~

We paid sign‑on bonuses to certain named executive officers in connection with their commencing employment with us. Providing these sign-on bonuses is an industry standard practice that makes executives whole for forfeited compensation that they would otherwise receive if they had not left their prior employment. In certain limited cases, we will provide retention bonuses to certain of our executive officers as an inducement for them to stay in active service with us. We describe these bonuses in the description2018. The general structure of the ~~named executive officers employment and letter agreements.~~Executive Bonus Program:

~~Other Compensation~~

~~We model~~defers a portion of a participant’s award over a three- or five-year period, depending on the ~~compensation packages for~~participant’s position within our ~~employees who are expatriates, including certain of the named executive officers, to be competitive globally and within the country of assignment, and attractive to each executive in relation~~organization, subject to the ~~significant commitment he must make in connection with~~non-occurrence of certain events;

links a global posting. In addition to the benefits in which all our employees are eligible to participate, the expatriate employees are eligible for certain other benefits and perquisites. The additional benefits and perquisites include reimbursement for housing expenses, children’s education costs, travel expenses, and income tax and tax equalization payments. These benefits and perquisites are, however, consistent with those paid to similarly situated Santander Group executives who are subject to appointmentportion of such amount to Santander ~~Group locations globally as Santander Group senior management deems appropriate. Additionally, Santander Group reviewed compensation surveys~~performance over a multi-year period; and

pays a portion of ~~human resources advisory firms, which have shown that these types of benefits~~such award in cash and ~~perquisites are common elements of expatriate programs of global companies.~~a portion in equity, in accordance with the rules and standards referenced above and set forth in more detail below.

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~~After~~On February 13, 2018, 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), and Santander’s shareholders approved it at its annual meeting of shareholders on March 23, 2018. On March 6, 2018, we approved the preliminary design of the Executive Bonus Program scorecard. Santander’s Remuneration Committee and Board of Directors approved the final scorecard for the Executive Bonus Program, as recommended by our BCTMC, on April 16, 2018 and April 23, 2018, respectively.

The Executive Bonus Program provides for differences in the amount of final awards, higher or lower than their target bonus amounts (which we describe below), in order to reinforce our pay for performance philosophy.

Under the Executive Bonus Program, we determine an aggregate pool from which awards for all participants are determined and paid. The pool incorporates both quantitative (via a ~~period~~scorecard) and qualitative considerations as well as feedback from Santander to ensure that the Executive Bonus Program links our executives' pay to performance. Our BCTMC worked with Mr. Powell and Santander’s Human Resources Committee and the Board Remuneration Committee to validate that the proposed scorecard performance metrics aligned with overall business goals. Our BCTMC reviewed the appropriateness of ~~time of employment~~the financial measures used in the Executive Bonus Program with us, we offer our expatriate employees an opportunity to continue working with us as regular (i.e., non‑expatriate) employees. Regular employees are not generally entitled to the benefits and perquisites described above. We provide certain compensation to these expatriate employees in connection with their transition to regular employee status. None of our named executive officers transitioned to regular employee status in 2015.

~~We describe the additional perquisites and benefits that we paid~~respect to the named executive officers ~~below~~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 Program are determined in accordance with International Financial Reporting Standards because Santander uses similar terms and metrics in its incentive programs across the Group, making the use of country-specific accounting standards infeasible.

Our named executive officers all perform functions for both us and SBNA, and in the ~~notes~~case of Mr. Powell, also for SC. Our BCTMC, and in the case of Mr. Powell, the SC BCTMC, agreed to consider individual allocation of the ~~Summary Compensation Table.~~final bonus pool funding level for these executives based on both our and SBNA's performance, and in the case of Mr. Powell, SC's performance, to align pay decisions to all applicable businesses' performance as well as certain principles set forth by our regulators.

~~Retirement Benefits~~SHUSA Bonus Pool Scorecard Overview: The bonus pool funding is determined through a scorecard, which is primarily driven by a quantitative (mathematically informed) score, and is then adjusted by qualitative and discretionary measures. We develop the scorecard metrics to measure our, our subsidiaries’ and our business units’ performance on an aggregate basis over the full year.

~~Each~~Together these make up our overall bonus pool funding level. As we describe in more detail below, the bonus pool funding was approved by Santander at 100.0% of aggregate target amounts for 2018. We determine the aggregate total of the bonus amounts, in U.S. dollars, available for distribution to our participating employees, including the named executive officers, by multiplying this bonus pool funding level by the sum of target incentives.

Below is ~~eligible to participate~~a summary of how we calculated the bonus pool for 2018.



Part 1: Quantitative Score	95.3	%

1. Quantitative Score:The quantitative score is a mathematically derived score based on our achievement of pre-determined business goals (which we reflect in our qualified retirement plan under the same terms as our other eligible employees. In addition, (i) certain of Santander Group’s executive officers, including Messrs. Somoza, Blanco, and Sabater participate in defined contribution retirement plans that Santander Group provides for certain of its executives; and (ii) each of the named executive officers is eligible to defer all or a portion of his cash bonus that he is not otherwise required to defer under the terms of the Executive Bonus Program into a nonqualified deferred compensation plan. Santander Group provides these benefits in order to foster the development of these executives’ long-term careers with Santander Group. We describe these executive officers’ retirement benefitsTable 1 below under the ~~caption “Deferred Compensation Arrangements.”~~

~~Employment and Other Agreements~~

We (or Santander Group, in the case of Messrs. Somoza, Blanco, and Sabater) have entered into letter agreements with each of our named executive officers to establish key elements of compensation that differ from our standard plans and programs. We and Santander Group both believe these 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 agreements below under the caption “Description of Employment and Related Agreements.”

~~Benchmarking~~heading "Quantitative Metrics").

In ~~2015,~~collaboration with Santander, ~~Group benchmarked our named executive officers’ compensation~~we pre-assign each metric with a weight and a goal. Then Santander calculates the percentage credit towards the quantitative score for ~~reference:~~

~~when hiring Scott Powell;~~

~~in determining~~each metric by multiplying its percentage weight by its percentage achievement. Finally, we add up all the ~~pool funding under~~percentages to derive the ~~Executive Bonus Program; and~~

~~to define the peer groups Santander Group used in determining any adjustment to awards under the Performance Shares Plan.~~

We describe the peer group used in connection with the Executive Bonus Program under the caption “Executive Bonus Program” and the peer groups used in connection with the Performance Shares Plan under the caption “Additional Long-Term Incentive Compensation.” Santander Group has also periodically used compensation surveys and databases to assist in setting certain of its executive officers’ overall compensation.

~~Compensation Committee Report~~

total quantitative score.

For purposes of Item 407(e)(5) of Regulation S-K, the Compensation Committee furnishes the following information. The Compensation Committee has reviewed and discussed the Compensation Discussion and Analysis included in Part III-Item 11 of the 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, 2015.

~~Submitted by:~~

~~Catherine Keating, Chair~~

~~Stephen Ferriss~~

~~Juan Guitard~~

~~Victor Matarranz~~

~~Richard Spillenkothen~~

The foregoing “Compensation Committee Report” shall not be deemed to be “filed” with the SEC or subject to the liabilities of Section 18 of the Securities Exchange Act, and notwithstanding anything to the contrary set forth in any of2018, our previous filings under the Securities Act or the Securities Exchange Act, that incorporate future filings, including this Form 10-K, in whole or in part, the foregoing “Compensation Committee Report” shall not be incorporated by reference into any such filings.total quantitative score was 95.3%.

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~~Compensation Committee Interlocks and Insider Participation~~Table 1: SHUSA Bonus Pool Funding Scorecard

The following directors served as members of our Compensation Committee in 2015: Marian Heard, Wolfgang Schoellkopf, Gonzalo de Las Heras, Catherine Keating, Stephen A. Ferriss, Juan Guitard, Richard Spillenkothen, and Victor Matarranz. Ms. Heard resigned as a director on March 31, 2015, and Mr. de Las Heras resigned as a director on May 29, 2015. Mr. de Las Heras served as Executive Vice President supervising Santander Group's business in the United States until October 2009, when he retired. Mr. Guitard is the Head of Internal Audit at Banco Santander, S.A. and Mr. Matarranz is the Head of Group Strategy at Banco Santander, S.A. With these exceptions, no member of the Compensation Committee (i) was during the 2015 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 except for two fixed rate first mortgage loans to Mr. de Las Heras, one of our former directors.

In 2013, a fixed rate first mortgage loan was made to Mr. de Las Heras in the original principal amount of $400,000. The interest rate on this loan is 3.99%. For 2015, the highest outstanding balance was $356,308.83, and the balance outstanding at December 31, 2015, was $345,600.94. Mr. de Las Heras paid $10,707.89 in principal and $14,022.31 in interest on this loan in 2015. For 2014, the highest outstanding balance was $366,599, and the balance outstanding at December 31, 2014, was $356,309. Mr. de Las Heras paid $10,290 in principal and $14,440 in interest on this loan in 2014. For 2013, the highest outstanding balance was $374,684, and the balance outstanding at December 31, 2013, was $366,599. Mr. de Las Heras paid $8,085 in principal and $14,803 in interest on this loan in 2013. For 2012, the highest outstanding balance was $382,453, and, the balance outstanding at December 31, 2012 was $374,684. Mr. de Las Heras paid $7,769 in principal and $15,119 in interest on this loan in 2012. In 2011, a fixed rate first mortgage loan to Mr. de Las Heras was made in the original principal amount of $255,000. The interest rate on this loan is 2.375%. For 2015, the highest outstanding balance was $236,418.97, and the balance outstanding at December 31, 2015, was $230,072.42. Mr. de Las Heras paid $6,346.55 in principal and $5,546.17 in interest on this loan in 2015. For 2014, the highest outstanding balance was $242,617, and the balance outstanding at December 31, 2014, was $236,419. Mr. de Las Heras paid $6,198 in principal and $5,695 in interest on this loan in 2014. For 2013, the highest outstanding balance was $255,000, and the balance outstanding at December 31, 2013, was $242,617. Mr. de Las Heras paid $12,383 in principal and $5,126 in interest on this loan in 2013.

With the exception of what is noted above, no executive officer of SHUSA serves as a member of the compensation committee or Board of Directors of any other company whose members include an individual who also serves on our Board of Directors or the Compensation Committee.

~~Summary Compensation Table - 2015~~

Name and
Principal Position Year
Salary
($) ⁽⁸⁾

Bonus ($)⁽⁹⁾

Stock
Awards
($)⁽¹⁰⁾
Option
Awards
($) Non-Equity
Incentive
Plan
Compensation
($) Change in
Pension
Value and
Nonqualified
Deferred
Compensation
Earnings
($)
All Other
Compensation
($) ⁽¹¹⁾

Total ($)

Scott Powell ⁽¹⁾
2015 $ 1,653,846
$ 3,750,000
$ —
$ —
$ —
$ —
$ 73,336
$ 5,477,182
President and Chief Executive Officer

Gerald Plush ⁽²⁾
2015 $ 738,462
$ 600,000
$ 509,802
$ —
$ —
$ —
$ 15,060
$ 1,863,324
Chief Financial Officer and Principal Financial Officer 2014 $ 447,692
$ 375,000
$ —
$ —
$ —
$ —
$ 73,417
$ 896,109

Brian Gunn ⁽³⁾
2015 $ 557,692
$ 800,000
$ —
$ —
$ —
$ —
$ 44,720
$ 1,402,412
Chief Risk Officer

Michael Lipsitz ⁽⁴⁾
2015 $ 215,000
$ 1,175,000
$ —
$ —
$ —
$ —
$ 31,063
$ 1,421,063
Chief Legal Officer
Julio Somoza⁽⁵⁾
2015 $ 400,000
$ 275,000
$ 349,261
$ —
$ —
$ 5,511
$ 484,689
$ 1,514,461
Managing Director Technology and Operations

Román Blanco ⁽⁶⁾
2015 $ 1,150,192
$ —
$ 1,068,200
$ —
$ —
$ 33,345
$ 1,823,088
$ 4,074,825
Former President and Chief Executive Officer 2014 $ 1,280,000
$ 865,500
$ 816,746
$ —
$ —
$ 32,398
$ 1,647,746
$ 4,642,390
2013 $ 450,462
$ —
$ 392,309
$ —
$ 593,233
$ 26,672
$ 553,944
$ 2,016,620

Guillermo Sabater⁽⁷⁾
2015 $ 166,853
$ 125,000
$ 264,744
$ —
$ —
$ 10,185
$ 398,324
$ 965,106
Former Comptroller and Co-Principal Financial Officer 2014 $ 361,287
$ 175,000
$ 225,000
$ —
$ —
$ 13,212
$ 899,844
$ 1,674,343
2013 $ 349,253
$ —
$ 305,000
$ —
$ 225,000
$ 11,141
$ 492,563
$ 1,382,957



Scorecard Component (Part)	Quantitative Metrics	Weight		2018 Goal		Full Year Result ⁽¹⁾		% Achievement⁽²⁾		% Credit Towards Quantitative Score ("Weight" * "% Achievement")		Component (Part) Score (sum previous column)
Part 1: Quantitative Score	Customer Satisfaction (%)	2.5	%	22	%	20	%	87.5	%	2.2	%	95.3%
	Loyal Customers (#)	2.5	%	327,359		344,860		105.4	%	2.6	%
	Employee Engagement (%)	5	%	69	%	67	%	87.5	%	4.4	%
	Cost of Credit Ratio (Loan Loss Ratio) (%)	5	%	3.35	%	3.09	%	107.7	%	5.4	%
	Non-Performing Ratio (%)	5	%	2.97	%	3.07	%	96.6	%	4.8	%
	% Completion of Certain Regulatory Requirements	10	%	95	%	97	%	102.1	%	10.2	%
	Contribution to Santander's Capital ($ millions)	20	%	$556		$425		76.3	%	15.3	%
	Net Profit ($ millions)	27.5	%	$899		$908		101.0	%	27.8	%
	Return on Risk Weighted Assets (%)	22.5	%	0.98	%	0.98	%	100.5	%	22.6	%


(1)	Figures shown in the "Full Year Result" column are forecasts as of November 2018. We used these forecasts in determining the 2018 bonus pool. The full-year results were not materially different from the forecasts.


(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. Additionally, % achievement for each metric is capped at 150%, except for return on risk-weighted assets (“RoRWA”) and net profit, which have no cap on % achievement.



Part 2: Qualitative Adjustment	-1.4	%

•progress of our regulatory agenda

•advancement of our integration and governance model

•management of our Risk Appetite Statement

Santander's Remuneration Committee applied a -1.4% qualitative adjustment to our quantitative score based on its assessment of our progress against these qualitative factors.

~~283~~



Part 3: Santander Multiplier	+3.0	%

The evaluation of Santander's categories of quantitative metrics and qualitative factors, which results in the Santander bonus pool funding level of 108.7%, is as follows:

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Table of Contents

~~Footnotes~~:Customers: the goals set for customer satisfaction and loyalty were met with a result of 105.5%, which was qualitatively adjusted upwards to 107.9% for the Group's overall progress on the implementation of conduct risk controls with customers.

Risks: the quantitative results obtained from the evaluated metrics, cost of credit and NPL ratio provided a result of 103.9%, which was qualitatively adjusted upwards to 105.1% for aspects related to the management of the risk appetite model.

Capital: Santander exceeded the capital targets set for the year, providing a result of 101.9%, which was qualitatively adjusted upwards to 105.1% for aspects related to the sustainability of the capital creation.

Profitability: Ordinary net profit result was 98.5%, and the RoRWA result was at 102.2%. Qualitative factors were evaluated, including comparison with comparable companies and the solidity and sustainability of results, and no material qualitative modification was applied (-0.02%), resulting in a category achievement of 100.1%.



1.Part 4: Exceptional Adjustment by Santander's Remuneration Committee	Mr. Powell commenced employment as our Chief Executive Officer on February 27, 2015, and as Santander Bank’s Chief Executive Officer on July 30, 2015. Mr. Powell also served as a director of us and Santander Bank. Mr. Powell received no compensation for his service as a director.+3.1	%


2.	~~Mr. Plush served as our co-Principal Financial Officer through June 19, 2015, and as our sole Principal Financial Officer thereafter.~~


3.	~~Mr. Gunn commenced employment with us on June 8, 2015.~~


4.	~~Mr. Lipsitz commenced employment with us on August 28, 2015.~~


5.	~~Mr. Somoza commenced employment with us on September 1, 2011.~~

Mr. Blanco also served as a director of us and of Santander Bank through July 29, 2015. Mr. Blanco received no compensation for his service as a director. Mr. Blanco terminated employment as our Chief Executive Officer on February 26, 2015, and as Santander Bank’s Chief Executive Officer on July 29, 2015. Mr. Blanco terminated employment with us and Santander Bank on January 29, 2016. Mr. Blanco remains employed by Santander Group.


7.	Mr. Sabater served as our Comptroller and Senior Executive Vice President and as co-Principal Financial Officer through June 19, 2015, upon his termination with us. Mr. Sabater remains employed by Santander Group. For 2015, amounts reflect pro-rated portion of Mr. Sabater’s compensation related to his employment with us.


8.	~~Reflects actual base salary paid through the end of the applicable fiscal year.~~

The amounts in this column for 2015 reflect the cash portion of the applicable named executive officer’s payable under the Executive Bonus Program as well as other cash bonuses payable pursuant to an applicable letter agreement and do not include amounts payable in Santander Group common stock that vest in future years pursuant to the terms of the Executive Bonus Program. We describe the Executive Bonus Program under the caption “Short‑Term Incentive Compensation.” The bonuses earned by the named executive officers for 2015 under the Executive Bonus Program before deferral were:

Named Executive Officer Bonus
Scott Powell $ 2,000,000
Gerald Plush $ 1,200,000
Brian Gunn $ 1,600,000
Michael Lipsitz $ 950,000
Julio Somoza $ 550,000
Guillermo Sabater $ 250,000

~~Mr. Blanco did not receive~~4. Exceptional Adjustment by Santander's Remuneration Committee:Santander’s Remuneration Committee may, in its discretion, make an exceptional adjustment to the pool funding level. Santander took into account various factors, including U.S contributions to Santander's capital goal and profitability growth and in its discretion assigned an exceptional adjustment of +3.1%.

Bonus Pool Calculation Result: Notwithstanding the analysis and calculation above, Santander ultimately determined that our Executive Bonus Pool would equal an amount that could support bonuses paid at an aggregate level up to 107.7% of targets. This level of bonus payout is aligned with the original recommendation of our BCTMC to Santander based on our assessment of scorecard results and our overall performance.

Setting Bonus Targets: We assigned each of the named executive officers a target bonus amount at the beginning of 2018, as disclosed in the Incentive Compensation section above. We determined the target bonus 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 ~~2015~~each individual, impacts of regulatory changes, and our budget. We review these factors at least annually and the target bonus amounts for 2018 were subject to our BCTMC and Santander's Remuneration Committee review.

We conducted a detailed assessment of each named executive officer’s accomplishments versus pre-established goals for the year with respect to ~~his service with us. Amounts reflect~~ the ~~portion~~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; and 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. ~~Sabater’s bonus that he earned for service with us.~~Powell

Mr. Powell’s 2018 functional objectives included, but were not limited to:

~~10.The amounts in this column for 2015 reflect the grant date fair value of such awards granted under Santander Group’s Performance Share Plan determined in accordance~~Deliver budget financials, with ~~A.S.C. Topic 718. The fair value was estimated using~~ a ~~Monte Carlo model~~focus on net income, RoRWA, and ~~included the following assumptions: Santander Group~~return on tangible equity, which are all common volatility 26.24% pa, comparator volatilities 14% pa to 54% pa, future dividend yield 0% pa, risk-free interest rate 0.86% pa, correlation relative to peer group. We describe Santander Group’s Performance Share Planfinancial measures in the ~~Compensation Discussion & Analysis section.~~banking industry.

Execute year one of Santander U.S. integration.

Complete risk framework implementation.

Continue to make progress on outstanding regulatory issues.

Improve compliance, operational risk, including data quality, cyber security, information security, internal controls, and risk control self-assessments ("RCSAs") and SC specific regulatory issues.

Continue to implement a culture of risk management and compliance, and ensure Santander values (including, Simple, Personal and Fair) are embedded.

Improve engagement scores and senior management diversity.

Ensure integration with Santander and Santander initiatives.

Based on his performance results for 2018, we paid Mr. Powell 100% of his target bonus level.

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Table of Contents

~~11.Includes the following amounts~~Mr. Dayal

Mr. Dayal’s 2018 functional objectives included, but were not limited to:

Deliver 2018 budget commitments by line of business.

Optimize balance sheet to enhance capital, liquidity, and profitability.

Ensure that we pass financial regulation tests such as the Comprehensive Capital Analysis and Review ("CCAR") and the DFA stress test.

Implement year one of strategic transformation in Commercial.

Grow Commercial deposits and loans.

CRA upgrade to Satisfactory.

Contribute to our culture of risk management and compliance and ensure that we maintain our values.

Improve engagement scores and senior management diversity.

Ensure integration with Santander and Santander initiatives.

Based on his performance results for 2018, we paid Mr. Dayal approximately 114% of his target bonus level.

Mr. Griffiths

Mr. Griffiths’ 2018 functional objectives included, but were not limited to:

Deliver the 2018 financial plan and efficiency target within Information Technology.

Continue information security remediation processes and materially reduce exposure in order to ormeet Sarbanes Oxley compliance requirements by Q1 2019.

Improve data quality and governance by continuing to mature the Chief Data Officer organization and deploy a standard model across all IHC subsidiaries.

Leverage IHC project governance and realize opportunities across core infrastructure, information security, and corporate functions while eliminating duplicate and redundant systems.

Improve engagement scores and senior management diversity.

Ensure integration with Santander and Santander initiatives.

Based on ~~behalf~~his performance results for 2018, we paid Mr. Griffiths approximately 108% of his target bonus level.

Mr. Wolf

Mr. Wolf’s 2018 functional objectives included, but were not limited to:

Implement the ~~named executive officers~~Career Framework, a comprehensive re-set of titling, job families and roles.

Evolve employee communications, including U.S. intranet landing page and a new Human Resources ("HR") portal.

Develop and begin implementation of a new compensation and benefits strategy.

Enhance governance over compliance training and increase quality and effectiveness.

Improve engagement scores across Santander U.S. and improve senior management diversity.

Execute on HR function expectations for Santander U.S. integration.

Based on his performance results in 2018, we paid Mr. Wolf approximately 108% of his target bonus level.

Mr. Aditya

Mr. Aditya's 2018 functional objectives included, but were not limited to:

Deliver credit and fraud loss and expense budget for Risk.

Accurate and timely production of month-end results and monthly review packages.

Stabilize Risk leadership, develop bench strength.

Addition of talent as needed.

Significantly improve U.S. risk management framework.

Improve collaboration with ~~respect to service for us:~~

Santander and SHUSA's subsidiaries.

Year Powell Plush Gunn Lipsitz Somoza Blanco Sabater

Provision of Car, Car Allowance, or Personal Use of Company Automobile(*) 2015 $ 0
$ 9,000
$ 0
$ 0
$ 12,492
$ 5,566
$ 4,726
2014 $ —
$ 6,750
$ —
$ —
$ —
$ 5,735
$ 12,483
2013 $ —
$ —
$ —
$ —
$ —
$ 0
$ 12,827

Contribution to Defined Contribution Plan 2015 $ 10,600
$ 0
$ 0
$ 0
$ 38,219
$ 298,584
$ 31,053
2014 $ —
$ 0
$ —
$ —
$ —
$ 385,000
$ 40,040
2013 $ —
$ —
$ —
$ —
$ —
$ 101,794
$ 37,809

Relocation Expenses, Temporary Housing, and Spousal Allowance 2015 $ 36,300
$ 0
$ 0
$ 0
$ 0
$ 800
$ 0
2014 $ —
$ 62,187
$ —
$ —
$ —
$ 11,113
$ 0
2013 $ —
$ 0
$ —
$ —
$ —
$ 29,646
$ 0

Housing Allowance, Utility Payments, and Per Diem 2015 $ 0
$ 0
$ 34,850
$ 20,000
$ 106,620
$ 310,000
$ 67,264
2014 $ —
$ 0
$ —
$ —
$ —
$ 372,000
$ 131,280
2013 $ —
$ —
$ —
$ —
$ —
$ 130,240
$ 130,178

Legal, Tax, and Financial Consulting Expenses 2015 $ 0
$ 0
$ 0
$ 0
$ 2,715
$ 4,125
$ 2,375
2014 $ —
$ 0
$ —
$ —
$ —
$ 5,085
$ 3,285
2013 $ —
$ —
$ —
$ —
$ —
$ 2,735
$ 1,500

Tax Reimbursements (**) 2015 $ 26,436
$ 0
$ 2,510
$ 11,063
$ 193,641
$ 677,969
$ 225,034
2014 $ —
$ 0
$ —
$ —
$ —
$ 730,717
$ 440,832
2013 $ —
$ —
$ —
$ —
$ —
$ 188,425
$ 182,993

Tax Payment for Spanish Retirement Plan (***) 2015 $ 0
$ 0
$ 0
$ 0
$ 42,240
$ 330,000
$ 34,320
2014 $ —
$ 0
$ —
$ —
$ —
$ 0
$ 128,678
2013 $ —
$ —
$ —
$ —
$ —
$ 0
$ 0

School Tuition and Language Classes 2015 $ 0
$ 0
$ 4,800
$ 0
$ 57,674
$ 112,637
$ 14,196
2014 $ —
$ 0
$ —
$ —
$ —
$ 111,818
$ 99,030
2013 $ —
$ —
$ —
$ —
$ —
$ 53,736
$ 83,900

Paid Parking 2015 $ 0
$ 6,060
$ 2,560
$ 0
$ 6,060
$ 11,080
$ 3,000
2014 $ —
$ 4,480
$ —
$ —
$ —
$ 7,950
$ 5,950
2013 $ —
$ —
$ —
$ —
$ —
$ 1,470
$ 5,880

Airfare for Trip Home 2015 $ 0
$ 0
$ 0
$ 0
$ 16,000
$ 9,450
$ 0
2014 $ —
$ 0
$ —
$ —
$ —
$ 9,594
$ 26,831
2013 $ —
$ —
$ —
$ —
$ —
$ 41,583
$ 23,602

REIT Shares 2015 $ 0
$ 0
$ 0
$ 0
$ 0
$ 0
$ 0
2014 $ —
$ 0
$ —
$ —
$ —
$ 0
$ 0
2013 $ —
$ —
$ —
$ —
$ —
$ 0
$ 1,000

Taxable Fringe Benefits 2015 $ 0
$ 0
$ 0
$ 0
$ 9,028
$ 62,877
$ 16,356
2014 $ —
$ 0
$ —
$ —
$ —
$ 8,734
$ 11,435
2013 $ —
$ —
$ —
$ —
$ —
$ 4,315
$ 12,874

Total 2015 $ 73,336
$ 15,060
$ 44,720
$ 31,063
$ 484,689
$ 1,823,088
$ 398,324
2014 $ —
$ 73,417
$ —
$ —
$ —
$ 1,647,746
$ 899,844
2013 $ —
$ —
$ —
$ —
$ —
$ 553,944
$ 492,563
Enhance and improve Board Risk Committee presentations with better coverage of risks and stronger oversight and accountability.

~~(*)~~

The value that we attribute to the personal use of company-provided automobiles (as calculated in accordance with Internal Revenue Service guidelines) is generally included as compensation on the Forms W-2 of the named executive officers who receive such benefits. Each such named executive officer is responsible for paying income tax on such amount (generally subject to the right of each named executive officer to receive a tax gross-up payment with respect to the provision of such benefits). We determined the aggregate incremental cost of any personal use of company automobiles in accordance with the requirements of the U.S. Treasury Regulation § 1.61-21.


~~(**)~~	~~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.~~


~~(***)~~	~~Includes amounts reimbursed or paid for U.S. income tax liabilities made in connection with the vesting of Santander Group-sponsored retirement plan amounts in 2013.~~

Improve engagement scores and senior management diversity.

Ensure integration with Santander and Santander initiatives.

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~~Grants~~Based on his performance results for 2018, we paid Mr. Aditya approximately 100% of ~~Plan-Based Awards-2015~~his target bonus level.

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
($)
Name
Grant
__Date__

Target
___(#)__

Scott Powell

$ —

Gerald Plush
2/27/2015

27,427
⁽¹⁾
$ 201,306
2/27/2015 18,285
⁽²⁾
$ 134,206
6/29/2015 24,570
⁽³⁾
$ 134,172
7/21/2015 3,286
⁽⁴⁾
$ 24,074
7/21/2015 2,190
⁽⁵⁾
$ 16,044

Brian Gunn $ —

Michael Lipsitz $ —

Julio Somoza
2/27/2015

20,113
⁽¹⁾
$ 147,623
2/27/2015 13,409
⁽²⁾
$ 98,418
6/29/2015 13,514
⁽³⁾
$ 73,797
7/21/2015 2,410
⁽⁴⁾
$ 17,656
7/21/2015 1,606
⁽⁵⁾
$ 11,766

Román Blanco
2/27/2015

52,752
⁽¹⁾
$ 387,184
2/27/2015 52,752
⁽²⁾
$ 387,184
6/29/2015 36,855
⁽³⁾
$ 201,258
7/21/2015 6,318
⁽⁴⁾
$ 46,287
7/21/2015 6,318
⁽⁵⁾
$ 46,287

Guillermo Sabater
2/27/2015

12,799
⁽¹⁾
$ 93,941
2/27/2015 8,533
⁽²⁾
$ 62,630
6/29/2015 16,380
⁽³⁾
$ 89,448
7/21/2015 1,534
⁽⁴⁾
$ 11,238
7/21/2015 1,022
⁽⁵⁾
$ 7,487
Mr. Gunn

~~Footnotes~~:


~~(1)~~	~~Reflects the shares of vested Santander common stock granted in 2015 to applicable named executive officer under the Executive Bonus Program subject to one-year retention.~~


~~(2)~~	Reflects the number of bonus deferral shares of Santander common stock granted in 2015 to applicable named executive officer under the Executive Bonus Program. Such shares vest ratably over three years on the anniversary of the grant date.


~~(3)~~	Reflects shares of Santander common stock granted under the first cycle of the Performance Shares Plan, subject to vesting criteria as we describe under “Additional Long-Term Incentive Compensation.”


~~(4)~~	~~Reflects additional shares of vested Santander common stock granted in 2015 to applicable named executive officers subject to one-year retention.~~


~~(5)~~	Reflects additional shares of deferral shares of Santander common stock granted in 2015 to applicable named executive officer. Such shares vest ratably over three years on each of February 27, 2016, 2017, and 2018.

*Santander Group’sBased on his performance results for 2018, considering his accomplishments and time in role as the Chief Risk Officer and as a Special Advisor, we paid Mr. Gunn 100% of his target bonus level.

BCTMC Review and Approval

On December 12, 2018, the BCTMC determined preliminary bonus awards under the Executive Bonus Program for the named executive officers (other than Mr. Powell, who is discussed below) subject to validation by Santander’s CEO and Santander's Board of Directors. On January 23, 2019, the BCTMC approved the final bonus awards for the named executive officers other than Mr. Powell. On January 29, 2019, Santander's Board of Directors ~~revised~~also approved the ~~exchange rate used to determine the number of shares awarded under the 2014 Executive Bonus Plan. Initially the exchange rate used was 1.3261, the average annual EUR/USD exchange rate~~final bonus awards for all of ~~2014. In June 2015,~~ the named executive officers.

On January 28, 2019, Santander’s Board Remuneration Committee recommended Mr. Powell’s award to Santander’s Board of Directors ~~adjusted~~and, on January 29, 2019, Santander’s Board of Directors validated and approved Mr. Powell’s award. Our and SC's Board of Directors approved Mr. Powell’s final bonus on February 15, 2019 and February 20, 2019, respectively.

Bonus Delivery: We paid current awards to the ~~exchange rate used~~named executive officers under the Executive Bonus Program for 2018 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 SC common stock and Restricted Stock Units ("RSUs"). These amounts include payments made with respect to ~~determine~~each of the ~~number~~named executive officer’s individual performance and the performance of ~~shares~~Santander, SC (in the case of Mr. Powell), and us, as applicable. 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, SC Common Stock). Amounts that we pay in equity as long-term incentive awards are subject to vesting criteria, as we describe below, and are in the ~~awards~~form of restricted Santander ADRs (and, in the case of Mr. Powell, SC RSUs). Any payment made in shares of Santander ADRs or SC Common Stock under the Executive Bonus Program is subject to ~~1.1875, which was~~a one-year holding requirement from the ~~average exchange rate for~~grant date (in the ~~period~~case of ~~January 1, 2015, through January 15, 2015. As~~immediately vested ADRs/SC shares) or vesting date, if any, of the deferred ADRs/SC RSU shares.

Short-term/Immediate: Under the Executive Bonus Program, the named executive officers receive the short-term award 50% in cash and 50% in immediately vested Santander ADRs, or in the case of Mr. Powell, 50% in cash and 50% in a ~~result, on July 21, 2015, we granted additional~~combination of immediately-vested Santander ADRs and SC shares ~~to impacted employees, including Messrs. Plush, Somoza, Blanco,~~(with the division between Santander ADRs and ~~Sabater, as set forth above,~~SC shares determined based on the ~~adjusted exchange rate. These shares~~allocation of Mr. Powell’s time in 2018 between us and SC).

Long-term/Deferred: Under the Executive Bonus Program, participants are ~~reflected~~required to defer a portion of their bonus depending on their position and/or targeted incentive levels within Santander. For 2018, Santander considers:

Mr. Powell to be a "Category 1" executive, and therefore 60% of his overall bonus award is deferred for five years.

Mr. Dayal to be a "Category 2" executive, and therefore 50% of his overall bonus award is deferred for five years, and

Messrs. Griffiths, Aditya, Wolf, and Gunn to be "Category 3" executives and therefore 40% of their respective overall bonus awards are deferred for three years.

We deliver deferred amounts under the Executive Bonus Program 50% in cash and 50% in restricted Santander ADRs, and in the case of Mr. Powell, 50% in cash, 18% in restricted Santander ADRs, and approximately 32% in SC RSUs. The deferred amounts vest over three or five years, depending on the participant’s category (as described above) and the participant remaining employed through the applicable payment date (except in certain limited circumstances). The deferred amounts are subject to our Policy on Malus and Clawback Requirements, including the requirement that none of the following events have occurred due to the participant's actions during the period prior to each payment:

A significant failure with respect to our risk management or any control or support function;

A material or negative (in each case as ~~additional shares~~determined by our external auditors) restatement of our financial statements (other than any restatement undertaken as a result of a change in ~~footnotes (4) and (5) above.~~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 or 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;

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~~Outstanding Equity Awards at Fiscal 2015 Year End~~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).

Stock 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 ($) Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights that have not Vested
(#) Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights that have not Vested
($)
Scott Powell 0
$ 0

Gerald Plush 18,285
⁽³⁾
$ 89,048
2,190
⁽⁴⁾
$ 10,656
24,570
⁽⁵⁾
$ 119,656

Brian Gunn 0
$ 0

Michael Lipsitz 0
$ 0

Julio Somoza 1,699
⁽¹⁾
$ 8,274
6,014
⁽²⁾
$ 29,288
13,409
⁽³⁾
$ 65,302
1,606
⁽⁴⁾
$ 7,821
13,514
⁽⁵⁾
$ 65,813

Román Blanco 15,844
⁽¹⁾
$ 77,160
30,701
⁽²⁾
$ 149,514
52,752
⁽³⁾
$ 256,902
6,318
⁽⁴⁾
$ 30,679
36,855
⁽⁵⁾
$ 179,484

Guillermo Sabater 4,928
⁽¹⁾
$ 23,999
6,766
⁽²⁾
$ 32,950
8,533
⁽³⁾
$ 41,556
1,022
⁽⁴⁾
$ 4,977
16,380
⁽⁵⁾
$ 79,771
The accrual of a portion of such deferred amounts is subject to the compliance with certain multi-year objectives, which we describe below, during the 2018-2020 period. At the end of the 2020 fiscal year, Santander`s Board will set the maximum amount of each annual payment of the deferred portion for each participant.

~~Footnotes~~:Multi-year objectives, metrics and compliance scales for deferred cash and Santander ADRs applicable to the Executive Bonus Program are as follows:

~~(1)~~a)

Compliance with consolidated earnings per share ("EPS") growth target of Santander ~~Group awarded these shares on February 3, 2013, under~~for 2020 versus 2017. The coefficient corresponding to this target (the "EPS Coefficient") will be obtained from the deferral feature of the 2012 Executive Bonus Program. One-third of these shares vested on February 3, 2014, one-third vested on February 3, 2015, and one-third vest on February 3, 2016, in accordance with the terms of the Executive Bonus Program.following table:



2020 EPS growth (% against 2017)		EPS Coefficient
≥ 25%		1

~~(2)~~b)

Relative performance of total shareholder return ("TSR", as we define below) of Santander ~~Group awarded these shares on February 8, 2014, under~~for the ~~deferral feature~~2018-2020 period compared to the weighted TSRs of ~~the 2013 Executive Bonus Program. One-third~~a peer group of ~~these shares vested on February 8, 2015, one-third vested on February 8, 2016, and one-third vest on February 8, 2017, in accordance with the terms of the Executive Bonus Program.~~17 financial institutions, which we set forth below.

We define "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, 2018 (for the calculation of the initial value), and of the 15 trading sessions prior to January 1, 2021 (for the calculation of the final value).

The peer group is the following 17 financial institutions:



Financial Institutions
Banco Bilbao Vizcaya Argentaria SA	Itaú Unibanco Holding SA
JPMorgan Chase & Co.	Wells Fargo & Co
Bank of America Corp	Unicredit SpA
UBS Group AG	Standard Chartered PLC
Intesa San Paolo SpA	Citigroup Inc
HSBC Holdings PLC	ING Groep NV
Barclays PLC	Lloyds Banking Group PLC
BNP Paribas SA	Deutsche Bank AG
Société Générale SA

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 percentile		1
From the 33rd to the 66th percentiles		0-1
Below the 33rd percentile		0

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~~(3)~~c)

Compliance with the fully-loaded CET1 ratio target of Santander Group ~~awarded these shares on February 27, 2015, under~~for the ~~deferral feature of~~financial year 2020. The coefficient corresponding to this target (the "CET1 Coefficient") will be obtained from the ~~2014 Executive Bonus Program. One-third of these shares vest on February 27, 2016, one-third vest on February 27, 2017, and one-third vest on February 27, 2018.~~following table:



~~(4)~~CET1 in 2019	Santander awarded these shares on July 21, 2015, as additional shares granted under the 2014 Executive Bonus Program. One-third of these shares vest on February 27, 2016, one‑third vest on February 27, 2017, and one-third vest on February 27, 2018.

	CET1 Coefficient
~~(5)~~≥ 11.30%	Santander awarded these shares on June 29, 2015, under the first cycle of the Performance Shares Plans. One‑third of these shares vest on June 29, 2016, one-third vest on June 29, 2017, and one‑third vest on June 29, 2018. The number of shares delivered depend on achievement of performance criteria set forth in the first cycle, which we describe in the Compensation Discussion analysis under the section entitled “Additional Long-Term Incentive Compensation.”	1
≥ 11% but < 11.30%		0.5‑1
< 11%		0

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 formula will be applied to each one of the annual payments pending payment:

Final Annual Payment = Amount x ((1/3 x A) + (1/3 x B) + (1/3 x C))

where:

"Amount" 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 2020 with respect to 2017.

"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 2018-2020 period with respect to the peer group.

"C" is the CET1 coefficient according to compliance with the CET1 target for 2020 described in paragraph (c) above.

For SC RSUs awarded to Mr. Powell, the performance metrics are weighted 50% towards Santander performance and 50% towards SC performance and follow a balanced "scorecard" approach.

The Santander goals are described above.

Special Regulatory Incentive Program ("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.

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~~Option Exercises~~2018 Program:

Total target opportunity over the life of the multi-year program was set at $2,000,000 for Mr. Powell and ~~Stock Vested-2015~~

Option Awards Stock Awards
Name Number of Shares Acquired on Exercise (#) Value Realized on Exercise ($) Number of Shares
Acquired on
Vesting (#) Value Realized
on Vesting (#)
Scott Powell —
$ —
—
$ —
Gerald Plush —
$ —
30,713
$ 225,261
Brian Gunn —
$ —
—
$ —
Michael Lipsitz —
$ —
—
$ —
Julio Somoza —
$ —
27,230
$ 203,552
Román Blanco —
$ —
97,404
$ 731,094
Guillermo Sabater —
$ —
28,219
$ 195,860

~~Equity Compensation Plans~~

~~As we describe in~~at $1,000,000 each for the ~~Compensation Discussion and Analysis, the~~other named executive ~~officers receive a portion~~officers.

For 2018, 35% of ~~their compensation in Santander common stock (or American Depositary Shares,~~each participant’s total targeted opportunity was based on achieving certain regulatory and/or compliance criteria or goals.

We successfully achieved or met the criteria to satisfy achieving these goals for 2018, and therefore our BCTMC, the SC BCTMC in the case of ~~native U.S. participants or participants who elect~~Mr. Powell, and Santander's Remuneration Committee each approved the named executive officers' actual award amounts for 2018 at 35% of their respective total target opportunity.

Any payments made under the SRIP to ~~have their shares delivered in~~our named executive officers are subject to the ~~U.S.)~~same payment, deferral, and performance requirements as those applicable to payments made under the Executive Bonus Program, which we describe above.

Total Results for 2018 Executive Bonus Program and SRIP

The following chart summarizes the ~~Performance Shares Plan. We set forth below information about~~2018 Executive Bonus Program and SRIP awards for the ~~potential shares that our~~ named executive ~~officers may receive under these programs.~~officers:



Name		Cash			Equity
Name		Immediate ($)	Deferred ($)	Total ($)	Immediate ($)	Deferred ($)	Total ($)
Mr. Powell	Bonus	$850,000	$1,275,000	$2,125,000	$850,000	$1,275,000	$2,125,000
Mr. Powell	SRIP	$140,000	$210,000	$350,000	$140,000	$210,000	$350,000
Mr. Dayal	Bonus	$537,500	$537,500	$1,075,000	$537,500	$537,500	$1,075,000
Mr. Dayal	SRIP	$87,500	$87,500	$175,000	$87,500	$87,500	$175,000
Mr. Griffiths	Bonus	$537,000	$358,000	$895,000	$537,000	$358,000	$895,000
Mr. Griffiths	SRIP	$105,000	$70,000	$175,000	$105,000	$70,000	$175,000
Mr. Wolf	Bonus	$382,500	$255,000	$637,500	$382,500	$255,000	$637,500
Mr. Wolf	SRIP	$105,000	$70,000	$175,000	$105,000	$70,000	$175,000
Mr. Aditya	Bonus	$322,800	$215,200	$538,000	$322,800	$215,200	$538,000
Mr. Aditya	SRIP	$105,000	$70,000	$175,000	$105,000	$70,000	$175,000
Mr. Gunn	Bonus	$276,750	$184,500	$461,250	$276,750	$184,500	$461,250
Mr. Gunn	SRIP	$105,000	$70,000	$175,000	$105,000	$70,000	$175,000

The total cash amount for each named executive officer, both immediate and deferred, is included in the 2018 "Bonus" column in the Summary Compensation Table.

These equity awards were granted in early 2019 after the 2018 performance assessments, and under SEC rules will be reported as 2019 compensation based on their accounting grant date fair values.

Additional Long-Term Incentive Compensation

Santander discontinued use of any additional long-term incentive plan beginning with the 2016 performance year. Santander merged the targeted awards made under the long-term incentive plan in previous years with the targeted incentive awards granted under the Executive Bonus Program.

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Executive Bonus Program

Our incentive program, which we refer to as the "Executive Bonus Program," establishes both financial and non-financial measures to determine the bonus pool level from which we pay annual bonuses. We align the Executive Bonus Program each year with Santander’s corporate bonus program for executives of similar levels across Santander. Each of the named executive officers participated in the Executive Bonus Program for 2018. The general structure of the Executive Bonus Program:

defers a portion of a participant’s award over a three- or five-year period, depending on the participant’s position within our organization, subject to the non-occurrence of certain events;

links a portion of such amount to Santander performance over a multi-year period; and

pays a portion of such award in cash and a portion in equity, in accordance with the rules and standards referenced above and set forth in more detail below.

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On February 13, 2018, 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), and Santander’s shareholders approved it at its annual meeting of shareholders on March 23, 2018. On March 6, 2018, we approved the preliminary design of the Executive Bonus Program scorecard. Santander’s Remuneration Committee and Board of Directors approved the final scorecard for the Executive Bonus Program, as recommended by our BCTMC, on April 16, 2018 and April 23, 2018, respectively.

Under the Executive Bonus Program, we determine an aggregate pool from which awards for all participants are 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 Program links our executives' pay to performance. Our BCTMC worked with Mr. Powell and Santander’s Human Resources Committee and the Board Remuneration Committee to validate that the proposed scorecard performance metrics aligned with overall business goals. Our BCTMC 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 Program are determined in accordance with International Financial Reporting Standards because Santander uses similar terms and metrics in its incentive programs across the Group, making the use of country-specific accounting standards infeasible.

Our named executive officers ~~deferred~~all perform functions for both us and SBNA, and in the ~~following amounts into~~case of Mr. Powell, also for SC. Our BCTMC, and in the ~~Executive Bonus Program~~case of Mr. Powell, the SC BCTMC, agreed to consider individual allocation of the final bonus pool funding level for ~~2015 and will be entitled to the following number of shares if the program’s conditions are satisfied:~~

Named Executive Officer Total Amount Deferred Cash Deferred Shares Deferred*
Scott Powell $1,000,000 $500,000 115,967
Gerald Plush $480,000 $240,000 55,664
Brian Gunn $640,000 $320,000 74,219
Michael Lipsitz $380,000 $190,000 44,068
Julio Somoza $220,000 $110,000 25,513
Guillermo Sabater** $100,000 $50,000 11,597

* Number of sharesthese executives based on both our and SBNA's performance, and in the case of Mr. Powell, SC's performance, to align pay decisions to all applicable businesses' performance as well as certain principles set forth by our regulators.

SHUSA Bonus Pool Scorecard Overview: The bonus pool funding is determined through a scorecard, which is primarily driven by a quantitative (mathematically informed) score, and is then adjusted by qualitative and discretionary measures. We develop the scorecard metrics to measure our, our subsidiaries’ and our business units’ performance on an ~~exchange rate of €1.08576 to $1 and a $4.31 per share price. Amounts deferred by and shares awarded are estimates subject to~~aggregate basis over the ~~tax-equalization provisions of the named executive officer’s respective employment or letter agreement, if applicable~~.full year.

** Amounts for Mr. Sabater reflects the portion of amounts that he earned under the Executive Bonus Program in connection with his service to us.

~~Performance Shares Plan~~

~~Our named executive officers are also eligible to receive shares under the first and second cycles of Performance Shares Plan, which~~Together these make up our overall bonus pool funding level. As we describe in more detail ~~under~~below, the ~~caption “Additional Long-Term Incentive Compensation.”~~

~~The maximum value~~bonus pool funding was approved by Santander at 100.0% of ~~shares payable under~~aggregate target amounts for 2018. We determine the ~~first cycle as determined and awarded~~aggregate total of the bonus amounts, in U.S. dollars, available for distribution to our participating employees, including the named executive officers, by multiplying this bonus pool funding level by the sum of target incentives.

Below is ~~as follows:~~a summary of how we calculated the bonus pool for 2018.



Part 1: Quantitative Score	95.3	%

In collaboration with Santander, we pre-assign each metric with a weight and a goal. Then Santander calculates the percentage credit towards the quantitative score for each metric by multiplying its percentage weight by its percentage achievement. Finally, we add up all the percentages to derive the total quantitative score.

For 2018, our total quantitative score was 95.3%.

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Table 1: SHUSA Bonus Pool Funding Scorecard



Scorecard Component (Part)	Quantitative Metrics	Weight		2018 Goal		Full Year Result ⁽¹⁾		% Achievement⁽²⁾		% Credit Towards Quantitative Score ("Weight" * "% Achievement")		Component (Part) Score (sum previous column)
Part 1: Quantitative Score	Customer Satisfaction (%)	2.5	%	22	%	20	%	87.5	%	2.2	%	95.3%
	Loyal Customers (#)	2.5	%	327,359		344,860		105.4	%	2.6	%
	Employee Engagement (%)	5	%	69	%	67	%	87.5	%	4.4	%
	Cost of Credit Ratio (Loan Loss Ratio) (%)	5	%	3.35	%	3.09	%	107.7	%	5.4	%
	Non-Performing Ratio (%)	5	%	2.97	%	3.07	%	96.6	%	4.8	%
	% Completion of Certain Regulatory Requirements	10	%	95	%	97	%	102.1	%	10.2	%
	Contribution to Santander's Capital ($ millions)	20	%	$556		$425		76.3	%	15.3	%
	Net Profit ($ millions)	27.5	%	$899		$908		101.0	%	27.8	%
	Return on Risk Weighted Assets (%)	22.5	%	0.98	%	0.98	%	100.5	%	22.6	%


(1)	Figures shown in the "Full Year Result" column are forecasts as of November 2018. We used these forecasts in determining the 2018 bonus pool. The full-year results were not materially different from the forecasts.


(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. Additionally, % achievement for each metric is capped at 150%, except for return on risk-weighted assets (“RoRWA”) and net profit, which have no cap on % achievement.



Part 2: Qualitative Adjustment	-1.4	%

•progress of our regulatory agenda

•advancement of our integration and governance model

•management of our Risk Appetite Statement

Santander's Remuneration Committee applied a -1.4% qualitative adjustment to our quantitative score based on its assessment of our progress against these qualitative factors.



~~Named~~Part 3: Santander Multiplier	+3.0	%

The evaluation of Santander's categories of quantitative metrics and qualitative factors, which results in the Santander bonus pool funding level of 108.7%, is as follows:

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Profitability: Ordinary net profit result was 98.5%, and the RoRWA result was at 102.2%. Qualitative factors were evaluated, including comparison with comparable companies and the solidity and sustainability of results, and no material qualitative modification was applied (-0.02%), resulting in a category achievement of 100.1%.



Part 4: Exceptional Adjustment by Santander's Remuneration Committee	+3.1	%

4. Exceptional Adjustment by Santander's Remuneration Committee:Santander’s Remuneration Committee may, in its discretion, make an exceptional adjustment to the pool funding level. Santander took into account various factors, including U.S contributions to Santander's capital goal and profitability growth and in its discretion assigned an exceptional adjustment of +3.1%.

Setting Bonus Targets: We assigned each of the named executive officers a target bonus amount at the beginning of 2018, as disclosed in the Incentive Compensation section above. We determined the target bonus 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 the target bonus amounts for 2018 were subject to our BCTMC and Santander's Remuneration Committee review.

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; and 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. Powell

Mr. Powell’s 2018 functional objectives included, but were not limited to:

Deliver budget financials, with a focus on net income, RoRWA, and return on tangible equity, which are all common financial measures in the banking industry.

Execute year one of Santander U.S. integration.

Complete risk framework implementation.

Continue to make progress on outstanding regulatory issues.

Improve compliance, operational risk, including data quality, cyber security, information security, internal controls, and risk control self-assessments ("RCSAs") and SC specific regulatory issues.

Continue to implement a culture of risk management and compliance, and ensure Santander values (including, Simple, Personal and Fair) are embedded.

Improve engagement scores and senior management diversity.

Ensure integration with Santander and Santander initiatives.

Based on his performance results for 2018, we paid Mr. Powell 100% of his target bonus level.

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Mr. Dayal

Mr. Dayal’s 2018 functional objectives included, but were not limited to:

Deliver 2018 budget commitments by line of business.

Optimize balance sheet to enhance capital, liquidity, and profitability.

Ensure that we pass financial regulation tests such as the Comprehensive Capital Analysis and Review ("CCAR") and the DFA stress test.

Implement year one of strategic transformation in Commercial.

Grow Commercial deposits and loans.

CRA upgrade to Satisfactory.

Contribute to our culture of risk management and compliance and ensure that we maintain our values.

Improve engagement scores and senior management diversity.

Ensure integration with Santander and Santander initiatives.

Based on his performance results for 2018, we paid Mr. Dayal approximately 114% of his target bonus level.

Mr. Griffiths

Mr. Griffiths’ 2018 functional objectives included, but were not limited to:

Deliver the 2018 financial plan and efficiency target within Information Technology.

Continue information security remediation processes and materially reduce exposure in order to meet Sarbanes Oxley compliance requirements by Q1 2019.

Improve data quality and governance by continuing to mature the Chief Data Officer organization and deploy a standard model across all IHC subsidiaries.

Leverage IHC project governance and realize opportunities across core infrastructure, information security, and corporate functions while eliminating duplicate and redundant systems.

Improve engagement scores and senior management diversity.

Ensure integration with Santander and Santander initiatives.

Based on his performance results for 2018, we paid Mr. Griffiths approximately 108% of his target bonus level.