UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the fiscal year ended December 31, 2015
OR
| o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to .
Commission File Number: 001-16581
SANTANDER HOLDINGS USA, INC.
(Exact name of registrant as specified in its charter)
Virginia (State or other jurisdiction of incorporation or organization) | 23-2453088 (I.R.S. Employer Identification No.) | |
75 State Street, Boston, Massachusetts (Address of principal executive offices) | 02109 (Zip Code) | |
(617) 346-7200
Registrant’s telephone number including area code
Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes o. No þ.
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.
Yes o. No þ.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ. No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation ST (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ. No o.
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer o | Accelerated filer o | Non-accelerated filer þ | Smaller reporting company o | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o. No þ.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
| Class | Outstanding at March 31, 2016 | |
| Common Stock (no par value) | 530,391,043 shares | |
INDEX
| Page | |
| Ex-31.1 Certification | |
| Ex-31.2 Certification | |
| Ex-31.3 Certification | |
| Ex-32.1 Certification | |
| Ex-32.2 Certification | |
| Ex-32.3 Certification | |
| EX-101 INSTANCE DOCUMENT | |
| EX-101 SCHEMA DOCUMENT | |
| EX-101 CALCULATION LINKBASE DOCUMENT | |
| EX-101 LABELS LINKBASE DOCUMENT | |
| EX-101 PRESENTATION LINKBASE DOCUMENT | |
| EX-101 DEFINITION LINKBASE DOCUMENT | |
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FORWARD-LOOKING STATEMENTS
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
This Annual Report on Form 10-K of Santander Holdings USA, Inc. (“SHUSA” or the “Company”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the financial condition, results of operations, business plans and future performance of the Company. Words such as “may,” “could,” “should,” “looking forward,” “will,” “would,” “believe,” “expect,” “hope,” “anticipate,” “estimate,” “intend,” “plan,” “assume” or similar expressions are intended to indicate forward-looking statements.
Although SHUSA believes that the expectations reflected in these forward-looking statements are reasonable as of the date on which the statements are made, these statements are not guarantees of future performance and involve risks and uncertainties based on various factors and assumptions. Among the factors that could cause SHUSA’s financial performance to differ materially from that suggested by forward-looking statements are:
| • | the effects of regulation and policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the "FDIC"), the Office of the Comptroller of the Currency (the “OCC”) and the Consumer Financial Protection Bureau (the “CFPB”), including changes in trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve, the failure to adhere to which could subject SHUSA to formal or informal regulatory compliance and enforcement actions; |
| • | the strength of the United States economy in general and regional and local economies in which SHUSA conducts operations in particular, which may affect, among other things, the level of non-performing assets, charge-offs, and provisions for credit losses; |
| • | continued residual effects of recessionary conditions and uneven spread of positive impacts of recovery on the U.S. economy and SHUSA's counterparties, including adverse impacts on levels of unemployment, loan utilization rates, delinquencies, defaults and counterparties' ability to meet credit and other obligations; |
| • | the ability of certain European member countries to continue to service their debt and the risk that a weakened European economy could negatively affect U.S.-based financial institutions, counterparties with which SHUSA does business, as well as the stability of global financial markets; |
| • | inflation, interest rate, market and monetary fluctuations, which may, among other things, reduce net interest margins, impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets; |
| • | adverse movements and volatility in debt and equity capital markets and adverse changes in the securities markets, including those related to the financial condition of significant issuers in SHUSA’s investment portfolio; |
| • | SHUSA’s ability to manage changes in the value and quality of its assets, changing market conditions that may force management to alter the implementation or continuation of cost savings or revenue enhancement strategies and the possibility that revenue enhancement initiatives may not be successful in the marketplace or may result in unintended costs; |
| • | SHUSA's ability to grow revenue, manage expenses, attract and retain highly-skilled people and raise capital necessary to achieve its business goals and comply with regulatory requirements and expectations; |
| • | SHUSA’s ability to timely develop competitive new products and services in a changing environment that are responsive to the needs of SHUSA's customers and are profitable to SHUSA, the acceptance of such products and services by customers, and the potential for new products and services to impose additional costs on SHUSA and expose SHUSA to increased operational risk; |
| • | changes or potential changes to the competitive environment, including changes due to regulatory and technological changes, the effects of industry consolidation and perceptions of SHUSA as a suitable service provider or counterparty; |
| • | the ability of SHUSA and its third-party vendors to convert and maintain SHUSA’s data processing and related systems on a timely and acceptable basis and within projected cost estimates; |
| • | SHUSA's ability to control operational risks, data security breach risks and outsourcing risks, and the possibility of errors in quantitative models SHUSA uses to manage its business and the possibility that SHUSA's controls will prove insufficient, fail or be circumvented; |
| • | the impact of changes in financial services policies, laws and regulations, including laws, regulations and policies concerning taxes, banking, capital, liquidity, proper accounting treatment, securities and insurance, the applications and interpretations thereof by regulatory bodies and the impact of changes in and interpretations of generally accepted accounting principles in the United States of America ("GAAP"); |
| • | the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "DFA"), enacted in July 2010, which is a significant development for the industry, the full impact of which will not be known until the rule-making processes mandated by the legislation are complete, although the impact has involved and will involve higher compliance costs that have affected and will affect SHUSA’s revenue and earnings negatively; |
| • | SHUSA's ability to promote a strong culture of risk management, operating controls, compliance oversight and governance that meets regulatory expectations; |
| • | competitors of SHUSA that may have greater financial resources or lower costs, may innovate more effectively, or may develop products and technology that enable those competitors to compete more successfully than SHUSA; |
| • | acts of terrorism or domestic or foreign military conflicts; and acts of God, including natural disasters; |
| • | the costs and effects of regulatory or judicial proceedings; |
| • | the outcome of ongoing tax audits by federal, state and local income tax authorities that may require SHUSA to pay additional taxes or recover fewer overpayments compared to what has been accrued or paid as of period-end; |
| • | adverse publicity, whether specific to SHUSA or regarding other industry participants or industry-wide factors, or other reputational harm; and |
| • | SHUSA’s success in managing the risks involved in the foregoing. |
1
GLOSSARY OF ABBREVIATIONS AND ACRONYMS
Santander Holdings USA, Inc. provides the following list of abbreviations and acronyms as a tool for the reader that are used in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Consolidated Financial Statements and the Notes to Consolidated Financial Statements.
2015 Amendment: OCC consent order signed by Santander Bank, National Association ("SBNA") on June 16, 2015 which amended prior orders signed by SBNA and the Office of the Comptroller of the Currency on April 13, 2011 and January 7, 2013 | IHC: U.S. intermediate holding company | |
ABS: Asset-backed securities | IFRS: International Financial Reporting Standards | |
ACL: Allowance for credit losses | IPO: Initial public offering | |
ADRs: American Depositary Receipts | IRS: Internal Revenue Service | |
ALLL: Allowance for Loan and Lease Losses | ISDA: International Swaps and Derivatives Association, Inc. | |
Alt-A: Loans originated through brokers outside the Bank's geographic footprint, often lacking full documentation | IT: Information Technology | |
AOD: Assurance of Discontinuance | Legacy Covered Funds: Investments in and relationships with covered funds that were in place prior to December 31, 2013 | |
APR: Annual percentage rate | LCR: Liquidity coverage ratio | |
ASC: Accounting Standards Codification | LHFI: Loans held for investment | |
ASU: Accounting Standards Update | LHFS: Loans held-for-sale | |
ATM: Automated teller machine | LIBOR: London Interbank Offered Rate | |
Bank: Santander Bank, National Association | LIHTC: Low Income Housing Tax Credit | |
BB&T: BB&T Corp. | LTD: Long-term debt | |
BHC: Bank holding company | LTV: Loan-to-value | |
BNY Mellon: Bank of New York Mellon | MBS: Mortgage-backed securities | |
BOLI: Bank-owned life insurance | Massachusetts AG: Massachusetts Attorney General | |
Brokers: Independent parties | MD&A: Management's Discussion and Analysis of Financial Condition and Results of Operations | |
CBP: Citizens Bank of Pennsylvania | MSR: Mortgage servicing right | |
CCAR: Comprehensive Capital Analysis and Review | MVE: Market value of equity | |
CCART: Chrysler Capital Auto Receivables Trust | NCI: Non-controlling interest | |
CD: Certificate(s) of deposit | NMD: Non-maturity deposits | |
CEVF: Commercial equipment vehicle funding | NMTC: New Markets Tax Credit | |
CET1: Common equity tier 1 | NPL: Non-performing loans | |
CFPB: Consumer Financial Protection Bureau | NPR: Notice of proposed rulemaking | |
CFTC: U.S. Commodity Futures Trading Commission | NPWMD: Non-Proliferation of Weapons of Mass Destruction | |
Change in Control: First quarter 2014 change in control and consolidation of SC | NSFR: Net stable funding ratio | |
Chrysler Agreement: Ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC, formerly Chrysler Group LLC, signed by SC | NYSE: New York Stock Exchange | |
Chrysler Capital: trade name used in providing services under the Chrysler Agreement. | OCC: Office of the Comptroller of the Currency | |
CID: Civil investigative demand | OEM: Original equipment manufacturer | |
CLO: Collateralized loan obligations | OIS: Overnight indexed swap | |
CLTV: Combined loan-to-value | Order: OCC consent order signed by SBNA on January 26, 2012 which replaced a prior order signed by the Bank and other parties with the OTS. | |
CMO: Collateralized mortgage obligation | OREO: Other real estate owned | |
CODM: Chief Operating Decision Maker | OTC Derivatives: Over-the-counter derivatives | |
Company: Santander Holdings USA, Inc. | OTS: Office of Thrift Supervision | |
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Consent Order: Consent order signed by the Bank with the OCC on April 17, 2015 that resolved issues related to the sale and servicing of the identify theft protection product. | OTS Order: Consent order signed by the Bank and other parties with the OTS on April 13, 2011 resolving certain of the Bank's and other parties' foreclosure activities. | |
Covered Fund: hedge fund or a private equity fund under the Volcker Rule | OTTI: Other-than-temporary impairment | |
CPR: Changes in anticipated loan prepayment rates | Plan: Pension plan acquired during acquisition Independence Community Bank Corp. | |
CRA: Community Reinvestment Act | REIT: Real estate investment trust | |
DCF: Discounted cash flow | RIC: Retail installment contracts | |
DDFS: Dundon DFS LLC | RSUs: Restricted stock units | |
DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act | RV: Recreational vehicle | |
DOJ: Department of Justice | RWA: Risk-weighted assets | |
DOJ Order: Consent order signed by SC with the DOJ on February 25, 2015 that resolved claims related to certain of SC's repossession and collection activities. | S&P: Standard & Poor's | |
DTI: Debt-to-income | Santander: Banco Santander, S.A. | |
DTL: Deferred tax liability | Santander NY: New York branch of Banco Santander, S.A. | |
ECOA: Equal Credit Opportunity Act | Santander Transaction: SHUSA became a wholly-owned subsidiary of Santander on January 30, 2009 | |
EPS: Enhanced Prudential Standards | Santander US: [Used in Item 11] current composition of Santander Holdings USA, Inc. | |
EMI: Equity method investment | Santander UK: Santander UK plc | |
ETR: Effective tax rate | SBNA: Santander Bank, National Association | |
Exchange Act: Securities Exchange Act of 1934, as amended | SC: Santander Consumer USA Holdings Inc. and its subsidiaries | |
FASB: Financial Accounting Standards Board | SC Common Stock: Common shares of SC | |
FBO: Foreign banking organization | SCF: Statement of Cash Flows | |
FDIA: Federal Deposit Insurance Act | SC Transaction: The de-consolidation of SC from SHUSA on December 31, 2012 | |
FDIC: Federal Deposit Insurance Corporation | SCI: Santander Consumer International PR, LLC | |
Federal Reserve: Board of Governors of the Federal Reserve System | SCRA: Servicemembers Civil Relief Act | |
FHLB: Federal Home Loan Bank | SDART: Santander Drive Auto Receivables Trust, a SC securitization platform | |
FHLMC: Federal Home Loan Mortgage Corporation | SDGT: Specially Designated Global Terrorist | |
FICO: Fair Isaac Corporation® credit scoring model | SDN: Specially Designated Nationals and Blocked Persons | |
Final Rule: Rule implementing certain of the EPS mandated by Section 165 of the DFA | SEC: Securities and Exchange Commission | |
FNMA: Federal National Mortgage Association | Securities Act: Securities Act of 1933, as amended | |
FOMC: Federal Open Market Committee | Separation Agreement: Agreement entered into by Thomas Dundon, the former Chief Executive Officer of SC, SC, DDFS, Santander Consumer USA Inc. and Banco Santander, S.A on July 2, 2015. | |
FRB: Federal Reserve Bank | SHUSA: Santander Holdings USA, Inc. | |
FSB: Financial Stability Board | SIFI: systemically important financial institution | |
FVO: Fair value option | SPE: Special purpose entity | |
GAAP: Accounting principles generally accepted in the United States of America | Sponsor Holdings: Sponsor Auto Finance Holding Series LP | |
GCB: Global Corporate Banking | Steck Lawsuit: purported securities class action lawsuit filed against SC on August 26, 2014. | |
GSE: Government-sponsored entity | TDR: Troubled debt restructuring | |
HQLA: High-quality liquid assets | TLAC: Total loss absorbing capacity | |
Trusts: Securitization trusts | ||
VIE: Variable interest entity | ||
VOE: Voting rights entity | ||
3
PART I
ITEM 1 - BUSINESS
General
Santander Holdings USA, Inc. ("SHUSA" or the "Company") is the parent company of Santander Bank, National Association, (the "Bank" or "SBNA"), a national banking association, and owns a majority interest (approximately 59%) of Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SC"), a specialized consumer finance company focused on vehicle finance and third-party servicing. SHUSA is headquartered in Boston, Massachusetts and the Bank's main office is in Wilmington, Delaware. SC is headquartered in Dallas, Texas. SHUSA is a wholly-owned subsidiary of Banco Santander, S.A. ("Santander").
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. At December 31, 2015, the Bank had 675 branches and 2,100 automated teller machines (ATMs) across its footprint. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios. The Bank earns interest income on its loan and investment portfolios. In addition, the Bank generates non-interest income from a number of sources, including deposit and loan services, sales of loans and investment securities, capital markets products and bank-owned life insurance ("BOLI"). The Bank's principal non-interest expenses include employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. The volumes, and accordingly the financial results, of the Bank are affected by the economic environment, including interest rates and consumer and business confidence and spending, as well as the competitive conditions within the Bank's geographic footprint.
SC's primary business is the indirect origination of retail installment contracts (RICs), principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to 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 Fiat Chrysler Automobiles US LLC ("FCA"), formerly Chrysler Group LLC signed by SC in 2013 (the "Chrysler Agreement"). These products and services include consumer RIC and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. SC also originates vehicle loans through a web-based direct lending program, purchases vehicle RICs from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, SC has several relationships through which it provides personal unsecured consumer loans, private-label credit cards and other consumer finance products. Common stock of SC ("SC Common Stock") is listed for trading on the New York Stock Exchange (the "NYSE") under the trading symbol "SC".
Segments
The Company's reportable segments are organized in accordance with its strategic business units. Except for the Company's SC segment, segments are focused principally around the customers the Bank serves.
In 2015, the Company's reportable segments include the following:
Retail Banking
The Retail Banking segment is primarily comprised of the Bank's branch locations and the residential mortgage business. The branch locations offer a wide range of products and services to customers, and attract deposits by offering a variety of deposit instruments, including demand and interest-bearing demand deposit accounts, money market and savings accounts, certificates of deposit (CDs) and retirement savings products. The branch locations also offer consumer loans such as credit cards, home equity loans and lines of credit, as well as business banking and small business loans to individuals. The Retail Banking segment also includes investment services and provides annuities, mutual funds, managed monies, and insurance products, and acts as an investment brokerage agent to the customers of the Retail Banking segment.
Auto Finance & Business Banking
The Auto Finance & Business Banking segment currently provides indirect consumer leasing as well as commercial loans to dealers and financing for commercial vehicles and municipal equipment. The Auto Finance and Alliances segment includes the activity related to the Bank's intercompany agreements with SC.
4
In conjunction with the Chrysler Agreement, the Bank has an agreement with SC under which SC provides the Bank with the first right to review and assess Chrysler dealer floor plan lending opportunities and, if the Bank elects, to provide the proposed financing. Historically and through September 30, 2014, SC provided servicing under this arrangement. Effective October 1, 2014, the servicing of all Chrysler Capital receivables from dealers, including receivables held by the Bank and by SC, were transferred to the Bank. The agreements executed in connection with this transfer require SC to provide the Bank first right to review and assess Chrysler Capital dealer lending opportunities which requires the Bank to pay SC a relationship management fee based upon the performance and yields of Chrysler Capital dealer loans held by the Bank. All intercompany revenue and fees between the Bank and SC are eliminated in the consolidated results of SHUSA. The terms of this lending relationship were renegotiated between SBNA and SC in the first quarter of 2016. The terms provide greater fee income opportunity for SC for leads provided that meet SBNA approved credit criteria.
In 2014, the Bank entered into a flow agreement with SC under which the Bank has the first right to review and approve all prime and super prime Chrysler Capital consumer vehicle lease applications. SC could review any applications declined by the Bank for SC’s own portfolio. SC provided servicing and receives an origination fee on all leases originated under this agreement. All intercompany revenue and fees between the Bank and SC are eliminated in the consolidated results of SHUSA. In April 2015, the Bank and SC determined not to renew this direct origination agreement, which expired by its terms on May 9, 2015.
Real Estate and Commercial Banking
The Real Estate and Commercial Banking segment offers commercial real estate loans, multifamily loans, commercial loans, and the Bank's related commercial deposits. This segment also provides financing and deposits for government entities and niche product financing for specific industries, including oil and gas and mortgage warehousing, among others.
Global Corporate Banking ("GCB")
The GCB segment serves the needs of global commercial and institutional customers by leveraging the international footprint of the Santander group to provide financing and banking services to corporations with over $500 million in annual revenues. GCB's offerings and strategy are based on Santander's local and global capabilities in wholesale banking.
Santander Consumer USA Inc. ("SC")
SC is a specialized consumer finance company focused on vehicle finance and third-party servicing. SC’s primary business is the indirect origination of RICs, principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers. In conjunction with the Chrysler Agreement, SC offers a full spectrum of auto financing products and services to Chrysler customers and dealers under the Chrysler Capital brand. These products and services include consumer RICs and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. SC also originates vehicle loans through a web-based direct lending program, purchases vehicle RICs from other lenders, and services automobile, recreational and marine vehicle portfolios for other lenders. Additionally, SC has several other relationships through which it holds personal loans, private-label credit cards and other consumer finance products. In the third quarter of 2015, SC announced that it would exit personal lending, and such assets were accordingly classified as held for sale. In February 2016, SC announced the sale of substantially all of the $900 million Lending Club portfolio. The remaining personal lending portfolio is being actively marketed.
SC has entered into a number of intercompany agreements with the Bank as described above as part of the Auto Finance & Business Banking segment. All intercompany revenue and fees between the Bank and SC are eliminated in the consolidated results of SHUSA.
The financial results for each of these reportable segments are included in Note 24 of the Notes to Consolidated Financial Statements and are discussed in Item 7, "Line of Business Results" within Management's Discussion & Analysis of Financial Condition and Results of Operations (MD&A) section of this Form 10-K. These results have been presented based on the Company's management structure and management accounting practices. The structure and accounting practices are specific to the Company and, as a result, the financial results of the Company's reportable segments are not necessarily comparable with similar information for other financial institutions.
5
Subsidiaries
SHUSA had two principal consolidated majority-owned subsidiaries at December 31, 2015, the Bank and SC.
By July 1, 2016, due to both its global and U.S. non-branch total consolidated asset size, Santander is subject to both of the provisions of the Final Rule as discussed below under "Supervision and Regulation" section of Item 1 of this Form 10-K. As a result of this rule, Santander is required to transfer its U.S. non-bank subsidiaries currently outside the Company to the Company, which would become a U.S. intermediate holding company (an "IHC"), or establish a top-tier IHC structure that would include all of its U.S. bank and non-bank subsidiaries. SHUSA must consolidate all but 10% of Santander's U.S. subsidiaries activity under an IHC by July 1, 2016.
Employees
At December 31, 2015 the Company had approximately 15,150 employees. This compares to approximately 14,000 employees as of December 31, 2014. No Company employees are represented by a collective bargaining agreement.
Competition
The Bank is subject to substantial competition in attracting and retaining deposits and in lending funds. The primary factors in competing for deposits include the ability to offer attractive rates, the convenience of office locations, the availability of alternate channels of distribution, and servicing capabilities. Direct competition for deposits comes primarily from other national and state banks, thrift institutions, and broker dealers. Competition for deposits also comes from money market mutual funds, corporate and government securities, and credit unions. The primary factors driving competition for commercial and consumer loans are interest rates, loan origination fees, service levels and the range of products and services offered. Competition for origination of loans normally comes from thrift institutions, national and state banks, mortgage bankers, mortgage brokers, finance companies, and insurance companies.
SC is also subject to substantial competition, particularly in the automotive finance industry. SC competes on the pricing it offers on its loans and leases as well as the customer service SC provides automotive dealer customers. SC, along with its competitors, provides pricing and other terms and conditions for loans and leases through web-based credit application aggregation platforms. When dealers submit applications for consumers acquiring vehicles, they can compare SC's terms and conditions against its competitors’ pricing. Dealer relationships are important in the automotive finance industry. Vehicle finance providers tailor product offerings to meet dealers' needs. SC's primary competitors in the vehicle finance space are national and regional banks, credit unions, independent financial institutions, and the affiliated finance companies of automotive manufacturers.
Supervision and Regulation
The activities of the Company and the Bank are subject to regulation under various U.S. federal laws, including the Bank Holding Company (the "BHC") Act, the Federal Reserve Act, the National Bank Act, the Federal Deposit Insurance Act (the "FDIA"), 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 agencies 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 Servicemembers Civil Relief Act (the "SCRA"), 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 Federal Reserve Bank (the "FRB") for BHC regulatory supervision purposes, as well as the Consumer Financial Protection Bureau (the "CFPB").
6
Dodd-Frank Wall Street Reform and Consumer Protection Act ("DFA")
On July 21, 2010, the DFA was enacted. The DFA instituted major changes to the banking 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.
More specifically, the DFA imposes enhanced prudential standards on BHCs with at least $50.0 billion in total consolidated assets (often referred to as “systemically important financial institutions” or "SIFIs"), which includes 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 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, 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.
7
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.
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.
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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.
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 10.97%, 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 11.95%, 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.
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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.
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.
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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.
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
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 be required to obtain approval from the Federal Reserve if the Company were to acquire shares of any depository institution or any holding company of a depository institution. In addition, the Company may have to provide notice to the Federal Reserve if the Company acquires 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 common stock may, alone or together with other investors, be deemed to control the Company and thereby the Bank. 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.
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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.
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 million for the year ended December 31, 2015.
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, the Bank paid Financing Corporation assessments of $4.2 million, compared to $4.1 million in 2014. The annual rate for all insured institutions dropped to $0.060 for every $1,000 in domestic deposits in 2015, compared to $0.062 for the same measure in 2014. The assessments are revised quarterly and will continue until the bonds mature in 2017.
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Federal Restrictions on Transactions with Affiliates and Insiders
All national banks are subject to affiliate and insider transaction rules applicable to member banks of the Federal Reserve under the Federal Reserve Act, as well as additional limitations the institutions’ primary federal regulator may adopt. These provisions prohibit or limit 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) of the banking institution and its affiliates. For these purposes, 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.
Restrictions on Subsidiary Banking Institution Capital Distributions
The Company has the following major sources of funding to meet its liquidity requirements: dividends and returns of capital and investment from its subsidiaries, short-term investments held by non-bank affiliates and access to the capital markets. 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 required if the Bank’s examination 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.
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 were no dividends declared or paid in 2015 or 2014. There were no returns of capital in 2015. The Bank returned capital of $128.0 million in 2014.
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 of total reserve requirement at December 31, 2015 and 2014 were $492.7 million and $446.5 million, respectively. At December 31, 2015 and 2014, the Company complied with the reserve requirements.
Federal Home Loan Bank (FHLB) System
The FHLB system was created in 1932 and consists of eleven 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 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 million as of December 31, 2015, compared to $425.0 million at December 31, 2014. The Bank utilizes advances from 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 billion at December 31, 2015 and had outstanding advances of $13.9 billion or 73% 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 million and $13.8 million in dividends on its stock in the FHLB of Pittsburgh in 2015 and 2014, respectively.
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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 Bank or the public.
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; created criminal penalties; compelled the production of documents located both inside and outside the U.S., including those of non-U.S. institutions that have a correspondent relationship in the U.S.; and clarified the safe harbor from civil liability to clients. The U.S. Treasury has issued a number of regulations that further clarify the USA Patriot Act’s requirements and provide more specific guidance on their application. The Company has complied with these regulations.
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 hazards have become 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 not aware of any borrower which is currently subject to any environmental investigation or clean-up preceding that is likely to have a material adverse effect on the financial condition or results of operations of SHUSA or its subsidiaries.
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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.
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 were 2.15. |
| • | 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 revenue of £ 2.15 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.
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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 activities, transactions, or dealings which would require disclosure under Section 13(r) to the Securities Exchange Act of 1934.
Corporate Information
All reports filed electronically by the Company with the SEC, including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as any amendments to those reports, are accessible on the SEC’s website at www.sec.gov. Our filings are also accessible through our website at https://www.santanderbank.com/us/about/financials/sec-filings. 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 its business, financial condition, results of operations and cash flows. As a financial services organization, certain elements of risk are inherent in 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 important part of the Company's business model. The success of the business is dependent on management's ability to identify, understand and manage the risks presented by business activities so that management can appropriately balance revenue generation and profitability. These risks include credit risk, market risk, liquidity risk, operational risk, model risk, compliance and legal risk, and strategic and reputation risk. We discuss our principal risk management processes in the Risk Management section included in Item 7 of this Report.
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, which are described below. These risk factors and other risks 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.
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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 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 face, among others, the following risks related to the economic downturn:
| • | Increased regulation of our industry. Compliance with such regulation has increased and will continue to increase our costs and may affect the pricing for 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 economic conditions might impair the ability of our borrowers to repay their loans. The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the sufficiency of our loan and lease loss allowances. |
| • | The value and liquidity of the portfolio of investment securities that we hold may be adversely affected. |
| • | Any worsening of economic conditions may delay the recovery of the financial industry and impact our financial condition and results of operations. |
| • | Macroeconomic shocks may impact the household income of our retail customers negatively and adversely affect the recoverability of our retail loans, resulting in increased loan and lease losses. |
Despite recent improvements in certain segments of the economy, some uncertainty remains concerning 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. Such economic uncertainty could have a negative impact on our business and results of operations. Investors remain cautious. A slowing or failing of 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 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 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 in capital markets funding availability or costs or in deposit rates could have a material adverse effect on our interest margins and liquidity.
If some or all of the foregoing risks were to materialize, it could have a material adverse effect on us.
We may suffer adverse effects as a result of economic and sovereign debt tensions.
Our results 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.
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Our growth, asset quality and profitability may be adversely affected by volatile macroeconomic and political conditions.
The United States economy has experienced volatility recently, characterized by slow or regressive growth. This volatility resulted in fluctuations in the levels of deposits 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 in public debt could cause to the banking system as a whole, particularly since commercial banks' exposure to government debt is high in certain Latin American and European regions or countries.
In addition, our revenues are subject to risk of loss from unfavorable political and diplomatic developments, social instability, and changes in governmental policies, international ownership legislation, interest-rate caps and tax policies.
Growth, asset quality and profitability may be affected by volatile macroeconomic and political conditions.
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 at any time. In addition, the 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.
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.
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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.
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
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, 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.
With respect to over-the-counter ("OTC") derivatives, the DFA provides for an extensive framework for the regulation of OTC derivatives, including mandatory clearing, exchange trading and transaction reporting of certain OTC derivatives. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants are required to register with the SEC 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.
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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 FBOs 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 not required to be transferred to the IHC. The IHC will be 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 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, 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 Company to invest significant management attention and resources.
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 implementing the Volcker Rule. The final rules 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 of the DFA and the implementing regulations issued by the Federal Reserve and the FDIC require each BHC with assets of $50 billion or more, including Santander, to prepare and submit a plan annually for the orderly resolution of our subsidiaries and operations domiciled in the United States in the event of future material financial distress or failure. The plan must include information on resolution strategy, major counterparties, and interdependencies, among other things, and requires substantial effort, time, and cost to prepare. Santander submitted its United States resolution plan in December 2015. The United States resolution plan is subject to review by the Federal Reserve and the FDIC.
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. 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 instruments and other eligible liabilities that can be written down or converted into equity during resolution to (ii) the Company's risk-weighted assets and the Basel III leverage ratio denominator.
Each of these aspects of the DFA, as well as other changes in United States banking regulations, may directly and indirectly impact various aspects of our business. The full spectrum of risks that the DFA, including the Volcker Rule, poses to us is not yet known. However, such risks could be material and could materially and adversely affect us.
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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 other banking laws or policies. In March 2014 and 2015, the Federal Reserve Board, as part of its Comprehensive Capital Analysis and Review (“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 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 object to the Company’s next capital plan.
In addition, we are subject 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 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.
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 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 Act, the Federal Reserve has the authority to disallow us and certain of our U.S. subsidiaries from engaging in certain categories of new activities in the United States or acquiring shares or control of other companies in the United States. Such actions and restrictions currently applicable to us or certain of our U.S. subsidiaries could adversely affect our costs and revenues. Moreover, efforts to comply with nonpublic supervisory actions or restrictions could require material investments in additional resources and systems, as well as a significant commitment of managerial time and attention. As a result, such supervisory actions or restrictions could have a material adverse effect on our business and results of operations; and we may be subject to significant legal restrictions on our ability to publicly disclose these matters or the full details of these actions. 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 to conduct 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.
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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 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 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 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 on the relevant jurisdictions on which we operate, give the regulators the power to make temporary product intervention rules either to improve a firm’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 of the regulatory regimes on the relevant jurisdictions on which we operate, require us to be in compliance across all aspects of our business, including the training, authorization and supervision of personnel, systems, processes and documentation. 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, 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.
We are subject to certain 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 discovery, we cannot state with confidence what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be. We believe that we have established adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings. However, the amount of these provisions is substantially less than the total amount of the claims asserted against us and in light of the uncertainties involved in such claims and proceedings; there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves we have currently accrued. As a result, the outcome of a particular matter may materially and adversely affect our financial condition and results of operations for a particular period, depending upon, among other factors, the size of the loss or liability imposed and our level of income for that period.
In addition, from time to time, the Company is, or may become, the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings and other forms of regulatory inquiry, including by the SEC and law enforcement authorities.
Often, the announcement or other publication of claims or actions that may arise from such litigation and 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.
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Our operations are subject to regular and ongoing inspection by our bank and other financial market regulators 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.
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. 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 illegal or improper purposes.
While we review our relevant counterparties’ internal policies and procedures with respect to such matters, to a large degree, we rely on our relevant counterparties to maintain and properly apply their own appropriate anti-money laundering procedures. Such measures, procedures and compliance may not be completely effective in preventing third parties from using our (and our relevant counterparties’) services as a conduits for money laundering (including illegal cash operations) without our (and our relevant counterparties’) knowledge. If we are associated with, or even accused of being associated with, or become a party to, money laundering, our reputation could suffer and/or we could become subject to fines, sanctions and/or legal enforcement (including being added to any “blacklists” that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operating results, financial condition and prospects.
An incorrect interpretation of tax laws and regulations may adversely affect us.
The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations, and is subject to review by taxing authorities. We are subject to the income tax laws of the United States and certain foreign countries. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, which are sometimes subject to prolonged evaluation periods until a final resolution, is reached. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the application of these inherently complex tax laws. If the judgments, estimates, and assumptions we use in preparing our tax returns are subsequently found to be incorrect, there could be a material effect on our results of operations.
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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.
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 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.
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 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 banks for deposits. Any of these factors could significantly increase the amount of deposit withdrawals in a short period of time, thereby reducing our ability to access deposit funding in the future on appropriate terms, or at all. If these circumstances were to arise, they could have a material adverse effect on our operating results, financial condition and prospects.
We anticipate that our customers will continue to make deposits (particularly demand deposits and short-term time deposits) in the near future, and we intend to maintain our emphasis on the use of banking deposits as a source of funds. The short-term nature of some deposits could cause liquidity problems for us in the future if deposits are not made in the volumes we expect or are not renewed. If a substantial number of our depositors withdraw their demand deposits or do not roll over their time deposits upon maturity, we may be materially and adversely affected.
We cannot assure you that in the event of a sudden or unexpected shortage of funds in the banking system, we will be able to maintain levels of funding without incurring high funding costs, a reduction in the term of funding instruments or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.
Credit, market and liquidity risk may have an adverse effect on our credit ratings and our cost of funds. Any downgrading in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our interest margins and results of operations.
Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings of our debt are based on a number of factors, including our financial strength and conditions affecting the financial services industry generally.
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Any downgrade in our 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 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 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 activities through Santander and Santander UK. We estimate that as of December 31, 2015, 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 and other financial contracts. Refer to further discussion in Note 15 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 numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a company's long-term credit rating precipitates downgrades to its short-term credit rating, and assumptions about the potential behaviors of various customers, investors and counterparties. Actual outflows could be higher or lower than this hypothetical example, depending on certain factors including which credit rating agency downgrades our credit rating, any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although, unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, it is still the case that a credit rating downgrade could have a material adverse effect on the Company, the Bank, and SC.
In addition, if we were required to cancel our derivatives contracts with certain counterparties and were unable to replace such contracts, our market risk profile could be altered.
There can be no assurance that the rating agencies will maintain their current ratings or outlooks. Failure to maintain favorable ratings and outlooks could increase the cost of funding and adversely affect interest margins, which could have a material adverse effect on us.
Credit Risks
If the level of our non-performing loans increases or our credit quality deteriorates in the future, or if our loan and lease loss reserves are insufficient to cover loan and lease losses, this could have a material adverse effect on us.
Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Non-performing or low credit quality loans have in the past negatively impacted and can continue to negatively impact our results of operations. In particular, the amount of our reported non-performing loans 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.
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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.
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:
| • | net interest income; |
| • | the volume of loans originated; |
| • | the market value of our securities holdings; |
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| • | 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.
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 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 or the market value of our assets and liabilities could be materially adversely affected.
Market conditions have resulted, and could result, in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects.
In the past eight 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 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 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 transactions that could have a material adverse effect on us.
We enter into derivative 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).
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The execution and performance of derivative 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 transactions continues to depend, to a great extent, on our information technology systems. These factors further increase the risks associated with these transactions and could have a material adverse effect on us.
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.
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 could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. We could face adverse consequences as a result of decisions, based on models that are poorly developed, implemented, or used, or as a result of a modeled outcome being misunderstood or used of for purposes for which it was not designed. In addition, if existing or potential customers believe our risk management is inadequate, they could take their business elsewhere or seek to limit transactions with us. This could have a material adverse effect on our reputation, operating results, financial condition, and prospects.
As a commercial bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management is to employ an internal credit rating system to assess the particular risk profile of a customer. Since this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human or 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 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 could adversely affect us.
Market turmoil and economic recession could materially and adversely affect the liquidity, businesses and/or financial conditions of our borrowers, which could in turn increase our non-performing loan (NPL) ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. In addition, our customers may further decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds significantly, which would adversely affect our fee and commission income. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.
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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.
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 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, including in originating loans and attracting deposits. 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 has been a trend towards consolidation in the banking industry, which has created larger and stronger banks with which we must now compete. 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 could require that we increase our rates offered on deposits or lower the rates we charge on loans, which could also have a material adverse effect on us, including on our profitability. It may also negatively affect our business results and prospects by, among other things, limiting our ability to increase our customer base and expand our operations and increasing competition for investment opportunities.
In addition, 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. 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.
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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 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.
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 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 systems adequately with those of an enlarged group; |
| • | apply our risk management policy 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.
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Goodwill impairments may be required in relation to acquired businesses.
We have made business acquisitions for which it is possible that the goodwill which has been attributed to those businesses may have to be written down if our valuation assumptions are required to be reassessed as a result of any deterioration in the business’ underlying profitability, asset quality or other relevant matters. Impairment testing with respect to goodwill is performed annually, more frequently if impairment indicators are present, and includes a comparison of the carrying amount of the reporting unit with its fair value. If the carrying value of the reporting unit is higher than the fair value, there is an indication that 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 the same manner as the amount of goodwill recognized in a business combination upon acquisition. There were no 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 it is reasonably possible we may be required to record impairment of our remaining $1.0 billion of goodwill, as well as $38.3 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.
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. Replacing these third-party vendors could also entail significant delays and expense.
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. 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, 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.
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Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis and the seeming shift toward increasing regulatory supervision and enforcement has 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.
The Bank engages in transactions with its subsidiaries or affiliates that others may not consider to be on an arm’s-length basis.
The Bank and its subsidiaries have entered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others.
United States law applicable to public companies and financial groups and institutions provide for 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 is likely to continue to engage in transactions with our 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 favor.
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 other catastrophic accidents or events), terrorist activities and 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 Risks
Any failure to effectively improve or upgrade our information technology 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 on a timely and cost-effective basis. We must continually make significant investments and improvements in our information technology infrastructure in order to remain competitive. We cannot assure you 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. Any failure to improve or upgrade our information technology infrastructure and management information systems effectively and in a timely manner could have a material adverse effect on us.
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Risks relating to data collection, processing, storage systems and security are inherent in our business.
Like other financial institutions with a large customer base, we 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 may be the target of attempted cyber-attacks, such as denial of services, malware and phishing-based attacks. Cyber-attacks continue to evolve in scope and sophistication and we may incur significant costs 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 effective 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 the payment of compensation to customers, regulatory penalties and fines, and/or the loss of assets.
We take protective measures and continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption, but our systems, software and networks nevertheless 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, such as denial of service, malware and phishing. Cyber-attacks could give rise to the loss of significant amounts of customer data and other sensitive information, as well as significant levels of liquid assets (including cash). In addition, cyber-attacks could give rise to the disablement of information technology systems used to service our customers. As attempted attacks 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 to our customers. Failure to effectively manage our cyber security risk 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 to maintain and regularly update our systems and processes 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 websites 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.
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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, or damage to our computers or systems and those of our customers and counterparties, and could result in violations of applicable privacy and other laws, financial loss to us or our customers, loss of confidence in our security measures, customer dissatisfaction, significant litigation exposure and harm to our reputation, all of which could have a material adverse effect on us.
Financial Reporting and Control Risks
Changes in accounting standards could impact reported earnings.
The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our consolidated financial statements. These changes can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.
Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.
The preparation of consolidated financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect our consolidated financial statements and accompanying notes. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgments and estimates, include impairment of loans and advances, goodwill impairment, valuation of financial instruments, impairment of available-for-sale financial assets, deferred tax assets and provisions for liabilities.
The 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 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 may not prevent or detect all errors or acts of fraud.
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 disclosure controls and procedures have inherent limitations, which include the possibilities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by any unauthorized override of the controls. Consequently, our businesses 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 suffered 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.
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As of December 31, 2015, 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 to timely remediate its material weaknesses, it could affect the Company's ability to effectively remediate its own material weaknesses.
Our independent registered public accounting firm, Deloitte & Touche LLP, recently advised our audit committee that they had identified a matter that raised concerns in relation to the SEC's auditor independence rules.
The Company’s independent registered public accounting firm, Deloitte & Touche LLP (“Deloitte”), recently advised the Audit Committee 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, the 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 for a period of six years compared to five years that is allowed under the SEC auditor independence rules. Upon identification of the partner rotation issue, Deloitte identified new engagement partners to serve SC for 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.
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. 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. |
| • | 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 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. |
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| • | SC has repurchase obligations in its capacity as a servicer in securitizations and whole-loan sales. If significant repurchases of assets or other payments are required under its responsibility as a servicer, this could have a material adverse effect on SC’s financial condition, liquidity, and results of operations. |
| • | The obligations associated with being a public company require significant resources and management attention which increases the costs of SC's operations and may divert focus from business operations. As a result of its IPO, SC is now required to remain in compliance with the reporting requirements of the SEC and the New York Stock Exchange ("NYSE"), maintain corporate infrastructure required of a public company, and incur significant legal and financial compliance costs, which may divert SC management’s attention and resources from implementing its growth strategy. |
| • | The market price of SC Common Stock may be volatile, which could cause the value of an investment in SC Common Stock to decline. Conditions affecting the market price of SC Common Stock may be beyond SC’s control and include general market conditions, economic factors, actual or anticipated fluctuations in quarterly operating results, changes in or failure to meet publicly disclosed expectations related to future financial performance, analysts’ estimates of SC’s financial performance or lack of research or reports by industry analysts, changes in market valuations of similar companies, future sales of SC Common Stock, or additions or departures of its key personnel. |
| • | SC's business and results of operations could be negatively impacted if it fails to manage and complete divestitures. SC regularly evaluates its portfolio in order to determine whether an asset or business may no longer be aligned with its strategic objectives. For example, in October 2015, SC disclosed a decision to exit the personal lending business and to explore strategic alternatives for its existing personal lending assets. Of its two primary lending relationships, SC completed the sale of substantially all of its loans associated with the Lending Club relationship in February 2016. SC continues to classify loans from its other primary lending relationship, Bluestem, as held-for-sale and 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, 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. 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. |
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 April 14, 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.
SHUSA's unresolved comments, in general, relate to the accounting methodologies for the fair value option loan portfolios associated with our retail installment contracts and auto loans portfolio, the ACL associated with our retail installment contracts ("RICs") 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. We believe that the ultimate resolution of these comments will not have a material impact on our Consolidated Financial Statements and/or related footnotes.
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ITEM 2 - PROPERTIES
As of December 31, 2015, the Company utilized 771 buildings that occupy a total of 6.5 million square feet, including 212 owned properties with 1.6 million square feet, 434 leased properties with 3.1 million square feet, and 125 sale and leaseback properties with 1.7 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 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, Call Center and Operations and Loan Processing Center - Santander Way, 95 Amaral Street, Riverside, Rhode Island - Leased, SHUSA/SBNA Administrative Offices - 75 State Street, Boston, Massachusetts - Leased, SBNA Commercial Bank Administrative Offices - 28 State Street, Boston, Massachusetts - Leased, Call Center and Operations and Loan Processing Center - 450 Penn Street, Reading, Pennsylvania - Leased, Loan Processing Center - 601 Penn Street, Reading, Pennsylvania - Owned, Operations and Administrative Offices - 1130 Berkshire Boulevard, Wyomissing, Pennsylvania - Owned, Administrative Offices and Branch - 446 Main Street, Worcester, Massachusetts - Leased, and SC Administrative Offices - 1601 Elm Street, Dallas, Texas - Leased.
The majority of these nine properties of the Company identified above are utilized for general corporate purposes. The remaining 762 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 retail branches of the Bank.
For additional information regarding the Company's properties refer to Note 7 - "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 to Note 16 to the Consolidated Financial Statements for disclosure regarding the lawsuit filed by SHUSA against the Internal Revenue Service ("IRS") and Note 20 to the Consolidated Financial Statements for SHUSA’s litigation disclosure, which are incorporated herein by reference.
ITEM 4 - MINE SAFETY DISCLOSURES
None.
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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, 530,391,043 shares were outstanding. There were no issuances of common stock during 2015.
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.
Refer to the "Liquidity and Capital Resources" section in Item 7, MD&A, for the two most recent fiscal years' activity on the Company's common stock.
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ITEM 6 - SELECTED FINANCIAL DATA
SELECTED FINANCIAL DATA FOR THE YEAR ENDED DECEMBER 31, | |||||||||||||||
| (Dollars in thousands) | 2015 (1) | 2014 (1) | 2013 | 2012 | 2011 | ||||||||||
| Balance Sheet Data | (Restated) (11) | ||||||||||||||
Total assets (2) | $127,633,001 | $118,776,870 | $77,144,021 | $85,790,202 | $80,565,199 | ||||||||||
| Loans held for investment, net of allowance | 76,279,051 | 74,273,471 | 49,087,340 | 51,375,442 | 50,223,888 | ||||||||||
| Loans held-for-sale at fair value | 3,191,762 | 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 | 12,376,624 | 19,264,206 | 18,278,433 | ||||||||||
| Total liabilities | 108,064,048 | 96,064,182 | 63,599,038 | 72,548,200 | 67,969,036 | ||||||||||
Total stockholder's equity (4) | 19,568,953 | 22,712,688 | 13,544,983 | 13,242,002 | 12,596,163 | ||||||||||
| Summary Statement of Operations | |||||||||||||||
| Total interest income | $7,977,033 | $7,039,496 | $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 | 6,772,708 | 5,984,773 | 1,513,771 | 1,674,123 | 3,864,814 | ||||||||||
Provision for credit losses (5) | 4,115,899 | 2,494,813 | 46,850 | 392,800 | 1,319,951 | ||||||||||
| Net interest income after provision for credit losses | 2,656,809 | 3,489,960 | 1,466,921 | 1,281,323 | 2,544,863 | ||||||||||
Total non-interest income (6) | 2,496,705 | 4,680,933 | 1,088,083 | 1,139,596 | 1,981,823 | ||||||||||
Total general and administrative expenses(7) | 4,319,263 | 3,351,453 | 1,662,063 | 1,481,248 | 1,842,224 | ||||||||||
Total other expenses (8) | 4,580,856 | 348,276 | 104,538 | 484,884 | 517,937 | ||||||||||
| Income/(loss) before income taxes | (3,746,605) | 4,471,164 | 788,403 | 454,787 | 2,166,525 | ||||||||||
Income tax provision/(benefit) (9) | (671,463) | 1,554,357 | 160,300 | (106,448) | 908,279 | ||||||||||
| Net (loss) / income | $(3,075,142) | $2,916,807 | $628,103 | $561,235 | $1,258,246 | ||||||||||
| Selected Financial Ratios | |||||||||||||||
Return on average assets (10) | (2.44 | )% | 2.69 | % | 0.79 | % | 0.68 | % | 1.37 | % | |||||
Return on average equity (10) | (13.26 | )% | 13.72 | % | 4.64 | % | 4.29 | % | 10.53 | % | |||||
Average equity to average assets (10) | 18.44 | % | 19.58 | % | 16.96 | % | 15.75 | % | 12.97 | % | |||||
Efficiency ratio (10) | 96.02 | % | 34.69 | % | 67.90 | % | 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.
| (1) | Financial results for the years ended 2015 and 2014 include the impact of the Change in Control. Prior 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 SC by the Company in accordance with Accounting Standards Codification ("ASC") No. 805 - Business Combinations (ASC 805). Refer to Note 1 of the Notes to Consolidated Financial Statements for additional information. |
| (2) | The five-year trend in total assets reflects the sale of investment securities used to pay down borrowed funds and an increase in the overall loan portfolio, including increases related to the Change in Control. |
| (3) | The decrease in borrowings and other debt obligations from 2012 to 2013 reflects the Company's use of portions of the proceeds from the sale of investment securities to pay off borrowed funds. The Change in Control was the primary cause of the increase in borrowings and other debt obligations in 2014. |
| (4) | Refer to the Statements of Changes in Stockholder's Equity for details of the increase from 2013 to 2014. |
| (5) | In 2011, 2012, and 2013, the Company experienced favorable credit quality trends and declining provisions due, in large part, to the modest economic recovery in the U.S. 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. |
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| (6) | The increase in Non-interest income in 2014 includes a $2.43 billion gain on acquisition, which is related to the Change in Control. Refer to the MD&A for further discussion. |
| (7) | Increases 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 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. |
| (8) | Other expenses increased in 2015 due to an impairment charge to goodwill in the amount of $4.4 billion on the Company's consumer finance subsidiary. Other expenses in 2014 included a one-time impairment charge of $97.5 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 16 of the Notes to Consolidated Financial Statements for additional information. The income tax benefit in 2015 is 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) | For further information on these ratios, see the Non-GAAP Financial Measures section of the MD&A. |
| (11) | Refer to Note 1 of the Consolidated Financial Statements for additional information. |
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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 ("MD&A")
EXECUTIVE SUMMARY
Santander Holdings USA, Inc. ("SHUSA" or the "Company") is the parent company of Santander Bank, National Association, (the "Bank" or "SBNA"), a national banking association, and owns approximately 59% of Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SC"), a specialized consumer finance company focused on vehicle finance and third-party servicing. SHUSA is headquartered in Boston, Massachusetts and the Bank's main office is in Wilmington, Delaware. SC is headquartered in Dallas, Texas. SHUSA is a wholly-owned subsidiary of Banco Santander, S.A. ("Santander").
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's primary business is the indirect origination of retail installment contracts ("RICs"), principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to 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 result 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.
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's registration statement for an initial public offering ("IPO") of shares of its common stock (the “SC Common Stock”), was declared effective by the Securities and Exchange Commission (the "SEC"). Prior to the IPO, the Company owned approximately 65% of SC Common Stock.
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 of SC Common Stock. Immediately following the IPO, the Company owned approximately 61% of the shares of SC Common Stock. In connection with these sales, certain board representation, governance and other rights granted to Dundon DFS, LLC ("DDFS") and Sponsor Holdings were terminated as a result of the reduction in DDFS and Sponsor Holdings’ collective ownership of shares of SC Common Stock below certain ownership thresholds, causing the first quarter 2014 change in control and consolidation of SC (the "Change in Control").
Prior to the Change in Control, the Company accounted for its investment in SC under the equity method. Following the Change in Control, the Company consolidated the financial results of SC in the Company’s Consolidated Financial Statements. The Company’s consolidation of SC is treated as an acquisition of SC by the Company in accordance with Accounting Standards Codification ("ASC") 805 - Business Combinations (ASC 805). SC Common Stock is now listed for trading on the New York Stock Exchange (the "NYSE") under the trading symbol "SC".
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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, unemployment improved while market results declined and the gross domestic product (GDP) growth rate came in under expectations in most quarters, marking overall mixed results for the U.S. economy.
The unemployment rate at December 31, 2015 improved to 5.0% from 5.1% at September 30, 2015 and 5.6% one year ago. According to the U.S Bureau of Labor Statistics, this job growth is primarily attributable to the professional and business services, retail trade, and health care sectors.
The Bureau of Economic Analysis advance estimate indicates that real GDP grew at an annualized rate of 0.7% during the fourth quarter of 2015. This is down from a rate of 2.0% in the third quarter of 2015. The decrease during the quarter is primarily attributed to a decrease in personal consumption expenditures, residential fixed investment, and federal government spending, but was offset by increased household spending, state and local government spending, and residential fixed investment.
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 total year-to-date returns for the following indices, based on closing prices, at December 31, 2015 were:
| December 31, 2015 | ||
| Dow Jones Industrial Average | (2.2)% | |
| S&P 500 | (0.7)% | |
| NASDAQ Composite | 5.7% | |
At its December 2015 meeting, the Federal Open Market Committee (the “FOMC”) announced an increase the federal funds rate target to 0.25%-0.5%. The inflation rate remains just under 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 Treasury bond rate at December 31, 2015 was 2.27%, up from 2.17% at December 31, 2014. Over the past year, the 10-year Treasury bond rate increased 10 basis points. Within the industry, this metric is often considered to correspond to 15- and 30-year mortgage rates. According to statistics published by the Mortgage Bankers Association, 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 the prior quarter and increased compared with the prior year. In addition, the ratio of NPL to total loans has declined for the past four consecutive years for U.S. banks, including a decreasing trend in 2015, which confirms continuing improvement in credit quality and downward trend in general allowance reserves.
Changing market conditions are considered a significant risk factor to the Company. The continued low interest rate environment presents challenges in the growth of net interest income for the banking industry, which continues to rely on non-interest activities to support revenue growth. Changing market conditions and political uncertainty could have an overall impact on the Company's results of operations and financial condition. Such conditions could also impact the Company's credit risk, and the associated provision for credit losses and legal expense.
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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.
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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 and Standard & Poor's ("S&P") credit ratings for the Bank, SHUSA, Santander and the Kingdom of Spain as of December 31, 2015:
| BANK | SHUSA | SANTANDER | SPAIN | ||||||||
| Moody's | S&P | Moody's | S&P | Moody's | S&P | Moody's | S&P | ||||
| LT Senior Debt | Baa2 | BBB+ | Baa2 | BBB+ | A3 | A- | Baa2 | BBB+ | |||
| ST Deposits | P-1 | A-2 | n/a | A-2 | P-2 | A-2 | P-2 | A-2 | |||
| Outlook | Stable | Stable | Negative | Stable | Positive | Stable | Positive | Stable | |||
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 and changed the outlook on the A3 long term and senior unsecured debt rating of Santander to stable from positive.
SHUSA funds its operations independently of the other entities owned by Santander, and believes its business is not necessarily closely related to the business or outlook of other entities owned by Santander. Future changes in the credit ratings of its parent, Santander, or the Kingdom of Spain could impact SHUSA's or its subsidiaries' credit ratings, and any other change in the condition of Santander could affect SHUSA.
At this time, SC is not rated by the major credit rating agencies.
REGULATORY MATTERS
The activities of the Company and the Bank are subject to regulation under various U.S. federal laws, including the Bank Holding Company ("BHC") Act, the Federal Reserve Act, the National Bank Act, the Federal Deposit Insurance Act (the "FDIA"), 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 agencies 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 Servicemembers Civil Relief Act (the "SCRA"), 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 FRB for BHC regulatory supervision purposes, as well as the Consumer Financial Protection Bureau (the "CFPB").
DFA
On July 21, 2010, the DFA was enacted. The DFA instituted major changes to the banking 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.
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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 with at least $50.0 billion in total consolidated assets (often referred to as “systemically important financial institutions” or "SIFIs"), which includes 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 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, 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.
In March 2013, the CFPB issued a bulletin recommending that indirect vehicle lenders, including SC, 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.
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.
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 is already 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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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 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.
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.
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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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") 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.
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.
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 10.97%, 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 11.95%, respectively. The calculation of the CET1 ratio under 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 the regulators would interpret the rules differently, there could be an impact to 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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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 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 Fed. 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 annual capital plan on April 5, 2016.
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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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 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.
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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
RESULTS OF OPERATIONS
The following discussion reviews the Company's financial performance from a consolidated perspective over the past three years. This review is analyzed in the following two sections - "Results of Operations for the Years Ended December 31, 2015 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 discussed in the "Financial Condition" section.
We have made certain corrections to previously disclosed amounts to correct for errors related to the allowance for credit losses, TDRs, and the classification of subvention payments related to leased vehicles. Refer to Note 1 of the Consolidated Financial Statements for additional information.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2015 AND 2014
| Year Ended December 31, | |||||||
| 2015 | 2014 | ||||||
| (As Restated) | |||||||
| (in thousands) | |||||||
| Net interest income | $ | 6,772,708 | $ | 5,984,773 | |||
| Provision for credit losses | (4,115,899 | ) | (2,494,813 | ) | |||
| Total non-interest income | 2,496,705 | 4,680,933 | |||||
| General and administrative expenses | (4,319,263 | ) | (3,351,453 | ) | |||
| Other expenses | (4,580,856 | ) | (348,276 | ) | |||
| (Loss)/income before income taxes | (3,746,605 | ) | 4,471,164 | ||||
| Income tax (provision)/benefit | 671,463 | (1,554,357 | ) | ||||
Net (loss)/income(1) | $ | (3,075,142 | ) | $ | 2,916,807 | ||
(1) Includes non-controlling interest ("NCI")
The Company reported pre-tax loss of $3.7 billion for the year ended December 31, 2015, compared to pretax income of $4.5 billion for the year ended December 31, 2014. Factors contributing to these changes were as follows:
| • | Net interest income increased $787.9 million for the year ended December 31, 2015, compared to the corresponding period in 2014. This increase was primarily due to the increased interest income on loans as a result of the growing RIC and auto loan portfolio. |
| • | 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 $967.8 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 $4.2 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 $4.4 billion. |
| • | The income tax provision decreased $2.2 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. |
50
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| 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) | |||||||||||||||||||
| (in thousands) | |||||||||||||||||||
| Return on Average Assets: | |||||||||||||||||||
| Net (loss)/income | $ | (3,075,142 | ) | $ | 2,916,807 | $ | 628,103 | $ | 561,235 | $ | 1,258,246 | ||||||||
| Average assets | 125,805,423 | 108,576,551 | 79,814,848 | 83,044,676 | 92,078,048 | ||||||||||||||
| Return on average assets | (2.44 | )% | 2.69 | % | 0.79 | % | 0.68 | % | 1.37 | % | |||||||||
| Return on Average Equity: | |||||||||||||||||||
| Net (loss)/income | $ | (3,075,142 | ) | $ | 2,916,807 | $ | 628,103 | $ | 561,235 | $ | 1,258,246 | ||||||||
| Average equity | 23,198,514 | 21,255,798 | 13,541,112 | 13,075,464 | 11,944,901 | ||||||||||||||
| Return on average equity | (13.26 | )% | 13.72 | % | 4.64 | % | 4.29 | % | 10.53 | % | |||||||||
| Average Equity to Average Assets: | |||||||||||||||||||
| Average equity | $ | 23,198,514 | $ | 21,255,798 | $ | 13,541,112 | $ | 13,075,464 | $ | 11,944,901 | |||||||||
| Average assets | 125,805,423 | 108,576,551 | 79,814,848 | 83,044,676 | 92,078,048 | ||||||||||||||
| Average equity to average assets | 18.44 | % | 19.58 | % | 16.96 | % | 15.75 | % | 12.97 | % | |||||||||
| Efficiency Ratio: | |||||||||||||||||||
| General and administrative expenses | $ | 4,319,263 | 3,351,453 | $ | 1,662,063 | $ | 1,481,248 | $ | 1,842,224 | ||||||||||
| Other expenses | 4,580,856 | 348,276 | 104,538 | 484,884 | 517,937 | ||||||||||||||
| Total expenses (numerator) | 8,900,119 | 3,699,729 | 1,766,601 | 1,966,132 | 2,360,161 | ||||||||||||||
| Net interest income | $ | 6,772,708 | $ | 5,984,773 | $ | 1,513,771 | $ | 1,674,123 | $ | 3,864,814 | |||||||||
| Non-interest income | 2,496,705 | 4,680,933 | 1,088,083 | 1,139,596 | 1,981,823 | ||||||||||||||
| Total net interest income and non- interest income (denominator) | 9,269,413 | 10,665,706 | 2,601,854 | 2,813,719 | 5,846,637 | ||||||||||||||
| Efficiency ratio | 96.02 | % | 34.69 | % | 67.90 | % | 69.88 | % | 40.37 | % | |||||||||
51
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 | ||||||||||||||||||
Common Equity Tier 1(1) | Tier 1 Common Capital (2) | ||||||||||||||||||
| Santander Bank, N.A. | |||||||||||||||||||
| Total stockholder's equity (U.S. GAAP) | $ | 13,325,978 | $ | 13,192,333 | |||||||||||||||
| Less: Goodwill and other intangible assets | (3,189,707 | ) | (3,724,874 | ) | |||||||||||||||
| Servicing assets | — | (14,780 | ) | ||||||||||||||||
| Other | — | (9,448 | ) | ||||||||||||||||
| Deferred taxes | (418,420 | ) | (711,128 | ) | |||||||||||||||
| Accumulated losses on certain available-for-sale securities and cash flow hedges | 139,804 | 99,053 | |||||||||||||||||
| Tier 1 common capital (numerator) | $ | 9,857,655 | $ | 8,831,156 | |||||||||||||||
Risk weighted assets (denominator)(3) | 71,395,253 | 66,762,918 | |||||||||||||||||
| Ratio | 13.81 | % | 13.23 | % | |||||||||||||||
| SHUSA | |||||||||||||||||||
| Total stockholder's equity | $ | 16,945,910 | $ | 18,665,766 | |||||||||||||||
| Less: Goodwill and other intangible assets | (3,876,819 | ) | (9,975,737 | ) | |||||||||||||||
| Servicing assets | — | (14,780 | ) | ||||||||||||||||
| Deferred tax | (245,152 | ) | 464,542 | ||||||||||||||||
| Other | — | 1,725,946 | |||||||||||||||||
| Accumulated losses on certain available-for-sale securities and cash flow hedges | 139,234 | 96,410 | |||||||||||||||||
| Preferred stock | — | — | |||||||||||||||||
| Qualifying Restricted Core Capital Elements - Minority Interest | — | — | |||||||||||||||||
| Tier 1 common capital (numerator) | 12,963,173 | 10,962,147 | |||||||||||||||||
Risk weighted assets (denominator)(3) | 108,454,912 | 100,640,251 | |||||||||||||||||
| Ratio | 11.95 | % | 10.89 | % | |||||||||||||||
(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").
52
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) | 2014, AS RESTATED (1) | 2013 | ||||||||||||||||||||||||||||||
Average Balance | Tax Equivalent Interest | Yield/ Rate | Average Balance | Tax Equivalent Interest | Yield/ Rate | Average Balance | Tax Equivalent Interest | Yield/ Rate | ||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||||||||||
| EARNING ASSETS | ||||||||||||||||||||||||||||||||
| INVESTMENTS AND INTEREST EARNING DEPOSITS | $ | 22,112,945 | $ | 404,096 | 1.85 | % | $ | 15,502,623 | $ | 340,990 | 2.20 | % | $ | 17,995,203 | $ | 375,559 | 2.09 | % | ||||||||||||||
LOANS(2): | ||||||||||||||||||||||||||||||||
| Commercial loans | 29,881,742 | 930,372 | 3.55 | % | 25,934,049 | 854,964 | 3.30 | % | 24,380,697 | 834,942 | 3.42 | % | ||||||||||||||||||||
| Multifamily | 8,927,502 | 362,176 | 4.06 | % | 9,032,193 | 376,741 | 4.17 | % | 7,799,415 | 346,125 | 4.44 | % | ||||||||||||||||||||
| Consumer loans: | ||||||||||||||||||||||||||||||||
| Residential mortgages | 6,759,740 | 267,429 | 3.96 | % | 8,956,321 | 364,136 | 4.07 | % | 10,158,329 | 408,141 | 4.02 | % | ||||||||||||||||||||
| Home equity loans and lines of credit | 6,165,718 | 218,017 | 3.54 | % | 6,214,241 | 223,186 | 3.59 | % | 6,438,413 | 232,025 | 3.60 | % | ||||||||||||||||||||
| Total consumer loans secured by real estate | 12,925,458 | 485,446 | 3.76 | % | 15,170,562 | 587,322 | 3.87 | % | 16,596,742 | 640,166 | 3.86 | % | ||||||||||||||||||||
| Retail installment contracts and auto loans | 24,700,892 | 5,030,156 | 20.36 | % | 19,875,688 | 4,167,603 | 20.97 | % | 169,288 | 12,557 | 7.42 | % | ||||||||||||||||||||
| Personal unsecured | 2,797,198 | 684,731 | 24.48 | % | 1,830,034 | 638,839 | 34.91 | % | 453,306 | 49,551 | 10.93 | % | ||||||||||||||||||||
Other consumer(3) | 1,159,888 | 104,876 | 9.04 | % | 1,440,909 | 123,063 | 8.54 | % | 1,491,051 | 89,076 | 5.97 | % | ||||||||||||||||||||
| Total consumer | 41,583,436 | 6,305,209 | 15.16 | % | 38,317,193 | 5,516,827 | 14.40 | % | 18,710,387 | 791,350 | 4.23 | % | ||||||||||||||||||||
| Total loans | 80,392,680 | 7,597,757 | 9.46 | % | 73,283,435 | 6,748,532 | 9.21 | % | 50,890,499 | 1,972,417 | 3.88 | % | ||||||||||||||||||||
Allowance for loan and lease losses (4) | (2,585,732 | ) | — | — | % | (1,253,894 | ) | — | — | % | (937,398 | ) | — | — | % | |||||||||||||||||
| NET LOANS | 77,806,948 | 7,597,757 | 9.76 | % | 72,029,541 | 6,748,532 | 9.37 | % | 49,953,101 | 1,972,417 | 3.95 | % | ||||||||||||||||||||
Intercompany investments(10) | 14,640 | 886 | 6.07 | % | — | — | — | % | — | — | — | % | ||||||||||||||||||||
| TOTAL EARNING ASSETS | 99,934,533 | 8,002,739 | 8.02 | % | 87,532,164 | 7,089,522 | 8.10 | % | 67,948,304 | 2,347,976 | 3.46 | % | ||||||||||||||||||||
Other assets(5) | 25,870,890 | 21,044,387 | 11,866,544 | |||||||||||||||||||||||||||||
| TOTAL ASSETS | $ | 125,805,423 | $ | 108,576,551 | $ | 79,814,848 | ||||||||||||||||||||||||||
| INTEREST BEARING FUNDING LIABILITIES | ||||||||||||||||||||||||||||||||
| Deposits and other customer related accounts: | ||||||||||||||||||||||||||||||||
| Interest bearing demand deposits | $ | 11,523,138 | $ | 55,247 | 0.62 | % | $ | 11,163,159 | $ | 36,037 | 0.32 | % | $ | 9,594,230 | $ | 15,280 | 0.16 | % | ||||||||||||||
| Savings | 3,953,200 | 4,768 | 0.12 | % | 3,993,387 | 5,280 | 0.13 | % | 3,849,615 | 5,377 | 0.14 | % | ||||||||||||||||||||
| Money market | 22,957,561 | 127,215 | 0.56 | % | 19,911,128 | 89,043 | 0.45 | % | 18,065,866 | 78,198 | 0.43 | % | ||||||||||||||||||||
| Certificates of deposit | 8,143,775 | 73,652 | 1.12 | % | 7,310,390 | 77,338 | 1.06 | % | 10,391,908 | 112,663 | 1.08 | % | ||||||||||||||||||||
| TOTAL INTEREST BEARING DEPOSITS | 46,577,674 | 260,882 | 0.60 | % | 42,378,064 | 207,698 | 0.49 | % | 41,901,619 | 211,518 | 0.50 | % | ||||||||||||||||||||
| BORROWED FUNDS: | ||||||||||||||||||||||||||||||||
| Federal Home Loan Bank advances | 10,208,082 | 181,396 | 1.78 | % | 7,675,404 | 262,455 | 3.42 | % | 10,335,211 | 330,027 | 3.19 | % | ||||||||||||||||||||
| Federal funds and repurchase agreements | 14,535 | 27 | 0.19 | % | 1,014 | 1 | 0.14 | % | 535,800 | 2,111 | 0.39 | % | ||||||||||||||||||||
| Other borrowings | 34,160,493 | 762,021 | 2.23 | % | 26,808,152 | 582,473 | 2.17 | % | 3,576,365 | 238,463 | 6.67 | % | ||||||||||||||||||||
TOTAL BORROWED FUNDS (6) | 44,383,110 | 943,444 | 2.13 | % | 34,484,570 | 844,929 | 2.45 | % | 14,447,376 | 570,601 | 3.95 | % | ||||||||||||||||||||
| TOTAL INTEREST BEARING FUNDING LIABILITIES | 90,960,784 | 1,204,326 | 1.32 | % | 76,862,634 | 1,052,627 | 1.37 | % | 56,348,995 | 782,119 | 1.39 | % | ||||||||||||||||||||
| Noninterest bearing demand deposits | 8,145,948 | 8,003,910 | 7,940,852 | |||||||||||||||||||||||||||||
Other liabilities(7) | 3,500,177 | 2,454,209 | 1,983,889 | |||||||||||||||||||||||||||||
| TOTAL LIABILITIES | 102,606,909 | 87,320,753 | 66,273,736 | |||||||||||||||||||||||||||||
| STOCKHOLDER’S EQUITY | 23,198,514 | 21,255,798 | 13,541,112 | |||||||||||||||||||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 125,805,423 | $ | 108,576,551 | $ | 79,814,848 | ||||||||||||||||||||||||||
53
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 | $ | 6,797,527 | $ | 6,036,895 | $ | 1,565,857 | ||||||||||||||||||||||||||
NET INTEREST SPREAD (8) | 6.69 | % | 6.73 | % | 2.07 | % | ||||||||||||||||||||||||||
NET INTEREST MARGIN (9) | 6.81 | % | 6.90 | % | 2.30 | % | ||||||||||||||||||||||||||
| TAX EQUIVALENT BASIS ADJUSTMENT | (24,819 | ) | (52,122 | ) | (52,086 | ) | ||||||||||||||||||||||||||
| NET INTEREST INCOME | 6,772,708 | 5,984,773 | 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 | ||||||
| (in thousands) | |||||||
| INTEREST INCOME: | |||||||
| Interest-earning deposits | $ | 8,556 | $ | 8,468 | |||
| Investments available-for-sale | 329,556 | 259,701 | |||||
| Other investments | 52,224 | 36,921 | |||||
| Total interest income on investment securities and interest-earning deposits | 390,336 | 305,090 | |||||
| Interest on loans | 7,586,697 | 6,734,406 | |||||
| Total Interest Income | 7,977,033 | 7,039,496 | |||||
| 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 | $ | 6,772,708 | $ | 5,984,773 | |||
Net interest income increased $787.9 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.
54
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Interest Income on Investment Securities and Interest-Earning Deposits
Interest income on investment securities and interest-earning deposits increased $85.2 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.
Interest Income on Loans
Interest income on loans increased $852.3 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 $862.6 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 $80.4 billion with an average yield of 9.46% for the year ended December 31, 2015, compared to $73.3 billion with an average yield of 9.21% for the corresponding period in 2014. The increase in the average balance of total loans of $7.1 billion was primarily due to the growth of the RIC and auto loan portfolio. The average balance of RICs and auto loans, which comprised a majority of the increase, was $24.7 billion with an average yield of 20.36% for the year ended December 31, 2015, compared to $19.9 billion with an average yield of 20.97% 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 0.60% for the year ended December 31, 2015, compared to an average balance of $42.4 billion with an average cost of 0.49% 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.
55
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| 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 the estimate of losses inherent in the portfolio. The provision for credit losses for the year ended December 31, 2015 was $4.1 billion, compared to $2.6 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.
| Year Ended December 31, | |||||||
| 2015 | 2014 | ||||||
| (As Restated) | |||||||
| (in thousands) | |||||||
| Allowance for loan and lease losses, beginning of period | $ | 1,750,643 | $ | 834,337 | |||
| Charge-offs: | |||||||
| Commercial | (165,546 | ) | (109,704 | ) | |||
| Consumer | (4,543,646 | ) | (2,697,290 | ) | |||
| Total charge-offs | (4,709,192 | ) | (2,806,994 | ) | |||
| 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 | (2,620,910 | ) | (1,599,287 | ) | |||
Provision for loan and lease losses (1) | 4,101,143 | 2,576,813 | |||||
Other(2): | |||||||
| Commercial | — | — | |||||
| Consumer | (27,117 | ) | (61,220 | ) | |||
| Allowance for loan and lease losses, end of period | $ | 3,203,759 | $ | 1,750,643 | |||
| 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 | $ | 3,351,156 | $ | 1,883,284 | |||
| (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 3.3% 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 6.1% 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.
| • | 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 with RIC and auto loan sales was $73.4 million. |
56
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.
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.
NON-INTEREST INCOME
| Year Ended December 31, | |||||||
| 2015 | 2014 | ||||||
| (As Restated) | |||||||
| (in thousands) | |||||||
| Consumer fees | $ | 444,032 | $ | 377,004 | |||
| Commercial fees | 187,539 | 185,373 | |||||
| Mortgage banking income, net | 107,983 | 204,558 | |||||
| Equity method investments (loss)/income, net | (8,818 | ) | 7,817 | ||||
| Bank-owned life insurance | 57,913 | 60,278 | |||||
| Capital markets revenue | 37,408 | 51,671 | |||||
| Lease income | 1,477,739 | 798,346 | |||||
| Miscellaneous income | 175,907 | 540,113 | |||||
| Net gain recognized in earnings | 17,002 | 2,455,773 | |||||
| Total non-interest income | $ | 2,496,705 | $ | 4,680,933 | |||
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 $67.0 million for the year ended December 31, 2015, compared to the corresponding period in 2014. The increase was primarily due to the $84.7 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 | |||
57
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 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.
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 increased $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.
58
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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.
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 increased $6.8 million for the year ended December 31, 2015, compared to 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 $16.6 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 $679.4 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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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.
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 $364.2 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) | |||||||
| (in thousands) | |||||||
| Compensation and benefits | $ | 1,391,308 | $ | 1,216,111 | |||
| 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 | 397,942 | 348,231 | |||||
| Lease expense | 1,112,555 | 588,062 | |||||
| Other administrative expenses | 340,614 | 317,834 | |||||
| Total general and administrative expenses | $ | 4,319,263 | $ | 3,351,453 | |||
Total general and administrative expenses increased $967.8 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 $175.2 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 $30.0 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. |
60
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| • | 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. |
| • | Loan expense increased $49.7 million for the year ended December 31, 2015 from the corresponding period in 2014. This increase was primarily due to an increase of $68.4 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 $524.5 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. |
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.
| • | Other administrative expenses increased $22.8 million for the year ended December 31, 2015 from the corresponding period in 2014. The increase was due to a $27.4 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 $32.9 million decrease in employee expenses throughout the year. |
OTHER EXPENSES
| Year Ended December 31, | |||||||
| 2015 | 2014 | ||||||
| (in thousands) | |||||||
| Amortization of intangibles | $ | 76,132 | $ | 67,921 | |||
| Deposit insurance premiums and other expenses | 56,946 | 55,746 | |||||
| Loss on debt extinguishment | — | 127,063 | |||||
| Impairment of capitalized software | — | 97,546 | |||||
| Impairment of goodwill | 4,447,622 | — | |||||
| Investment expense on affordable housing projects | 156 | — | |||||
| Total other expenses | $ | 4,580,856 | $ | 348,276 | |||
Total other expenses increased $4.2 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 increased $8.2 million for the year ended December 31, 2015, compared to the corresponding period in 2014. The increase was primarily due to a fourth quarter 2015 impairment of $11.7 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 $97.5 million was recorded due to the restructuring of the Company's capitalized software.
61
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
For the year ended December 31, 2015 the Company recorded an impairment of goodwill in the amount of $4.4 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.
INCOME TAX PROVISION
An income tax benefit of $671.5 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 17.9% for the year ended December 31, 2015, compared to 34.8% 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 $982.9 million for the reduction in the deferred tax liability. In 2014, the Company recognized a tax expense of $917.5 million (approximately $841.7 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 $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 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 $4.4 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
The Company's segments at December 31, 2015 consisted of Retail Banking, Auto Finance & Business Banking, Real Estate and Commercial Banking, Global Corporate Banking ("GCB"), and SC. 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 financial statements, effective January 28, 2014. For additional information with respect to the Company's reporting segments, see Note 24 to the Consolidated Financial Statements.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Results Summary
Retail Banking
Net interest income increased $24.7 million for the year ended December 31, 2015, compared to the corresponding period in 2014. The average balance of the Retail Banking segment's gross loans was $14.2 billion for the year ended December 31, 2015, compared to $16.5 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 the securitization transactions. The average balance of deposits was $32.7 billion for the year ended December 31, 2015, compared to $31.8 billion for the corresponding period in 2014, primarily driven by growth in money market accounts. Total non-interest income decreased $108.8 million for the year ended December 31, 2015, compared to the corresponding period in 2014. The provision for credit losses decreased $7.4 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 $78.1 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 average assets for the year ended December 31, 2015 was $17.0 billion, compared to $17.7 billion for the corresponding period in 2014. The decrease was primarily driven by a decrease within the mortgage loan portfolio.
Auto Finance & Business Banking
Net interest income increased $10.2 million for the year ended December 31, 2015, compared to the corresponding period in 2014. Total average gross loans was $6.5 billion for the year ended December 31, 2015, compared to $5.8 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 $182.4 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 Auto Finance & Business Banking segment ceased originations in the indirect leasing business line during the second quarter of 2015. The provision for credit losses decreased $7.7 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 $188.3 million for the year ended 2015, compared to the corresponding period in 2014, due primarily to growth in the indirect leasing business line.
Total average assets was $8.4 billion for the year ended December 31, 2015, compared to $6.6 billion for the corresponding period in 2014, driven by the growth in the indirect leasing business line. Total average deposits was $6.9 billion for the year ended December 31, 2015, compared to $6.7 billion for the corresponding period in 2014, driven by the growth in non-interest bearing core deposits.
Real Estate and Commercial Banking
Net interest income increased $43.7 million during the year ended December 31, 2015, compared to the corresponding period in 2014. Driven by growth in the special industries portfolio, the average balance of this segment's gross loans increased to $21.5 billion during the year ended December 31, 2015, compared to $20.5 billion for the corresponding period in 2014. The average balance of deposits increased to $9.6 billion during the year ended December 31, 2015, compared to $8.5 billion during the corresponding period in 2014, due to an increase in government banking deposits. Total non-interest income increased $11.0 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 $24.8 million for the year ended December 31, 2015, compared to provision releases of $72.9 million for the corresponding period in 2014. The increase in the provision was driven by changes to provision methodology. Total expenses increased $17.0 million during the year ended December 31, 2015, compared to the corresponding period in 2014.
Total average assets, which includes the related ACL, was $21.4 billion for the year ended December 31, 2015, compared to $20.4 billion for the corresponding period in 2014.
63
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 $38.9 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 $1.9 billion for the year ended December 31, 2015, compared to $1.2 billion for the corresponding period in 2014. Total non-interest income increased $5.4 million for the year ended December 31, 2015, compared to the corresponding period in 2014. The provision for credit losses increased $27.3 million for the year ended December 31, 2015, compared to the corresponding period in 2014. Total expenses increased $9.9 million for the year ended December 31, 2015, compared to the corresponding period in 2014.
Total average assets was $11.8 billion for the year ended December 31, 2015, compared to $9.4 billion for the corresponding period in 2014.
Other
Net interest income decreased $129.6 million for the year ended December 31, 2015, compared to the corresponding period in 2014. Total non-interest income decreased $94.1 million for the year ended December 31, 2015, compared to the corresponding period in 2014. There was a provision for credit losses of $25.7 million for the year ended December 31, 2015, compared to a provision release of $1.5 million during the corresponding period in 2014. Total expenses decreased $94.9 million during the year ended December 31, 2015, compared to the corresponding period in 2014.
Average assets was $32.6 billion for the year ended December 31, 2015, compared to $26.8 billion for the corresponding period in 2014.
SC
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 $533.2 million for the year ended December 31, 2015, compared to the corresponding period of 2014. Total non-interest income increased $223.6 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. The provision for credit losses increased $284.7 million for the year ended December 31, 2015, compared to the corresponding period in 2014. Total expenses increased $331.0 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.
Average assets was $34.6 billion for the year ended December 31, 2015, compared to $27.7 billion for the corresponding period of 2014.
64
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) | ||||||||
| (in thousands) | ||||||||
| Net interest income | $ | 5,984,773 | $ | 1,513,771 | ||||
| Provision for credit losses | (2,494,813 | ) | (46,850 | ) | ||||
| Total non-interest income | 4,680,933 | 1,088,083 | ||||||
| General and administrative expenses | (3,351,453 | ) | (1,662,063 | ) | ||||
| Other expenses | (348,276 | ) | (104,538 | ) | ||||
| Income before income taxes | 4,471,164 | 788,403 | ||||||
| Income tax provision | (1,554,357 | ) | (160,300 | ) | ||||
| Net income including Noncontrolling interest | $ | 2,916,807 | $ | 628,103 | ||||
The company reported a pre-tax income of $4.5 billion for the year ended December 31, 2014, compared to pretax income of $788.4 million for the year ended December 31, 2013. Factors contributing to this increase are as follows:
| • | Net interest income increased $4.5 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 $1.5 billion. |
| • | Total general and administrative expenses increased $1.7 billion for the year ended December 31, 2014, compared to 2013. Of this, $1.6 billion was the 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 $243.7 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 $97.5 million and early termination fees from debt repurchases. |
| • | The income tax provision increased $1.4 billion for the year ended December 31, 2014 compared to 2013. This increase was primarily due to the $654.9 million tax impact on provision from the Change in Control. |
65
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 | ||||||
| (in thousands) | |||||||
| INTEREST INCOME: | |||||||
| Interest-earning deposits | $ | 8,468 | $ | 6,494 | |||
| Investments available-for-sale | 259,701 | 302,820 | |||||
| Other investments | 36,921 | 27,669 | |||||
| Total interest income on investment securities and interest-earning deposits | 305,090 | 336,983 | |||||
| Interest on loans | 6,734,406 | 1,958,908 | |||||
| Total interest income | 7,039,496 | 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: | $ | 5,984,773 | $ | 1,513,771 | |||
Net interest income increased $4.5 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 $31.9 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 $4.8 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 9.21% 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 20.97% 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 0.49% 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.
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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 $14.4 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 $2.5 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) | |||||||
| (in thousands) | |||||||
| Allowance for loan and lease losses, beginning of period | $ | 834,337 | $ | 1,013,469 | |||
| Charge-offs: | |||||||
| Commercial | (109,704 | ) | (123,517 | ) | |||
| Consumer(3) | (2,697,290 | ) | (191,687 | ) | |||
| Total charge-offs | (2,806,994 | ) | (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 | (1,599,287 | ) | (215,982 | ) | |||
Provision for loan and lease losses (1) | 2,576,813 | 36,850 | |||||
Other(2): | |||||||
| Commercial | $ | — | $ | — | |||
| Consumer | $ | (61,220 | ) | $ | — | ||
| Allowance for loan and lease losses, end of period | $ | 1,750,643 | $ | 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 | $ | 1,883,284 | $ | 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. |
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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) | |||||||
| (in thousands) | |||||||
| Consumer fees | $ | 377,004 | $ | 228,666 | |||
| Commercial fees | 185,373 | 199,486 | |||||
| Mortgage banking income, net | 204,558 | 122,036 | |||||
| Equity method investments | 7,817 | 426,851 | |||||
| Bank owned life insurance | 60,278 | 57,041 | |||||
| Capital markets revenue | 51,671 | 31,742 | |||||
| Net gain recognized in earnings | 2,455,773 | 9,454 | |||||
| Lease income | 798,346 | — | |||||
| Miscellaneous income | 540,113 | 12,807 | |||||
| Total non-interest income | $ | 4,680,933 | $ | 1,088,083 | |||
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 $148.3 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 | |||
68
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.
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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 $7.8 million and $426.9 million on equity method investments for the year ended December 31, 2014 and 2013, respectively. The decrease of $419.0 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.
70
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 $798.3 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.
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.
Miscellaneous Income
Miscellaneous income increased $527.3 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) | |||||||
| (in thousands) | |||||||
| Compensation and benefits | $ | 1,216,111 | $ | 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 | 348,231 | 69,269 | |||||
| Lease expense | 588,062 | — | |||||
| Other administrative expenses | 317,834 | 227,156 | |||||
| Total general and administrative expenses | $ | 3,351,453 | $ | 1,662,063 | |||
Total general and administrative expenses increased $1.7 billion for the year ended December 31, 2014, compared to 2013. Factors contributing to this increase are as follows:
| • | Compensation and benefits expense increased $518.2 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 $279.0 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. |
71
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 $588.1 million in December 31, 2014. This is a result of the Change in Control. |
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.
| • | Other administrative expenses increased $90.7 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 | ||||||
| (in thousands) | |||||||
| Amortization of intangibles | $ | 67,921 | $ | 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 | 97,546 | — | |||||
| Total other expenses | $ | 348,276 | $ | 104,538 | |||
Total other expenses increased $243.7 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 $40.6 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 $97.5 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 $160.3 million for the year ended December 31, 2013, resulting in an effective tax rate of 34.8% for the year ended December 31, 2014 compared to 20.3% 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.
72
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.
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
The Company's segments at December 31, 2014 consisted of Retail Banking, Auto Finance & Alliances, Real Estate and Commercial Banking, Global Corporate Banking ("GCB"), and SC. 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 financial statements, effective January 28, 2014. For additional information with respect to the Company's reporting segments, see Note 24 to the Consolidated Financial Statements.
During the first quarter of 2014, certain management and business line changes were announced 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 to provide enhanced customer service to its clients. These changes became effective for reporting purposes during the second quarter of 2014. Accordingly, the following changes were made within the Company's reportable segments:
| • | The Investment Services business unit was combined with the Retail Banking business unit. |
| • | The CEVF line, formerly included in the Specialty and Government Banking business unit, was moved into the Auto Finance and Alliances business unit and |
| • | The Specialty and Government Banking business unit was combined with the Real Estate and Commercial Banking business unit. |
Accordingly, prior period information has been recast for comparability.
Results Summary
Retail Banking
Net interest income decreased $1.0 million for the year ended December 31, 2014 compared to the year ended December 31, 2013. The average balance of the Retail Banking segment's gross loans was $16.5 billion for the year ended December 31, 2014, compared to $18.1 billion in 2013. The average balance of deposits was $31.8 billion for the year ended December 31, 2014, compared to $32.9 billion for 2013. Total non-interest income increased $34.9 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 $58.9 million for the year ended December 31, 2014 compared to 2013. Total expenses decreased $71.5 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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Total average assets for the year ended December 31, 2014 was $17.7 billion, compared to $18.6 billion for the year ended December 31, 2013. This decrease was primarily driven by the decreases within the mortgage loan portfolio.
Auto Finance & Alliances
Net interest income increased $11.5 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 $5.8 billion for the year ended December 31, 2014, compared to $5.2 billion in 2013. Total non-interest income increased $172.3 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 decreased $23.9 million for the year ended December 31, 2014, compared to 2013. Total expenses increased $238.1 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 $6.6 billion for the year ended December 31, 2014 compared to $5.5 billion for the year ended December 31, 2013, due primarily to the launch of the indirect leasing segment in 2014. Total average deposits were $6,741.4 million for the year ended December 31, 2014 compared to $6,377.5 million for the year ended December 31, 2013.
Real Estate and Commercial Banking
Net interest income increased $39.3 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 $20.5 billion during the year ended December 31, 2014, compared to $19.6 billion in 2013. Growth in government banking drove the average balance of deposits to $8.5 billion for the year ended December 31, 2014, compared to $6.8 billion in 2013. Total non-interest income decreased $23.3 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 $72.9 million for the year ended December 31, 2014, compared to a release of $52.4 million for 2013. Total expenses decreased $37.9 million for the year ended December 31, 2014 compared to 2013.
Total average assets were $20.4 billion for the year ended December 31, 2014, compared to $19.0 billion for the year ended December 31, 2013.
Global Corporate Banking (GCB)
Net interest income increased $12.7 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 $800.1 million 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 $23.0 million for the year ended December 31, 2014 compared to 2013.
Total average assets were $9.4 billion for the year ended December 31, 2014, compared to $8.2 billion in 2013.
Other
Net interest income increased $2.2 million for the year ended December 31, 2014 compared to 2013. Total non-interest income increased $152.0 million for the year ended December 31, 2014 compared to 2013. Total expenses increased $359.9 million during the year ended December 31, 2014 compared to 2013.
Average assets were $26.8 billion for the year ended December 31, 2014 compared to $28.5 billion for the year ended December 31, 2013.
SC
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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
CRITICAL ACCOUNTING POLICIES
MD&A is based on the consolidated financial statements and accompanying notes that have been prepared in accordance with GAAP. The significant accounting policies of the Company are described in Note 1 to the Consolidated Financial Statements. The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions 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 and the reserve for unfunded lending commitments, goodwill, derivatives and hedging activities 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.
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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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 for loan and lease losses and Reserve for Unfunded Lending Commitments
The ALLL and reserve for unfunded lending commitments represent management's best estimate of probable losses inherent in the loan portfolio. The adequacy of SHUSA's ALLL and reserve for unfunded lending commitments is regularly evaluated. This evaluation process is subject to several estimates and applications of judgment. Management's evaluation of the adequacy of the allowance to absorb loan and lease losses takes into consideration the risks inherent in the loan portfolio, past loan and lease loss experience, loans that have loss potential, 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, 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. Note 1 to the Consolidated Financial Statements describes the methodology used to determine the allowance for loan and lease losses and reserve for unfunded lending commitments in the Consolidated Balance Sheet. A discussion of the factors driving changes in the amount of the allowance for loan and lease losses and reserve for unfunded lending commitments for the periods presented is included in the Credit Risk Management section of this MD&A.
The ALLL consists of two elements: (i) an allocated allowance, which is comprised of allowances established on loans individually 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. Reserve levels are collectively reviewed for adequacy and approved quarterly by Board-level committees.
The Company's allocated reserves are principally based on its various models subject to the Company's Model Risk Management framework. New models are approved by the Company's Model Risk Management Committee, and inputs are reviewed periodically by the Company's internal audit function. Models, inputs and documentation are further reviewed and validated at least annually, and the Company completes a detailed variance analysis of historical model projections against actual observed results on a quarterly basis. Required actions resulting from the Company's analysis, if necessary, are governed by its Allowance for Loan and Lease Losses Committee.
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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 positions are considered in light of these factors.
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.
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 present value of expected future cash flows or, if collateral-dependent, calculating the fair value of the collateral less its estimated cost to sell. The TDR classification will remain on the loan until it is paid in full or liquidated.
Consumer Loan TDRs
The primary modification program for the Company’s residential mortgage and home equity portfolios is a proprietary program designed to keep customers in their homes and, when appropriate, prevent them from entering into foreclosure. The program is available to all customers facing a financial hardship regardless of their delinquency status. The main goal of the modification program is to review the customer’s entire financial condition to ensure that the proposed modified payment solution is affordable according to a specific debt-to-income ("DTI") ratio range. The main modification benefits of the program allow for term extensions, interest rate reductions, and/or deferment of principal. The Company reviews each customer on a case-by-case basis to determine which benefit or combination of benefits will be offered to achieve the target DTI range.
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 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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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.
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.
The Company evaluates the results of its deferral strategies based upon the amount of cash installments that are collected on accounts after they have been deferred compared to the extent to which the collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation, the Company believes that payment deferrals granted according to its policies and guidelines are an effective portfolio management technique and result in higher ultimate cash collections from the portfolio.
Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts 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 of the collateral, if applicable, less its estimated cost to sell.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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.
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 24 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, the reporting units with assigned goodwill were Retail Banking, Auto Finance and Business Banking, Commercial Real Estate, Corporate and Commercial Banking, Global Corporate Banking, and SC.
Under ASC 350, Intangibles - Goodwill and Other, an entity's 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 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 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") 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 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. The Company utilizes the market approach to determine the fair value of its SC reporting unit as it is a publicly traded company that has a single reporting unit. Determining the fair value of the remaining reporting units requires significant valuation inputs, assumptions, and estimates.
The Company determines the carrying value of each reporting unit using a risk-based capital approach. Certain of the Company's assets are assigned to a Corporate / Other category. These assets are related to the Company's corporate-only programs, such as BOLI, and are not employed in or related to the operations of a reporting unit or considered in determining the fair value of a reporting unit.
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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Goodwill impairment testing involves management's judgment, to the extent that it requires 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") 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 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 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 the reporting units' forecasted cash flows, including a terminal value to estimate the fair value of cash flows beyond the final year of the forecasts. The discount rates utilized to obtain the net present value of the reporting units' cash flows were estimated using a capital asset pricing model. Significant inputs to this model include a risk-free rate of return, beta (which is a measure of the level of non-diversifiable risk associated with comparable companies for each specific reporting unit), market equity risk premium, and, in certain cases, additional premium for size and/or unsystematic Company specific risk factors. The Company utilized discount rates that it believes adequately reflect the risk and uncertainty in the financial markets. The Company estimated expected rates of equity returns based on historical market returns and risk/return rates for similar industries of the reporting unit. The Company uses its internal forecasts to estimate future cash flows, so actual results may differ from forecasted results.
All of the preceding fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove to be accurate predictions in the future. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impacts the estimated fair value of the aforementioned reporting units include such items as:
| • | a prolonged downturn in the business environment in which the reporting units operate; |
| • | an economic recovery that significantly differs from our assumptions in timing or degree; |
| • | volatility in equity and debt markets resulting in higher discount rates; and |
| • | unexpected regulatory changes. |
Refer to the Financial Condition, Goodwill section of Management's Discussion and Analysis for further details on the Company's Goodwill, including the results of Management's goodwill impairment analyses.
Derivatives and Hedging Activities
SHUSA and its subsidiaries use derivative instruments as part of the risk management process 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 the fair value of an asset, liability or firm commitment attributable to a particular risk (such as interest rate risk) are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. The Company formally documents the relationships of qualifying hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking each hedge transaction.
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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.
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 fair 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.
Income Taxes
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 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 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 not expiring unused; (h) estimates of applicable state tax rates based on current/most recent enacted tax rates and state apportionment calculations; (i) tax planning strategies and (j) current tax laws. Significant judgment is required to assess future earnings trends and the timing of reversals of temporary differences.
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| 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 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 16 of the Consolidated Financial Statements for details on the Company's income taxes.
FINANCIAL CONDITION
LOAN PORTFOLIO
The Company's loan portfolio(1) consisted of the following at the dates provided:
| December 31, 2015 | December 31, 2014 | December 31, 2013 | December 31, 2012 | December 31, 2011 | ||||||||||||||||||||||||||||||
| (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 | 22,548,351 | 27.2 | % | 19,195,638 | 25.1 | % | 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 | 40,709,731 | 49.2 | % | 36,640,761 | 48.0 | % | 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 | 9.2 | % | 9,672,204 | 19.3 | % | 11,244,409 | 21.1 | % | 11,638,021 | 22.5 | % | |||||||||||||||||||
| Home equity loans and lines of credit | 6,146,913 | 7.4 | % | 6,206,980 | 8.1 | % | 6,311,694 | 12.6 | % | 6,638,466 | 12.5 | % | 6,868,939 | 13.3 | % | |||||||||||||||||||
| Total consumer loans secured by real estate | 12,614,668 | 15.2 | % | 13,176,289 | 17.3 | % | 15,983,898 | 31.9 | % | 17,882,875 | 33.6 | % | 18,506,960 | 35.8 | % | |||||||||||||||||||
| Consumer loans not secured by real estate: | ||||||||||||||||||||||||||||||||||
| Retail installment contracts and auto loans | 25,669,232 | 31.0 | % | 22,467,217 | 29.5 | % | 81,804 | 0.2 | % | 295,398 | 0.6 | % | 958,345 | 1.9 | % | |||||||||||||||||||
| Personal unsecured loans | 2,648,361 | 3.2 | % | 2,696,820 | 3.5 | % | 493,785 | 1.0 | % | 446,416 | 0.8 | % | 364,588 | 0.7 | % | |||||||||||||||||||
| Other consumer | 1,032,580 | 1.4 | % | 1,303,279 | 1.7 | % | 1,321,985 | 2.6 | % | 1,676,325 | 3.1 | % | 1,940,765 | 3.8 | % | |||||||||||||||||||
| Total Consumer Loans | 41,964,841 | 50.8 | % | 39,643,605 | 52.0 | % | 17,881,472 | 35.7 | % | 20,301,014 | 38.1 | % | 21,770,658 | 42.2 | % | |||||||||||||||||||
| Total Loans | $ | 82,674,572 | 100.0 | % | $ | 76,284,366 | 100.0 | % | $ | 50,050,626 | 100.0 | % | $ | 53,232,353 | 100.0 | % | $ | 51,659,851 | 100.0 | % | ||||||||||||||
| Total Loans with: | ||||||||||||||||||||||||||||||||||
| Fixed | $ | 48,998,148 | 59.3 | % | $ | 45,653,333 | 59.9 | % | $ | 23,541,953 | 47.0 | % | $ | 24,899,616 | 46.8 | % | $ | 26,632,842 | 51.6 | % | ||||||||||||||
| Variable | 33,676,424 | 40.7 | % | 30,631,033 | 40.1 | % | 26,508,673 | 53.0 | % | 28,332,737 | 53.2 | % | 25,027,009 | 48.4 | % | |||||||||||||||||||
| Total Loans | $ | 82,674,572 | 100.0 | % | $ | 76,284,366 | 100.0 | % | $ | 50,050,626 | 100.0 | % | $ | 53,232,353 | 100.0 | % | $ | 51,659,851 | 100.0 | % | ||||||||||||||
(1) Includes LHFS
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Over the last five years, our overall loan portfolio has increased $31.0 billion or 60.0%, primarily driven by the Change in Control in 2014 which resulted in approximately $22.0 billion of loans being consolidated at the time of the Change in Control. In the commercial loans (excluding multifamily loans) portfolio, 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.
Commercial
Commercial loans (excluding multifamily loans) increased approximately $3.3 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%, from December 31, 2014 to December 31, 2015. This increase from December 31, 2014 to December 31, 2015 was primarily attributable to the $1.4 billion repurchase of FNMA loans during the third quarter of 2015, offset by loan repayment and runoff activity exceeding originations by $677.0 million during the year ended December 31, 2015.
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) | |||||||||||||
| (in thousands) | ||||||||||||||||
| Commercial real estate loans | $ | 1,828,800 | $ | 5,102,672 | $ | 1,791,445 | $ | 8,722,917 | ||||||||
| Commercial and industrial loans | 8,474,096 | 11,726,015 | 2,348,240 | 22,548,351 | ||||||||||||
| Multifamily loans | 775,645 | 6,712,788 | 1,950,030 | 9,438,463 | ||||||||||||
| Total | $ | 11,078,541 | $ | 23,541,475 | $ | 6,089,715 | $ | 40,709,731 | ||||||||
| Loans with: | — | |||||||||||||||
| Fixed rates | $ | 2,185,582 | $ | 9,383,238 | $ | 2,799,580 | $ | 14,368,400 | ||||||||
| Variable rates | 8,892,959 | 14,158,237 | 3,290,135 | 26,341,331 | ||||||||||||
| Total | $ | 11,078,541 | $ | 23,541,475 | $ | 6,089,715 | $ | 40,709,731 | ||||||||
(1) Includes LHFS.
Consumer
Consumer loans secured by real estate decreased $561.6 million, or 4.3%, from December 31, 2014 to December 31, 2015. The primary drivers of the decrease from December 31, 2014 were related to the Residential Mortgage portfolio, specifically loan sales of $2.5 billion and runoff of $1.2 billion exceeding originations of $3.2 billion.
The consumer loan portfolio not secured by real estate increased $2.9 billion, or 10.9%, from December 31, 2014 to December 31, 2015. The primary driver of the increase from December 31, 2014 was the RIC and auto loan portfolio, specifically originations of $22.1 billion exceeding paydowns and charge-off activity of $11.7 billion and sales of $7.9 billion.
83
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
As of December 31, 2015, 69.0% of the Company's RIC and auto loan portfolio was nonprime loans (defined by the Company as customers with a Fair Isaac Corporation ("FICO") score of below 640) with customers who did not qualify for conventional consumer finance products as a result of, among other things, a lack of or adverse credit history, low income levels and/or the inability to provide adequate down payments. While underwriting guidelines were designed to establish that the customer would be a reasonable credit risk, the nonprime loans, 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 collateral values and increasing 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, debt-to-income ratio, loan-to-value ratio, 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.
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 | |||||||||||
Credit Score Range(2) | Retail installment contracts and auto loans(3) | Retail installment contracts and auto loans(3) | ||||||||||
Standard file(4) | Non-Standard file(5) | Standard file(4) | Non-Standard file(5) | |||||||||
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) RICs loans include $905.7 million and $45.4 million of LHFS at December 31, 2015 and December 31, 2014, respectively, that do not have an allowance.
(4) Defined as borrowers with greater than 36 months of credit history or four or more trade lines
(5) Defined as borrowers with less than 36 months of credit history or less than four trade lines.
84
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
At December 31, 2015, a typical RIC was originated with an average annual percentage rate (APR) of 16.9% and was purchased from the dealer at a discount of 2.5%. All of the Company's RICs and auto loans are fixed rate loans.
Nonprime RICs and personal unsecured loans have a higher inherent risk of loss than prime loans. The Company records an allowance for loan and lease losses to cover its estimate of inherent losses on its RIC incurred as of the balance sheet date on its RICs. As of September 30, 2015, SC's personal unsecured portfolio was transferred to held for sale and thus does not have a related allowance. The inclusion of SC's nonprime loans within the Company's loan portfolio effective upon the Change in Control in 2014, among other things, resulted in an increase in the allowance for loan and lease losses as a percentage of loans held for investment from 2.3% at December 31, 2014 to 3.9% at December 31, 2015.
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 other significant personal lending relationship is with Bluestem. Management continues to perform in accordance with the terms and operative provisions of the agreements under which we are 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 loan portfolios are carried as held for sale in our consolidated financial statements. Accordingly, the Company has recorded lower-of-cost-or-market adjustments on these portfolios, and there may be further such adjustments required in future periods' financial statements. Management is currently evaluating alternatives for the Bluestem portfolio.
CREDIT RISK MANAGEMENT
Extending credit to customers exposes the Company to credit risk, which is the risk that contractual principal and interest due on loans will not be collected due to the inability or unwillingness of the borrower to repay the loan. The Company manages credit risk in its loan portfolio through adherence to consistent standards, guidelines, and limitations established by the Company’s Board of Directors as set forth in its Board-approved Risk Tolerance Statement. Written loan policies establish underwriting standards, lending limits, and other standards or limits deemed necessary and prudent. Various approval levels based on the amount of the loan and other key credit attributes have also been established. In order to ensure consistency and quality in accordance with the Company's credit and governance standards, authority to approve loans is shared jointly between the businesses and the credit risk group. Loans over certain dollar thresholds require approval by the Company's credit committees, with higher balance loans requiring approval by more senior level committees.
The Credit Risk Review group conducts ongoing independent reviews of the credit quality of the Company’s loan portfolios and credit management processes to ensure the accuracy of the risk ratings and adherence to established policies and procedures, verify compliance with applicable laws and regulations, provide objective measurement of the risk inherent in the loan portfolio, and ensure that proper documentation exists. The results of these periodic reviews are reported to business line management, Risk Management and the Audit Committee of both the Company and the Bank. The Company maintains a classification system for loans that identifies those requiring a higher level of monitoring by management because of one or more factors, including borrower performance, business conditions, industry trends, the nature of the collateral, collateral margin, economic conditions, or other factors. Loan credit quality is subject to scrutiny by line management, credit risk professionals, and Internal Audit.
The following discussion summarizes the underwriting policies and procedures for the major categories within the loan portfolio and addresses SHUSA’s strategies for managing the related credit risk. Additional credit risk management related considerations are discussed further in the "Allowance for Loan and Lease Losses" section of this MD&A.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Commercial Loans
Commercial loans principally represent commercial real estate loans (including multifamily loans), loans to commercial and industrial customers, and automotive dealer floor plan loans. Credit risk associated with commercial loans is primarily influenced by prevailing and expected economic conditions and the level of underwriting risk SHUSA is willing to assume. To manage credit risk when extending commercial credit, the Company focuses on assessing the borrower’s capacity and willingness to repay and obtaining sufficient collateral. Commercial and industrial loans are generally secured by the borrower’s assets and by personal guarantees. Commercial real estate loans are originated primarily within the Mid-Atlantic, New York, and New England market areas and are secured by real estate at specified loan-to-value ("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 levels, the creditworthiness of the borrower, and collateral values. In the home equity loan portfolio, combined loan-to-value ("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 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 or FNMA. Credit risk is further reduced, since a portion of the Company’s fixed-rate mortgage loan production is sold to investors in the secondary market without recourse.
Consumer Loans Not Secured by Real Estate
The Company’s consumer loans not secured by real estate include acquired RIC from 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 collection practices, which includes the repossession of vehicles.
Collections
The Company closely monitors delinquencies as another means of maintaining high asset quality. Collection efforts generally begin within 15 days after a loan payment is missed by attempting to contact all borrowers and offer a variety of loss mitigation alternatives. If these attempts fail, the Company will attempt to gain control of 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.
86
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
NON-PERFORMING ASSETS
The following table presents the composition of non-performing assets at the dates indicated:
| December 31, 2015 | December 31, 2014 | December 31, 2013 | December 31, 2012 | December 31, 2011 | |||||||||||||||
| (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 | 88,910 | 58,794 | 100,894 | 122,111 | 213,617 | ||||||||||||||
| Multifamily | 9,162 | 9,639 | 21,371 | 58,587 | 126,738 | ||||||||||||||
| Total commercial loans | 211,250 | 236,213 | 372,338 | 471,934 | 800,047 | ||||||||||||||
| Consumer: | |||||||||||||||||||
| Residential mortgages | 173,780 | 231,316 | 473,566 | 511,382 | 438,461 | ||||||||||||||
| Consumer loans secured by real estate | 127,171 | 142,026 | 141,961 | 170,486 | 108,075 | ||||||||||||||
| Consumer loans not secured by real estate | 1,127,849 | 986,954 | 10,544 | 18,874 | 12,883 | ||||||||||||||
| Total consumer loans | 1,428,800 | 1,360,296 | 626,071 | 700,742 | 559,419 | ||||||||||||||
| Total non-accrual loans | 1,640,050 | 1,596,509 | 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 | 136,136 | — | — | — | ||||||||||||||
| Other repossessed assets | 374 | 11,375 | 3,073 | 3,301 | 5,671 | ||||||||||||||
| Total other real estate owned and other repossessed assets | 211,708 | 212,562 | 91,676 | 69,263 | 108,697 | ||||||||||||||
| Total non-performing assets | $ | 1,851,862 | $ | 1,809,071 | $ | 1,090,085 | $ | 1,241,939 | $ | 1,468,163 | |||||||||
| Past due 90 days or more as to interest or principal and accruing interest | $ | 79,346 | $ | 93,152 | $ | 2,545 | $ | 3,052 | $ | 4,908 | |||||||||
Annualized net loan charge-offs to average loans (2) | 3.3 | % | 2.2 | % | 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 | % | 1.4 | % | 2.2 | % | 2.3 | % | 2.8 | % | |||||||||
ACL as a percentage of total non-performing assets (1) | 181.0 | % | 104.1 | % | 96.7 | % | 98.5 | % | 91.3 | % | |||||||||
ACL as a percentage of total NPLs (1) | 204.3 | % | 118.0 | % | 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. |
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 million and $71.8 million at December 31, 2015 and December 31, 2014, respectively. Potential problem consumer loans amounted to $3.6 billion and $3.4 billion at December 31, 2015 and December 31, 2014, respectively. Management has included these loans in its evaluation and reserved for them during the respective periods.
Non-performing assets increased during the period, to $1.9 billion, or 1.5% of total assets, at December 31, 2015, compared to $1.8 billion, or 1.5% of total assets, at December 31, 2014, primarily attributable to an increase in NPLs in the retail installment contract and auto loan portfolio, offset by decreases in the commercial loans and consumer loans secured by real estate portfolios.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
General
Non-performing assets consist of non-performing loans and leases ("NPLs"), which represent loans and leases no longer accruing interest, other real estate owned ("OREO") properties, and other repossessed assets. When interest accruals are suspended, accrued interest income is reversed, with accruals charged against earnings. The Company generally places all commercial loans and consumer loans secured by real estate on non-performing status at 90 days past due for interest, principal or maturity, or earlier if it is determined that the collection of principal or interest on the loan is in doubt. For certain individual portfolios, including the RIC portfolio, non-performing status will begin at 60 days past due. Personal unsecured loans, including credit cards, generally continue to accrue interest until they are 180 days delinquent, at which point they are charged-off and all 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 $25.0 million from December 31, 2014 to December 31, 2015. At December 31, 2015, commercial NPLs accounted for 0.5% of total commercial loans, compared to 0.6% of total commercial loans at December 31, 2014. The decrease in commercial NPLs was primarily attributable to a decrease of NPLs in the CRE portfolio of $54.6 million, due to continued improvement in credit quality, and offset by an increase of $30.1 million in the C&I portfolio, due to the energy sector.
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 and December 31, 2014, respectively:
| 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 | ||||||||||||
| (dollars in thousands) | |||||||||||||||
| Non-performing loans | $ | 173,780 | $ | 127,171 | $ | 231,316 | $ | 142,026 | |||||||
| Total loans | $ | 6,467,755 | $ | 6,146,913 | $ | 6,969,309 | $ | 6,206,980 | |||||||
| 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
The NPL ratio is significantly higher for the Company's residential mortgage loan portfolio compared to its consumer loans secured by real estate portfolio due to a number of factors, including: the prolonged workout and foreclosure resolution processes for residential mortgage loans; differences in risk profiles; and mortgage loans located outside the Northeast and Mid-Atlantic United States.
Resolution challenges with low foreclosure sales continue to impact both residential mortgage and consumer loans secured by real estate portfolio NPL balances, but foreclosure inventory decreased quarter-over-quarter. The foreclosure moratorium was lifted and activity resumed in 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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
A new foreclosure law was enacted in Massachusetts in August 2012, and the Massachusetts Division of Banks issued its final rules on the implementation 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 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 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.
NPLs in the consumer loans not secured by real estate portfolio increased $140.9 million from December 31, 2014 to December 31, 2015. At December 31, 2015, non-performing consumer loans not secured by real estate accounted for 3.8% of total consumer loans not secured by real estate, compared to 3.7% of total consumer loans not secured by real estate at December 31, 2014. The increase was primarily attributable to the increase in NPLs in the RIC and auto loan portfolio of $144.7 million. This NPL increase is due to the rise of nonprime loans, as a percentage of the portfolio, which have a higher default rate than prime loans.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
TROUBLED DEBT RESTRUCTURINGS ("TDRs")
TDRs are loans that have been modified as the Company has agreed to make certain concessions to both meet the needs of the customers and maximize its ultimate recovery on the loans. TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified with terms that would otherwise not be granted to the borrower. The types of concessions granted are generally interest rate reductions, limitations on accrued interest charged, term extensions, and deferments of principal.
TDRs are generally placed in nonaccrual status upon modification, unless the loan was performing immediately prior to modification. For most portfolios, TDRs may return to accrual status after demonstrating at least six consecutive months of sustained payments following modification, as long as the Company believes the principal and interest of the restructured loan will be paid in full. For the RIC portfolio, loans may return to accrual status when the balance is remediated to current status. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on the operation of the collateral, the loan may be returned to accrual status based on the foregoing parameters. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on disposal of the collateral, the loan may not be returned to accrual status.
The following table summarizes TDRs at the dates indicated:
| December 31, 2015 | December 31, 2014 | ||||||
| (As Restated) | |||||||
| (in thousands) | |||||||
| Performing | |||||||
| Commercial | $ | 128,073 | $ | 186,686 | |||
| Residential mortgage | 134,356 | 83,597 | |||||
| Retail installment contracts and auto loan | 3,454,861 | 1,697,038 | |||||
| Other consumer | 90,461 | 74,652 | |||||
| Total performing | 3,807,751 | 2,041,973 | |||||
| Non-performing | |||||||
| Commercial | 66,051 | 74,308 | |||||
| Residential mortgage | 66,573 | 70,624 | |||||
| Retail installment contracts and auto loan | 422,799 | 146,929 | |||||
| Other consumer | 48,073 | 51,672 | |||||
| Total non-performing | 603,496 | 343,533 | |||||
| Total | $ | 4,411,247 | $ | 2,385,506 | |||
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 $603.5 million at December 31, 2015, an increase of $260.0 million compared to December 31, 2014. The following table provides a summary of TDR activity:
| Year Ended December 31, 2015 | Year Ended December 31, 2014 | |||||||||||||||
| (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) | $ | 1,843,967 | $ | 524,943 | $ | — | $ | 1,003,643 | ||||||||
| New TDRs | 4,183,205 | 177,477 | 2,022,143 | 155,542 | ||||||||||||
| Charged-Off TDRs | (1,095,914 | ) | (9,195 | ) | (107,705 | ) | (44,987 | ) | ||||||||
| Sold TDRs | (606,009 | ) | (7,691 | ) | (930 | ) | (440,673 | ) | ||||||||
| Payments on TDRs | (447,589 | ) | (151,947 | ) | (69,542 | ) | (148,685 | ) | ||||||||
TDRs, end of period(2) | $ | 3,877,660 | $ | 533,587 | $ | 1,843,966 | $ | 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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Commercial
Performing commercial TDRs decreased from $186.7 million, or 71.5% of total commercial TDRs at December 31, 2014 to $128.1 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 (69.0% 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 payment deferrals to borrowers on its retail installment contracts, under which the consumer is allowed to move up to three delinquent payments to the end of the loan. 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. Additionally, the Company generally limits the granting of deferrals on new accounts until a requisite number of payments have been received. During the deferral period, the Company continues to accrue and collect interest on the loan in accordance with the terms of the deferral agreement.
At the time a deferral is granted, all delinquent amounts may be deferred or paid, resulting in the classification of the loan as current and therefore not considered a delinquent account. Thereafter, the account is aged based on the timely payment of future installments in the same manner as any other account.
The Company evaluates the results of its deferral strategies based upon the amount of cash installments that are collected on accounts after they have been deferred compared to the extent to which the collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation, the Company believes that payment deferrals granted according to its policies and guidelines are an effective portfolio management technique and result in higher ultimate cash collections from the portfolio.
Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts 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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Other Consumer Loans
Performing other consumer loan TDRs increased from $74.7 million, or 59.1% of total other consumer loan TDRs at December 31, 2014 to $90.5 million, or 65.3% of total other consumer loan TDRs at December 31, 2015. The increase is primarily attributable to the home equity loans and lines of credit portfolio, including new TDRs of $31.8 million exceeding payments and charge-offs of $16.6 million. If a customer’s financial difficulty is not temporary, the Company may agree, or be required by a bankruptcy court, to grant a modification involving one or a combination of the following: a reduction in interest rate, a reduction in the loan's principal balance, or an extension of the maturity date. The servicer also may grant concessions on the Company's revolving personal loans in the form of principal or interest rate reductions or payment plans.
TDR activity in the personal loan and other consumer portfolios was negligible to overall TDR activity.
Delinquencies
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 | Consumer Loans Not Secured by Real Estate | Commercial Loans | Total | Consumer Loans Secured by Real Estate | Consumer Loans Not Secured by Real Estate | Commercial Loans | Total | ||
| (dollars in thousands) | |||||||||
| Total Delinquencies | $390,714 | $3,904,809 | $159,501 | $4,455,024 | $488,911 | $3,589,648 | $175,459 | $4,254,018 | |
Total Loans(1) | $12,614,668 | $29,350,173 | $40,709,731 | $82,674,572 | $13,176,289 | $26,467,316 | $36,640,761 | $76,284,366 | |
| Delinquencies as a % of Loans | 3.1% | 13.3% | 0.4% | 5.4% | 3.7% | 13.6% | 0.5% | 5.6% | |
(1) Includes LHFS
Overall, total delinquencies have increased by $201.0 million or 4.7% from December 31, 2014 to December 31, 2015. Consumer loans secured by real estate delinquencies have decreased $98.2 million primarily due to improvements in credit quality in the residential mortgage portfolio. Consumer loans not secured by real estate delinquencies have increased $315.2 million primarily due to the increase in nonprime accounts in the RIC and auto loan portfolio. Commercial delinquencies have decreased $16.0 million primarily due to overall improvements in credit quality.
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”) and combined loan-to-value (“CLTV”), internal risk ratings, economic conditions and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the ACL may be necessary if conditions differ substantially from the assumptions used in making the evaluations.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following table presents the allocation of the allowance for loan and lease losses and the percentage of each loan type to total loans held for investment at the dates indicated:
| December 31, 2015 | December 31, 2014 | December 31, 2013 | December 31, 2012 | December 31, 2011 | ||||||||||||||||||||||||||||||
| (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) | ||||||||||||||||||||||||||||||||||
| Allocated allowance: | ||||||||||||||||||||||||||||||||||
| Commercial loans | $ | 433,514 | 51.2 | % | $ | 386,837 | 48.2 | % | $ | 443,074 | 64.4 | % | $ | 580,931 | 62.8 | % | $ | 766,865 | 58.2 | % | ||||||||||||||
| Consumer loans | 2,724,917 | 48.8 | % | 1,330,782 | 51.8 | % | 363,647 | 35.6 | % | 407,259 | 37.2 | % | 292,816 | 41.8 | % | |||||||||||||||||||
| Unallocated allowance | 45,328 | n/a | 33,024 | n/a | 27,616 | n/a | 25,279 | n/a | 23,811 | n/a | ||||||||||||||||||||||||
| Total allowance for loan and lease losses | 3,203,759 | 100.0 | % | 1,750,643 | 100.0 | % | 834,337 | 100.0 | % | 1,013,469 | 100.0 | % | 1,083,492 | 100.0 | % | |||||||||||||||||||
| Reserve for unfunded lending commitments | 147,397 | 132,641 | 220,000 | 210,000 | 256,485 | |||||||||||||||||||||||||||||
| Total ACL | $ | 3,351,156 | $ | 1,883,284 | $ | 1,054,337 | $ | 1,223,469 | $ | 1,339,977 | ||||||||||||||||||||||||
General
The ACL increased $1.5 billion from December 31, 2014 to December 31, 2015. The increase in the overall ACL was 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. 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.
Management regularly monitors the condition of the Company's portfolio, considering factors such as historical loss experience, trends in delinquencies and NPLs, changes in risk composition and underwriting standards, the experience and ability of staff, and regional and national economic conditions and trends.
The risk factors inherent in the ACL are continuously reviewed and revised by management when conditions indicate that the estimates initially applied are different from actual results. The Company also performs a comprehensive analysis of the ACL on a quarterly basis. In addition, a review of allowance levels based on nationally published statistics is conducted quarterly.
The factors supporting the ACL do not diminish the fact that the entire ACL is available to absorb losses in the loan portfolio 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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Commercial
For the commercial loan portfolio excluding small business loans (businesses with annual sales of up to $3.0 million), the Company has specialized credit officers, a monitoring unit, and workout units that identify and manage potential problem loans. Changes in management factors, financial and operating performance, company behavior, industry factors and external events and circumstances are evaluated on an ongoing basis to determine whether potential impairment is evident and additional analysis is needed. For the commercial loan portfolios, risk ratings are assigned to each loan to differentiate risk within the portfolio, reviewed on an ongoing basis by credit risk management and revised, if needed, to reflect the borrower’s current risk profile and the related collateral position. The risk ratings consider factors such as financial condition, debt capacity and coverage ratios, market presence and quality of management. Generally, credit officers reassess a borrower’s risk rating on at least an annual basis, and more frequently if warranted. This reassessment process is managed by credit officers and is overseen by the Credit Monitoring group to ensure consistency and accuracy in risk ratings, as well as the appropriate frequency of risk rating reviews by the Company’s credit officers. The Company’s Credit Risk Review Committee assesses whether the Company’s Credit Risk Review Framework and, risk management guidelines established by the Company’s Board and applicable laws and regulations are being followed, and reports key findings and relevant information to the Board. The Company’s Credit Risk Review group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings. When credits are downgraded below a certain level, the Company’s Workout Department becomes responsible for managing the credit risk. Risk rating actions are generally reviewed formally by one or more credit committees depending on the size of the loan and the type of risk rating action being taken. Detailed analyses are completed that support the risk rating and management’s strategies for the customer relationship going forward.
A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay (e.g., less than 90 days) or insignificant shortfall in the amount of payments does not necessarily result in the loan being identified as impaired. Impaired commercial loans are comprised of all TDRs plus non-accrual loans in excess of $1 million that are not TDRs. In addition, the Company may perform a specific reserve analysis on loans that fail to meet this threshold if the nature of the collateral or business conditions warrant. The Company performs a specific reserve analysis on certain loans regardless of loan size. If a loan is identified as impaired and is collateral-dependent, an initial appraisal is obtained to provide a baseline to determine the property’s fair market value. The frequency of appraisals depends on the type of collateral being appraised. If the collateral value is subject to significant volatility (due to location of the asset, obsolescence, etc.), an appraisal is obtained more frequently. At a minimum, updated appraisals for impaired loans are obtained within a 12-month period if the loan remains outstanding for that period of time.
If a loan is identified as impaired and is not collateral-dependent, impairment is measured based on a discounted cash flow 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 related to the commercial portfolio was $433.5 million at December 31, 2015 (1.1% of commercial loans held for investment)and $386.8 million at December 31, 2014 (1.1% of commercial loans held for investment). 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 ACL allocated to the commercial portfolio increased, in part, due to current economic environment impacting our commercial customers in the energy sector. Management recorded additional reserves in relation to this portfolio during 2015.
Consumer
The consumer loan and small business loan portfolios are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency LTV ratios, and internal and external credit scores. Management evaluates the consumer portfolios throughout their life cycles on a portfolio basis. When problem loans are identified that are secured with collateral, management examines the loan files to evaluate the nature and type of collateral. Management documents the collateral type, the date of the most recent valuation, and whether any liens exist to determine the value to compare against the committed loan amount.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Residential mortgages not adequately secured by collateral are generally charged-off when deemed to be uncollectible or are delinquent 180 days or more, whichever comes first, unless it can be clearly demonstrated that repayment will occur regardless of the delinquency status. Examples that would demonstrate repayment likelihood include: a loan that is secured by collateral and is in the process of collection; a loan supported by a valid guarantee or insurance; or a loan supported by a valid claim against a solvent estate.
For residential mortgage loans, loss severity assumptions are incorporated into the loan and lease loss reserve models to estimate loan balances that will ultimately charge-off. These assumptions are based on recent loss experience within various CLTV bands in these portfolios. CLTVs are refreshed quarterly by applying Federal Housing Finance Agency Home Price Index changes at a state-by-state level to the last known appraised value of the property to estimate the current CLTV. The Company's allowance for loan and lease losses 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 of December 31, 2015, the Company had $561.8 million and $5.4 billion 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.
A home equity loan or line of credit not adequately secured by collateral is treated similarly to how residential mortgages are treated. A 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 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 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% of junior lien home equity principal balances. Of the junior lien home equity loan and line of credit balances that are current, 0.8% have a senior lien that is one or more payments past due. When the senior lien is delinquent but the junior lien is current, allowance levels are adjusted to reflect loss estimates consistent with the delinquency status of the senior lien. The Company also extrapolates these impacts to the junior lien portfolio when the senior lien is serviced by another investor and the delinquency status of that senior lien is unknown.
Depository and lending institutions in the U.S. generally are expected to experience a significant volume of home equity lines of credit that will be approaching the end of their draw periods over the next several years, following the growth in home equity lending experienced during 2003 through 2007. As a result, many of these home equity lines of credit will either convert to amortizing loans or have principal due as balloon payments. The 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 and LTV ratio. 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.
95
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
For RIC and personal unsecured loans at SC, the Company estimates the allowance for loan and lease losses at a level considered adequate to cover probable credit losses inherent in the portfolio. RICs and personal unsecured loans are considered separately in assessing the required allowance for loan and lease losses using product-specific allowance methodologies applied on pooled basis. For RICs, the Company segregates the portfolio based on homogeneity into pools based on source, then further stratifies each pool by vintage and custom loss forecasting score. For each vintage and risk segment, the Company's vintage model predicts timing of unit losses and the loan balances at time of default. Auto loans are charged off when an account becomes 120 days delinquent if the Company has not repossessed the vehicle. The Company writes the vehicle down to the estimated recovery amount of the collateral when the automobile is repossessed and legally available for disposition.
The Company considers changes in the used vehicle index when forecasting recovery rates to apply to the gross losses forecasted by the vintage model. Its models do not include other macro-economic factors. Instead, the 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 billion and $1.3 billion at December 31, 2015 and December 31, 2014, respectively. The allowance as a percentage of held for investment consumer loans was 7.0% at December 31, 2015 and 3.4% at December 31, 2014. The increase in the allowance for 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.
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 with RIC and auto loan sales was $73.4 million.
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.
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 is maintained at a level sufficient to absorb inherent losses in the consumer portfolios.
Unallocated
Additionally, the Company reserves for certain inherent, but undetected, losses that are probable within the loan and lease portfolios. This is considered to be reasonably sufficient to absorb imprecisions of models or to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolios. These imprecisions may include loss factors inherent in the loan portfolio that may not have been discreetly contemplated in the general and specific components of the allowance, as well as potential variability in estimates. Period-to-period changes in the Company's historical unallocated allowance for loan and lease loss positions are considered in light of these factors. The unallocated allowance for loan and lease losses was $45.3 million at December 31, 2015 and $33.0 million at December 31, 2014.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Reserve for Unfunded Lending Commitments
In addition to the allowance for loan and lease losses, 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. 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.
The reserve for unfunded lending commitments increased from $132.6 million at December 31, 2014 to $147.4 million at December 31, 2015. This increase was due to an increase in off-balance sheet lending commitments, which is a result of the overall increase in the Company's commercial lending business. As a result of these shifts, the net impact of the decrease in the reserve for unfunded lending commitments to the overall ACL is immaterial.
INVESTMENT SECURITIES
Investment securities consist primarily of U.S. Treasuries, MBS, tax-free municipal securities, corporate debt securities, asset-backed securities ("ABS") and stock in the FHLB and the FRB. MBS consist of pass-through, collateralized mortgage obligations, and adjustable rate mortgages issued by federal agencies. The Company’s MBS are either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by S&P and Moody’s at the date of issuance. The Company’s available-for-sale investment strategy is to purchase liquid fixed-rate and floating-rate investments to manage the Company's liquidity position and interest rate risk adequately.
Total investment securities available-for-sale increased $5.0 billion to $20.9 billion at December 31, 2015, compared to $15.9 billion at December 31, 2014. During 2015, the composition of the Company's investment portfolio changed by decreases in ABS, corporate, and municipal securities which were offset by increases 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 guaranteed 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 billion primarily due to $8.3 billion of investment purchases, offset by sales and maturities of $0.7 billion and normal principal amortization during 2015. The state and municipal portfolio decreased by $1.1 billion primarily due to sales and maturities 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. For additional information with respect to the Company’s investment securities, see Note 4 in the Notes to the Consolidated Financial Statements.
Total gross unrealized losses increased $33.2 million during 2015, primarily due to increases in 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 investment portfolio (excluding certain ABS) at December 31, 2015 was approximately 3.94 years, compared to 4.11 years at December 31, 2014. The average effective duration of the investment portfolio (excluding certain ABS) at December 31, 2015 was approximately 2.95 years. The actual maturities of MBS available-for-sale will differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.
97
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| 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: | |||||||
| U.S. Treasury securities and government agencies | $ | 8,197,496 | $ | 4,280,301 | |||
| FNMA, and FHLMC securities | 8,630,503 | 4,877,787 | |||||
| State and municipal securities | 767,880 | 1,823,462 | |||||
Other securities (1) | 3,255,616 | 4,926,528 | |||||
| Total investment securities available-for-sale | 20,851,495 | 15,908,078 | |||||
| Other investments | 1,024,259 | 816,991 | |||||
| Total investment portfolio | $ | 21,875,754 | $ | 16,725,069 | |||
(1) Other securities primarily include corporate debt securities and ABS.
The following table presents the securities of single issuers (other than obligations of the United States and its political subdivisions, agencies, and corporations) having an aggregate book value in excess of 10% of the Company's Stockholder's equity that were held by the Company at December 31, 2015:
| 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.
GOODWILL
As described in the Company's Critical Accounting Policies section of Management's Discussion and Analysis, 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. At December 31, 2015, goodwill totaled $4.4 billion and represented 3.5% of total assets and 22.7% of total stockholder's equity. The following table shows goodwill by reportable segments at December 31, 2015:
| Retail Banking | Auto Finance & Business Banking | Real Estate and Commercial Banking | Global Corporate Banking | SC | Total | |||||||
| (in thousands) | ||||||||||||
| Goodwill at December 31, 2015 | $1,550,321 | $445,923 | $1,297,055 | $131,130 | $1,019,960 | $4,444,389 | ||||||
During the second quarter of 2015, the Company determined that the expiration of the direct lease origination agreement with SC constituted a potential impairment indicator in the Auto Finance & Business Banking reporting unit. As a result, the Company conducted a Step 1 interim impairment test on the Auto Finance & Business Banking reporting unit as 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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
As of October 1, 2015, the Company conducted its annual goodwill impairment test using the generally accepted valuation methods discussed in the Company's Critical Accounting Policies section of Management's Discussion and Analysis. After conducting a fair valuation analysis of each reporting unit as of the annual testing date, the Company determined that there was no impairment of goodwill identified as a result of the annual impairment analysis.
For the Retail 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% control premium based on the Company's review of transactions observable in the market place that was determined to be comparable. The projected tangible book value (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% 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 Retail Banking reporting unit by 21.3%, indicating the Retail Banking reporting unit was not considered to be impaired or at risk for impairment.
For the Auto Finance & Business Banking reporting unit's fair valuation analysis, an equal weighting of the market and income approach was applied. For the market approach, the Company selected a 35.0% control premium based on the Company's review of transactions observable in the market place that 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 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%, 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.
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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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 SC reporting unit by 11.7%, indicating 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 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 SC's stock price between the 2015 annual goodwill impairment analysis and year-end, the Company concluded that the fair value of the SC reporting unit was more likely than not less than its carrying value including goodwill. As a result, the Company conducted an interim impairment analysis for possible goodwill impairment of the SC reporting unit's goodwill as of December 31, 2015. For the Step 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 $4.4 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 $11.7 million. 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 is currently evaluating the goodwill of the SC reporting unit for potential impairment for the first quarter of 2016.
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 $97.5 million for the year ended December 31, 2014. See Note 7 for details on premises and equipment.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
DEFERRED TAXES AND OTHER TAX ACTIVITY
The Company's net deferred tax balance was a liability of $0.3 billion at December 31, 2015 and $1.2 billion at December 31, 2014. The $842.8 million decrease for the year ended December 31, 2015 was primarily due to a $982.9 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 $580.2 million increase in the deferred tax liability related to accelerated tax deprecation on leasing transactions. Other activity driving the reduction in the deferred tax liability included a $293.6 million increase in deferred tax assets related to net operating loss carryforwards and tax credits, a $167.5 million decrease in deferred tax liabilities related to purchase accounting adjustments for SC, and a net $21.0 million increase in the net deferred tax asset from other temporary differences.
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.
While the Company remains confident in the legal merits of its position, the Company increased its reserve position as of December 31, 2015 by $104.2 million, and believes its reserve amount adequately provides for potential exposure to the IRS related to these items. Over the next 12 months, it is reasonably possible that changes in the reserve for uncertain tax positions could range from a decrease of $230.1 million to an increase of $201.9 million.
OTHER ASSETS
Other assets at December 31, 2015 were $1.8 billion, compared to $2.8 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 $328.5 million, primarily due to the decrease in accrued federal tax receivables.
Miscellaneous assets and receivables decreased $730.8 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 $67.3 million between December 31, 2014 and December 31, 2015, primarily due to an increase in the average balance of the auto portfolio, maturities associated with the lease portfolio and the reclassification during 2015 of $31.7M of vehicle inventory previously included within miscellaneous other assets to other repossessed assets.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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 0.49% for the fourth quarter of 2014 to 0.60% 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.
102
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.
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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 | % | ||||
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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 | |||||||
| (in thousands) | ||||||||
| Accrued interest | $ | 126,771 | $ | 85,582 | ||||
| Accrued federal/foreign/state tax credits | 189,684 | 68,325 | ||||||
| Deposits payable | 105,530 | 125,365 | ||||||
| Expense accruals | 510,082 | 387,392 | ||||||
| Payroll/tax benefits payable | 351,900 | 275,607 | ||||||
| Accounts payable | 154,400 | 789,402 | ||||||
| Miscellaneous payable | 415,329 | 170,605 | ||||||
| Total accrued expenses | $ | 1,853,696 | $ | 1,902,278 | ||||
Accrued expenses decreased $48.6 million, or 2.6%, from 2014 to 2015. The decrease in accrued expenses was primarily due to the decrease in accounts payable of $635.0 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 $244.7 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 $122.7 million related to workflow accruals. In addition there was an increase in accrued tax credits of $121.4 million.
105
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 | |||||||
| (in thousands) | ||||||||
| Total derivative activity | $ | 227,662 | $ | 353,882 | ||||
| Official checks and money orders in process | 105,102 | 77,433 | ||||||
| Deferred gains/credits | 32,661 | 109,808 | ||||||
| Reserve for unfunded commitments | 147,395 | 132,641 | ||||||
| Total other liabilities | $ | 512,820 | $ | 673,764 | ||||
Other liabilities decreased $160.9 million, or 23.9%, from 2014 to 2015. The decrease in other liabilities was primarily related to the decrease in liabilities associated with derivative activity of $126.2 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 8 and Note 20 to the Consolidated Financial Statements, and Liquidity and Capital Resources section of the MD&A.
PREFERRED STOCK
On May 15, 2006, 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 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.
BANK REGULATORY CAPITAL
The Company's capital priorities are to support client growth, business investment, and maintain 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 and December 31, 2014, respectively, the Bank met the well-capitalized capital ratio requirements. The Company's capital levels exceeded the ratios required for BHCs.
For a discussion of Basel III, which became effective for SHUSA and the Bank on January 1, 2015, including the standardized approach and related future changes to the minimum U.S. regulatory capital ratios, see the section captioned Regulatory Matters within 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.
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| 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 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 required if the Bank's examination or Community Reinvestment Act ratings fall below certain levels or the Bank is notified by the OCC that it is a problem association 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 dividends declared or paid in 2015 or 2014. The Bank returned capital of $0.0 million and $128.0 million to SHUSA in 2015 and 2014, respectively.
The following schedule summarizes the actual capital balances of the Bank and SHUSA at December 31, 2015:
| BANK | |||||||||
| December 31, 2015 | Well-capitalized Requirement(1) | Minimum Requirement(1) | |||||||
| Common equity tier 1 capital ratio | 13.81 | % | 6.50 | % | 4.50 | % | |||
| Tier 1 capital ratio | 13.81 | % | 8.00 | % | 6.00 | % | |||
| Total capital ratio | 15.09 | % | 10.00 | % | 8.00 | % | |||
| Leverage ratio | 11.46 | % | 5.00 | % | 4.00 | % | |||
(1) As defined by OCC regulations. Presentation under a Basel III phasing-in basis.
| SHUSA | |||||||||
| December 31, 2015 | Well-capitalized Requirement(2) | Minimum Requirement(2) | |||||||
| Common equity tier 1 capital ratio | 11.95 | % | 6.50 | % | 4.50 | % | |||
| Tier 1 capital ratio | 13.51 | % | 8.00 | % | 6.00 | % | |||
| Total capital ratio | 15.33 | % | 10.00 | % | 8.00 | % | |||
| Leverage ratio | 11.57 | % | 5.00 | % | 4.00 | % | |||
(2) As defined by FRB regulations. Presentation under a Basel III phasing-in basis.
LIQUIDITY AND CAPITAL RESOURCES
Overall
The Company continues to maintain strong liquidity positions. Liquidity represents the ability of the Company to obtain cost-effective funding to meet the needs of customers as well as the Company's financial obligations. Factors that impact the liquidity position of the Company include loan origination volumes, loan prepayment rates, the maturity structure of existing loans, core deposit growth levels, CD maturity structure and retention, the Company's credit ratings, investment portfolio cash flows, the maturity structure of the Company's wholesale funding, and other factors. These risks are monitored and managed centrally. The Bank's Asset/Liability Committee reviews and approves the Company's liquidity policy and guidelines on a regular basis. This process includes reviewing all available wholesale liquidity sources. The Company also forecasts future liquidity needs and develops strategies to ensure adequate liquidity is available at all times. SHUSA conducts monthly liquidity stress test analyses to manage its liquidity under a variety of scenarios, all of which demonstrate that the Company has ample liquidity to meet its short-term and long-term cash requirements.
107
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Further changes to the credit ratings of SHUSA, Santander and its affiliates or the Kingdom of Spain could have a material adverse effect on SHUSA's business, including its liquidity and capital resources. The credit ratings of SHUSA have changed in the past and may change in the future, which could impact its cost of and access to sources of financing and liquidity. Any reductions in the long-term or short-term credit ratings of SHUSA would: increase its borrowing costs; require it to replace funding lost due to the downgrade, which may include the loss of customer deposits; and limit its access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements. See further discussion on the impacts of credit ratings actions in the Economic and Business Environment section of this MD&A.
Sources of Liquidity
Company and Bank
The Company and the Bank have several sources of funding to meet liquidity requirements, including the Bank's core deposit base, liquid investment securities portfolio, ability to acquire large deposits, FHLB borrowings, wholesale deposit purchases, and federal funds purchased, as well as through securitizations in the ABS market and committed credit lines from third-party banks and Santander. The Company has the following major sources of funding to meet its liquidity requirements: dividends and returns of investments from its subsidiaries, short-term investments held by non-bank affiliates, and access to the capital markets.
On September 15, 2014, the Company entered into a written agreement with the 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 July 2, 2015, the Company entered into another written agreement with the FRB of Boston. Under the terms of this written agreement, the Company is required to make enhancements with respect to, among other matters, Board oversight of the consolidated organization, risk management, capital planning and liquidity risk management.
SC
SC requires a significant amount of liquidity to originate and acquire loans and leases and to service debt. SC funds its operations through its lending relationships with 13 third-party banks and Santander, as well as through securitizations in the ABS market and large flow agreements. SC seeks to issue debt that appropriately matches the cash flows of the assets that it originates. SC has more than $4.4 billion of stockholders’ equity that supports its access to the securitization markets, credit facilities, and flow agreements.
During the year ended December 31, 2015, SC completed on-balance sheet funding transactions totaling approximately $15.4 billion, including:
| • | five securitizations on its Santander Drive Auto Receivables Trust ("SDART") platform for $5.7 billion; |
| • | a series of seven subordinate bond transactions on its SDART platform totaling $262.0 million to fund residual interests from existing securitizations; |
| • | four securitizations on its relaunched DRIVE, deeper subprime, platform for $3.4 billion; |
| • | seven private amortizing loan and lease facilities totaling $3.4 billion; and |
| • | top-ups of five private amortizing facilities totaling $2.6 billion. |
SC also completed $9.2 billion in asset sales, including $1.3 billion in third-party lease sales and $4.3 billion in recurring monthly sales with its third-party flow partners, in addition to executing several sales of charged off assets totaling $122.0 million in proceeds.
For information regarding SC's debt, see Note 12 in the Notes to the Consolidated Financial Statements.
108
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Institutional borrowings
The Company regularly projects its funding needs under various stress scenarios and maintains contingency plans consistent with the Company’s access to diversified sources of contingent funding. The Company maintains a substantial level of total available liquidity in the form of on-balance sheet and off-balance sheet funding sources. These include cash, unencumbered liquid assets, and capacity to borrow at the FHLB and the FRB’s discount window.
Available Liquidity
As of December 31, 2015, the Bank had approximately $22.2 billion in committed liquidity from the FHLB and the FRB. Of this amount, $5.9 billion was unused and therefore provides additional borrowing capacity and liquidity for the Company. At December 31, 2015 and December 31, 2014, liquid assets (cash and cash equivalents, loans held for sale ("LHFS"), and securities available-for-sale exclusive of securities pledged as collateral) totaled approximately $21.1 billion and $13.7 billion, respectively. These amounts represented 37.5% and 26.1% of total deposits at December 31, 2015 and December 31, 2014, respectively. As of December 31, 2015 the Bank had $4.1 billion in cash held at the Federal Reserve. Management believes that the Company has ample liquidity to fund its operations.
Cash and cash equivalents
| Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | ||||||||||
| (in thousands) | ||||||||||||
| Net cash provided by operating activities | $ | 5,135,383 | $ | 4,198,736 | $ | 1,361,585 | ||||||
| Net cash (used in) investing activities | (16,664,920 | ) | (14,681,713 | ) | 9,025,778 | |||||||
| Net cash provided by financing activities | 14,319,960 | 8,490,755 | (8,381,227 | ) | ||||||||
Cash provided by operating activities
Net cash provided by operating activities was $5.1 billion for the year ended December 31, 2015, which is comprised of net income of $(3.1) billion, $4.1 billion of provision for credit losses, $6.8 billion in proceeds from sales of LHFS, and $0.8 billion in proceeds from sales of trading securities, offset by $7.6 billion of originations of LHFS, net of repayments.
Net cash provided by operating activities was $4.2 billion for the year ended December 31, 2014, which was comprised of net income of $2.9 billion, $2.5 billion of provisions for credit losses, and $5.1 billion in proceeds from sales of LHFS, offset by $2.3 billion of a gain on the Change in Control and $4.6 billion of originations of LHFS, net of repayments.
Net cash provided by operating activities was $1.4 billion for the year ended December 31, 2013 which was primarily impacted by a decrease in the provision for credit losses and a decrease in LHFS originations.
Cash used in investing activities
For the year ended December 31, 2015, net cash used in investing activities was $16.7 billion, primarily due to $12.3 billion of purchases of investment securities available-for-sale, $9.5 billion in normal loan activity, and $5.7 billion in leased vehicle purchases, offset by $8.0 billion of investment sales, maturities and prepayments, $2.7 billion in proceeds from sales of loans held for investment and $2.0 billion in proceeds from sales of leased vehicles.
For the year ended December 31, 2014, net cash used in investing activities was $14.7 billion, primarily due to $5.2 billion of purchases of investment securities available-for-sale, $9.9 billion in normal loan activity and $6.2 billion in leased vehicle purchases, offset by $2.9 billion of investment sales, maturities and repayments and $3.7 billion in proceeds from sales of loans held for investment.
For the year ended December 31, 2013, net cash provided by investing activities was $9.0 billion, primarily due to $11.3 billion of investment sales, maturities and repayments and $2.1 billion of loan purchases and activity, offset by purchases of $4.9 billion of investment securities available-for-sale.
109
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Cash provided by financing activities
For the year ended December 31, 2015, net cash provided by financing activities was $14.3 billion, which was primarily due to a $3.6 billion increase in deposits and an increase in net borrowing activity of $10.6 billion.
Net cash provided by financing activities for the year ended December 31, 2014 was $8.5 billion, which was primarily driven by an increase in proceeds from the issuance of common stock of $1.8 billion, an increase in deposits of $3.2 billion, and an increase in net borrowing activity of $3.5 billion.
Net cash used in financing activities for the year ended December 31, 2013 was $8.4 billion, which consisted primarily of a $1.3 billion decrease in deposits and a net decrease in borrowings of $7.1 billion.
See the Consolidated Statement of Cash Flows ("SCF") for further details on the Company's sources and uses of cash.
Credit Facilities
Third-Party Revolving Credit Facilities
Warehouse Facilities
Warehouse facilities are used to fund originations. Each facility specifies the required collateral characteristics, collateral concentrations, credit enhancement, and advance rates. Warehouse facilities are generally backed by auto RIC and, in some cases, leases or personal loans. These facilities generally have one- or two-year commitments, staggered maturities and floating interest rates. SC maintains daily funding forecasts for originations, acquisitions, and other large outflows such as tax payments to balance the desire to minimize funding costs with its liquidity needs.
SC's warehouse facilities generally have net spread, delinquency, and net loss ratio limits. These limits are generally calculated based on the portfolio collateralizing the line; however, for two of the warehouse facilities, delinquency and net loss ratios are calculated with respect to the serviced portfolio as a whole. Failure to meet any of these covenants could trigger increased overcollateralization requirements or, in the case of limits calculated with respect to the specific portfolio underlying certain credit lines, result in an event of default under these agreements. If an event of default occurred under one of these agreements, the lender could elect to declare all amounts outstanding under the impacted agreement to be immediately due and payable, enforce its interests against collateral pledged under the agreement, restrict SC's ability to obtain additional borrowings under the agreement, and/or remove SC as servicer. SC has never had a warehouse facility terminated due to failure to comply with any ratio or meet any covenant. A default under one of these lines could be enforced only with respect to the impacted facility.
Certain of SC's credit facilities have covenants requiring timely filing of periodic reports with the SEC. SC has obtained waivers of all such covenants such that its non-timely filing of its Annual Report on Form 10-K for the year ended December 31, 2015 did not cause an event of default on any of its facilities. SC's Form 10-K for the year ended December 31, 2015 was filed with the SEC on March 31, 2016.
SC has two credit facilities with eight banks providing an aggregate commitment of $4.2 billion for the exclusive use of providing short-term liquidity needs to support Chrysler retail financing. As of December 31, 2015, there was an outstanding balance of $2.9 billion. One of the facilities can be used exclusively for loan financing and the other for lease financing. Both facility require reduced advance rates in the event of delinquency, credit loss, or residual loss ratios exceeding specified thresholds.
Repurchase Facility
SC also obtains financing through an investment management agreement with BlackRock, whereby it pledges retained subordinated bonds on its securitizations as collateral for repurchase agreements with various borrowers at renewable terms ranging from 30 to 90 days. As of December 31, 2015, there was an outstanding balance of $851.0 million under the BlackRock repurchase facility.
110
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Santander Credit Facilities
Santander historically has provided, and continues to provide, SC's business with significant funding support in the form of committed credit facilities. Through its New York branch ("Santander NY"), Santander provides SC with $3.0 billion of long-term committed revolving credit facilities.
The facilities offered through Santander NY's branch are structured as three- and five-year floating rate facilities, with current maturity dates of December 31, 2016 and 2018. Santander has the option to allow SC to continue to renew the term of these facilities annually going forward, thereby maintaining the three- and five-year maturities. These facilities currently permit unsecured borrowing, but generally are collateralized by RIC as well as securitization notes payable and residuals owned by SC. Any secured balances outstanding under the facilities at the time of their maturity will amortize to match the maturities and expected cash flows of the corresponding collateral.
Until March 4, 2016, when the facilities offered through the Santander New York branch were lowered to $3.0 billion, the commitments from the branch totaled $4.5 billion. There was an average outstanding balance of approximately $3.7 billion and $3.6 billion under these facilities during the years ended December 31, 2015 and 2014, respectively. The maximum outstanding balance during each period was $4.4 billion and $4.3 billion, respectively.
Santander also serves as the counterparty for many of SC's derivative financial instruments.
Secured Structured Financings
SC's secured structured financings primarily consist of public, SEC-registered securitizations. SC also executes private securitizations under Rule 144A of the Securities Act of 1933, as amended (the "Securities Act") and privately issues amortizing notes.
SC obtains long-term funding for its receivables through securitizations in the ABS market. The ABS market provides an attractive source of funding due to its cost efficiency, a large and deep investor base, and terms that appropriately match the cash flows of the debt to the cash flows of the underlying assets. The term structure of a securitization generally locks in fixed-rate funding for the life of the underlying fixed-rate assets, and the matching amortization of the assets and liabilities provides committed funding for the collateralized loans throughout their terms. In certain cases, SC may choose to issue floating rate securities based on market conditions; in such cases, SC generally executes hedging arrangements outside of the securitization trusts (the "Trusts") to lock in its cost of funds. Because of prevailing market rates, SC did not issue ABS in 2008 or 2009, but began issuing ABS again in 2010. SC has been the largest issuer of retail auto ABS in the U.S. since 2011. SC has issued a total of more than $47.0 billion in retail auto ABS since 2010.
SC executes each securitization transaction by selling receivables to the Trusts that issue ABS to investors. To attain specified credit ratings for each class of bonds, these transactions have credit enhancement requirements in the form of subordination, restricted cash accounts, excess cash flow, and overcollateralization, whereby more receivables are transferred to the Trusts than the amount of ABS issued by the Trusts.
Excess cash flows result from the difference between the finance and interest income received from the obligors on the receivables and the interest paid to the ABS investors, net of credit losses and expenses. Initially, excess cash flows generated by the Trusts are used to pay down outstanding debt of the Trusts, increasing over-collateralization until the targeted level of assets has been reached. Once the targeted level of over-collateralization is reached and maintained, excess cash flows generated by the Trusts are released to SC as distributions. SC also receives monthly servicing fees as servicer for the Trusts. SC's securitizations may require an increase in credit enhancement levels if cumulative net losses, as defined in the documents underlying each ABS transaction, exceed a specified percentage of the pool balance. None of SC's securitizations have cumulative net loss percentages above their respective limits.
111
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
SC's on-balance sheet securitization transactions utilize bankruptcy-remote special purpose entities, which are also variable interest entities ("VIEs") that meet the requirements to be consolidated in the Company's financial statements. Following a securitization, the finance receivables and notes payable related to the securitized retail installment contracts remain on the Company's Consolidated Balance Sheet. The Company recognizes finance and interest income as well as fee income on the collateralized RIC and interest expense on the ABS issued. The Company also records a provision for credit losses to cover inherent credit losses on the RIC. While these Trusts are included in the Company's Consolidated Financial Statements, they are separate legal entities. The finance receivables and other assets sold to the Trusts are owned by them, are available only to satisfy the notes payable related to the securitized RIC, and are not available to SC's or the Company's creditors or those of its other subsidiaries.
ABS credit spreads have been widening, beginning in the second half of 2015 and continuing into 2016. Highly liquid, frequent issuers with public shelf registrations, such as SC, have remained active in the market while smaller, newer market entrants have experienced significant spread widening. SC has completed eleven securitizations in 2015, in addition to executing seven subordinate bond transactions to obtain additional liquidity from residual interests in existing securitizations. SC currently has 35 securitizations outstanding in the market with a cumulative ABS balance of approximately $14.6 billion. SC's securitizations generally have several classes of notes, with principal paid sequentially based on seniority and any excess spread distributed to the residual holder. SC generally retains the lowest bond class and the residual, except in the case of off-balance sheet securitizations. SC uses the proceeds from securitization transactions to repay borrowings outstanding under its credit facilities, originate and acquire loans and leases, and for general corporate purposes. SC generally exercises clean-up call options on its securitizations when the collateral pool balance reaches 10% of its original balance.
SC periodically privately issues amortizing notes in transactions that are structured similarly to its public and Rule 144A securitizations but are issued to banks and conduits. SC's securitizations and private issuances are collateralized by vehicle RIC, loans and vehicle leases.
Off-Balance Sheet Financing
SC periodically executes Chrysler Capital-branded securitizations under Rule 144A of the Securities Act. Because all of the notes and residual interests in these securitizations are issued to third parties, SC records these transactions as true sales of the retail installment contracts securitized, and removes the sold assets from its Consolidated Balance Sheets. During the year ended December 31, 2015, SC executed two off-balance sheet securitizations under its Chrysler Capital Auto Receivables Trust, (CCART) a securitization platform, selling $1.6 billion of gross RIC.
The widening in ABS credit spreads in late 2015 and into 2016 has been accompanied by decreased demand for the subordinate tranches of securitizations, including the highest-yielding bonds as well as the residual interests. This market dynamic may impact SC's execution and pricing of off-balance sheet securitizations.
During the year ended December 31, 2015, SC sold residual interests in certain Trusts and certain retained bonds in those Trusts to an unrelated third party. SC received cash proceeds of $661.7 million for the year ended December 31, 2015 related to the sale of these residual interests and retained bonds. Each of these Trusts was previously determined to be a VIE. Prior to the sale of these residual interests, the associated Trusts were consolidated by SC because SC held a variable interest in each VIE and had determined that it was the primary beneficiary of the VIEs. SC will continue to service the loans of these Trusts and may reacquire certain retail installment loans from the Trusts through the exercise of an optional clean-up call, as permitted through the respective servicing agreements. Although SC will continue to service the loans in the associated Trusts and, therefore, will have the power to direct the activities that most significantly impact the economic performance of the Trust, SC concluded that it was no longer the primary beneficiary of the Trusts upon the sale of SC's residual interests. As a result, SC deconsolidated the assets and liabilities of the corresponding Trusts upon their sale. Upon settlement of these transactions, SC derecognized $1.9 billion in assets and $1.2 billion in notes payable and other liabilities of the Trust. For the year ended December 31, 2015 the sale of these interests resulted in a net decrease to provision for credit losses of $113.7 million, after giving effect to lower of cost or market adjustments of $73.0 million.
112
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
During the year ended December 31, 2015, SC executed its first two bulk sales of leases to a third party. Due to accelerated depreciation permitted for tax purposes, these two sales generated large taxable gains that SC has deferred through a qualified like-kind exchange program. To qualify for this deferral, SC is required to maintain the sale proceeds in escrow until reinvested in new lease originations. Because the sale proceeds were also needed to pay down the third-party credit facilities under which it had financed the leases prior to their sale, SC has increased its borrowings on its related party credit facilities until the sale proceeds are fully reinvested over the 180 days following each sale. Taxable gains related to proceeds not reinvested were recognized following the 180 day deferral period.
Uses of Liquidity
The Company uses liquidity for debt service and repayment of borrowings, as well as for funding loan commitments and satisfying deposit withdrawal requests.
Dividends and Stock Issuances
In February 2014, the Company issued 7.0 million shares of common stock to Santander in exchange for cash in the amount of $1.75 billion. Also in February 2014, the Company raised $750.0 million of capital by issuing 3.0 million shares of common stock to Santander in exchange for canceling debt of an equivalent amount.
In May 2014, the Company issued 84,000 shares of its common stock to Santander in exchange for cash in the amount of $21.0 million.
On May 1, 2014, SC's Board of Directors declared the May SC Dividend, a cash dividend of $0.15 per share, which was paid on May 30, 2014 to shareholders of record as of the close of business on May 12, 2014.
At December 31, 2015, the Company's liquidity to meet debt payments, debt service and debt maturities was in excess of 12 months.
There were no dividends declared or paid during the year ended December 31, 2015. As of December 31, 2015, the Company had 530,391,043 shares of common stock outstanding.
CONTRACTUAL OBLIGATIONS
The Company enters into contractual obligations in the normal course of business as a source of funds for its asset growth and asset/liability management, to fund acquisitions, and to meet required capital needs. These obligations require the Company to make cash payments over time as detailed in the table below.
| Payments Due by Period | |||||||||||||||||||
| Total | Less than 1 year | Over 1 yr to 3 yrs | Over 3 yrs to 5 yrs | Over 5 yrs | |||||||||||||||
| (in thousands) | |||||||||||||||||||
FHLB advances (1) | $ | 13,632,870 | $ | 7,789,190 | $ | 5,157,025 | $ | 557,660 | $ | 128,995 | |||||||||
| Notes payable - revolving facilities | 9,202,779 | 3,962,340 | 5,240,439 | — | — | ||||||||||||||
| Notes payable - secured structured financings | 20,934,776 | 814,351 | 5,506,666 | 9,855,940 | 4,757,819 | ||||||||||||||
Other debt obligations (1) (2) | 6,889,755 | 1,188,283 | 2,822,147 | 1,532,170 | 1,347,155 | ||||||||||||||
Junior subordinated debentures due to capital trust entities (1) (2) | 432,056 | 9,630 | 19,259 | 19,259 | 383,908 | ||||||||||||||
Certificates of deposit (1) | 8,567,812 | 7,017,031 | 1,442,815 | 107,966 | — | ||||||||||||||
| Non-qualified pension and post-retirement benefits | 70,445 | 6,881 | 13,906 | 14,159 | 35,499 | ||||||||||||||
Operating leases(3) | 723,199 | 118,269 | 202,498 | 145,324 | 257,108 | ||||||||||||||
| Total contractual cash obligations | $ | 60,453,692 | $ | 20,905,975 | $ | 20,404,755 | $ | 12,232,478 | $ | 6,910,484 | |||||||||
| (1) | Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based on interest rates in effect at December 31, 2015. The contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid. |
| (2) | Includes all carrying value adjustments, such as unamortized premiums and discounts and hedge basis adjustments. |
| (3) | Does not include future expected sublease income. |
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Subsequent to year-end the Bank has conducted early terminations on FHLB Advances. In January the Bank early terminated $0.4 billion of Advances maturing in April 2016 for which the Bank recognized a termination fee of $4.4 million. In March the Bank early terminated $0.9 billion of Advances with maturities ranging from September 2016 to February 2018 for with the Bank recognized a termination fee of $28.4 million.
Subsequent to year-end SHUSA issued $1.5 billion of Senior Unsecured Floating Rate Notes with a maturity of April 2017 to Santander in February 2016.
Excluded from the above table are deposits of $47.6 billion that are due on demand by customers. Additionally, $247.3 million of tax liabilities associated with unrecognized tax benefits have been excluded due to the high degree of uncertainty regarding the timing of future cash outflows associated with those obligations.
The Company is a party to financial instruments and other arrangements with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and manage its exposure to fluctuations in interest rates. See further discussion on these risks in Note 15 and Note 20 to the Consolidated Financial Statements.
Flow Agreements
In addition to its credit facilities and secured structured financings, SC has flow agreements in place with Bank of America and Citizens Bank of Pennsylvania ("CBP") for Chrysler Capital RIC, and with another third party for charged off assets.
SC enters into flow agreements under which assets are sold on a periodic basis to provide funding for new originations. These assets are not on SC's balance sheet, but may provide a gain or loss on sale and a stable stream of servicing fee income.
SC has a flow agreement with Bank of America under which SC is committed to sell up to a specified amount of eligible loans to that bank each month through May 2018. Prior to October 1, 2015, the amount of this monthly commitment was $300.0 million. On October 1, 2015, SC and Bank of America amended the flow agreement to increase the maximum commitment to sell up to $350.0 million of eligible loans each month, and to change the required written notice period from either party, in the event of termination of the agreement, from 120 days to 90 days. SC retains servicing on all sold loans and may receive or pay a servicer performance payment based on an agreed-upon formula if performance on the sold loans is better or worse, respectively, than expected performance at the time of sale.
SC has sold loans to CBP under terms of a flow agreement and predecessor sale agreements. SC retains servicing on the sold loans and will owe CBP a loss-sharing payment capped at 0.5% of the original pool balance if losses exceed a specified threshold, established on a pool-by-pool basis. On June 25, 2015, SC executed an amendment to the servicing agreement with CBP, which increased the servicing fee that SC receives. SC and CBP also amended the flow agreement which reduced, effective on August 1, 2015, CBP's committed purchases of Chrysler Capital prime loans from a maximum of $600.0 million and a minimum of $250.0 million per quarter to a maximum of $200.0 million and a minimum of $50.0 million per quarter, as may be adjusted according to the agreement. In January 2016, SC executed an amendment to the servicing agreement with CBP which decreased the servicing fee the Company received on loans sold to CBP by SC under the flow agreement.
Lending Arrangements
SC is obligated to make purchase price holdback payments to a third-party originator of loans that we purchase on a periodic basis, when losses are lower than originally expected. SC is also obligated to make total return settlement payments to this third-party originator in 2016 and 2017 if returns on the purchased pools are greater than originally expected.
SC has extended revolving lines of credit to certain auto dealers. Under this arrangement, SC is committed to lend up to each dealer’s established credit limit.
Under terms of agreements with LendingClub, the Company was committed to purchase, at a minimum, through December 31, 2015, the lesser of $30,000 per month or 50% of LendingClub's aggregate "near-prime" (as that term is defined in the agreements) originations and, thereafter through July 2017, the lesser of $30,000 per month or 50% of the lending platform company’s aggregate near-prime originations. This commitment could be reduced or canceled with 90 days' notice. On October 9, 2015, the Company sent a notice of termination to LendingClub.
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
In April 2013, SC entered into certain agreements with Bluestem. The terms of the agreements include a commitment by SC 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, renewable through April 2022 at Bluestem's option. Each customer account generated under the agreements generally is approved with a credit limit higher than the amount of the initial purchase, with each subsequent purchase automatically approved as long as it does not cause the account to exceed its limit and the customer is in good standing. As these credit lines do not have a specified maturity, but rather can be terminated at any time in the event of adverse credit changes or lack of use, SC has not recorded an allowance for unfunded commitments. SC is required to make a monthly profit-sharing payment to Bluestem.
In 2015, SC made a strategic decision to exit the personal lending market to focus on our core objectives of expanding the reach and realizing the full value of our vehicle finance platform. We believe that this will create other opportunities such as expanding our serviced for others platform and diversifying our funding sources and growing our capital. SC commenced certain marketing activities to find buyers for the personal lending assets. On February 1, 2016, SC completed the sale of assets from its personal lending portfolio to an unrelated third party. The portfolio was comprised solely of LendingClub installment loans with an unpaid principal balance of approximately $900 million as of December 31, 2015. Additionally, on March 24, 2016, in preparation for the sale or liquidation of our portfolio of loans originated under terms of an agreement whereby we review point-of-sale credit applications for retail store customers, we notified most of the retailers for which we review applications that we will no longer fund new originations effective April 11, 2016. As we refocus on our core objectives, we continue to perform under various other agreements under which we purchase specified volumes of personal loans originated by third parties.
In April 2014, SC entered into an application transfer agreement with Nissan, whereby SC has the first opportunity to review for its own portfolio any credit applications turned down by Nissan's captive finance company. The agreement does not require SC to originate any loans, but for each loan originated SC will pay Nissan a referral fee, comprised of a volume bonus fee and a loss betterment bonus fee. The loss betterment bonus fee will be calculated annually and is based on the amount by which losses on loans originated under the agreement are lower than an established percentage threshold.
Other
On July 2, 2015, the Company announced that it had entered into an agreement with former SC Chief Executive Officer Thomas G. Dundon, DDFS, and Santander related to Mr. Dundon's departure from SC (the “Separation Agreement”). Pursuant to the Separation Agreement the Company was deemed to have delivered an irrevocable notice to exercise its option to acquire all of the shares of SC Common Stock owned by DDFS and consummate the transactions contemplated by the call option notice, subject to the receipt of all required regulatory approvals (the "Call Transaction"). At that date, the SC Common Stock held by DDFS ("the DDFS Shares") represented approximately 9.7% of SC Common Stock. The Separation Agreement did not affect Santander’s option to assume the Company’s obligation under the Call Transaction as provided in the Shareholders Agreement that was entered into by the same parties on January 28, 2014. Under the Separation Agreement, because the Call Transaction was not consummated prior to October 15, 2015 (the “Call End Date”), DDFS is free to transfer any or all of the DDFS shares, subject to the terms and conditions of the Amended and Restated Loan Agreement, dated as of July 16, 2014, between DDFS and Santander. In the event the Call Transaction were to be completed after the Call End Date, interest would accrue on the price paid per share in the Call Transaction at the overnight LIBOR rate on the third business day preceding the consummation of the Call Transaction plus 100 basis points with respect to the shares of SC Common Stock that were ultimately sold in the Call Transaction. For additional detail regarding this transaction and the Separation Agreement, refer to the Form 8-K the Company filed with the SEC on July 2, 2015 and Note 17 to these Consolidated Financial Statements.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
ASSET AND LIABILITY MANAGEMENT
Interest Rate Risk
Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in market interest rates, and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. Interest rate risk is managed by the Company's Treasury group and measured by its Market Risk Department, with oversight by the Asset/Liability Committee. In managing interest rate risk, the Company seeks to minimize the variability of net interest income across various likely scenarios, while at the same time maximizing net interest income and the net interest margin. To achieve these objectives, the Treasury group works closely with each business line in the Company and guides new business. The Treasury group also uses various other tools to manage interest rate risk, including wholesale funding maturity targeting, investment portfolio purchase strategies, asset securitizations/sales, and financial derivatives.
Interest rate risk focuses on managing four elements of risk associated with interest rates: basis risk, repricing risk, yield curve risk and option risk. Basis risk stems from rate index timing differences with rate changes, such as differences in the extent of changes in Federal funds rates compared with the three-month London Interbank Offered Rate ("LIBOR"). Repricing risk stems from the different timing of contractual repricing, such as one-month versus three-month reset dates, as well as the related maturities. Yield curve risk stems from the impact on earnings and market value resulting from different shapes and levels of yield curves. Option risk stems from prepayment or early withdrawal risk embedded in various products. These four elements of risk are analyzed through a combination of net interest income and balance sheet valuation simulations, shocks to those simulations, and scenario and market value analyses and the subsequent results are reviewed by management. Numerous assumptions are made to produce these analyses, including assumptions about new business volumes, loan and investment prepayment rates, deposit flows, interest rate curves, economic conditions and competitor pricing.
Net Interest Income Simulation Analysis
The Company utilizes a variety of measurement techniques to evaluate the impact of interest rate risk, including simulating the impact of changing interest rates on expected future interest income and interest expense to estimate the Company's net interest income sensitivity. This simulation is run monthly and includes various scenarios that help management understand the potential risks in the Company's net interest income sensitivity. These scenarios include both parallel and non-parallel rate shocks as well as other scenarios that are consistent with quantifying the four elements of risk described above. This information is used to develop proactive strategies to ensure that the Company’s risk position remains within SHUSA Board of Directors-approved limits so that future earnings are not significantly adversely affected by future interest rates.
The table below reflects the estimated sensitivity to the Company’s net interest income based on interest rate changes:
| If interest rates changed in parallel by the amounts below at December 31, 2015 | The following estimated percentage increase/(decrease) to net interest income would result | ||
| Down 100 basis points | (1.29 | )% | |
| Up 100 basis points | 1.00 | % | |
| Up 200 basis points | 1.59 | % | |
Market Value of Equity ("MVE") Analysis
The Company also evaluates the impact of interest rate risk by utilizing MVE modeling. This analysis measures the present value of all estimated future cash flows of the Company over the estimated remaining life of the balance sheet. MVE is calculated as the difference between the market value of assets and liabilities. The MVE calculation utilizes only the current balance sheet, and therefore does not factor in any future changes in balance sheet size, balance sheet mix, yield curve relationships or product spreads, which may mitigate the impact of any interest rate changes.
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Management examines the effect of interest rate changes on MVE. The sensitivity of MVE to changes in interest rates is a measure of longer-term interest rate risk, and highlights the potential capital at risk due to adverse changes in market interest rates. The following table discloses the estimated sensitivity to the Company’s MVE at December 31, 2015 and December 31, 2014.
The following estimated percentage increase/(decrease) to MVE would result | ||||||
| If interest rates changed in parallel by | December 31, 2015 | December 31, 2014 | ||||
| Down 100 basis points | (3.44 | )% | (2.28 | )% | ||
| Up 100 basis points | 0.73 | % | (0.40 | )% | ||
| Up 200 basis points | 0.23 | % | (1.74 | )% | ||
As of December 31, 2015, the Company’s MVE profile showed a decrease of 3.44% for downward parallel interest rate shocks of 100 basis points and also an increase of 0.23% for upward parallel interest rate shocks of 200 basis points. This is due to the negative convexity as a result of the prepayment option embedded in mortgage-related products, the impact of which is not fully offset by the behavior of the funding base (largely non-maturity deposits) (“NMDs”).
In downward parallel interest rate shocks, mortgage-related products’ prepayments increase, their duration decreases and their market value appreciation therefore is limited. At the same time, with deposit rates already close to zero, the Company cannot effectively transfer interest rate declines to its NMD customers. For upward parallel interest rate shocks extension risk weighs on a sizable portion of the Company’s mortgage-related products, which are predominantly long-term and fixed-rate; and for larger shocks the loss in market value is not offset by the change in the NMD.
Limitations of Interest Rate Risk Analyses
Since the assumptions used are inherently uncertain, the Company cannot predict precisely the effect of higher or lower interest rates on net interest income or MVE. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, the difference between actual experience and the assumed volume, characteristics of new business and behavior of existing positions, and changes in market conditions and management strategies, among other factors.
Uses of Derivatives to Manage Interest Rate and Other Risks
To mitigate interest rate risk and, to a lesser extent, foreign exchange, equity and credit risks, the Company uses derivative financial instruments to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows.
Through the Company’s capital markets and mortgage banking activities, it is subject to price risk. The Company employs various tools to measure and manage price risk in its portfolios. In addition, the SHUSA Board of Directors has established certain limits relative to positions and activities. The level of price risk exposure at any point in time depends on the market environment and expectations of future price and market movements, and will vary from period to period.
Management uses derivative instruments to mitigate the impact of interest rate movements on the fair value of certain liabilities, assets and highly probable forecasted cash flows. These instruments primarily include interest rate swaps that have underlying interest rates based on key benchmark indices and forward sale or purchase commitments. The nature and volume of the derivative instruments used to manage interest rate risk depend on the level and type of assets and liabilities on the balance sheet and the risk management strategies for the current and anticipated interest rate environment.
The Company enters into cross-currency swaps to hedge its foreign currency exchange risk on certain Euro-denominated investments. These derivatives are designated as fair value hedges at inception.
The Company's derivative portfolio includes mortgage banking interest rate lock commitments, forward sale commitments and interest rate swaps. As part of its overall business strategy, the Bank originates fixed-rate residential mortgages. It sells a portion of this production to the FHLMC, the FNMA, and private investors. The Company uses forward sales as a means of hedging against the economic impact of changes in interest rates on the mortgages that are originated for sale and on interest rate lock commitments.
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The Company typically retains the servicing rights related to residential mortgage loans that are sold. Residential MSRs are accounted for at fair value. As deemed appropriate, the Company economically hedges MSRs, using interest rate swaps and forward contracts to purchase MBS. For additional information on MSRs, see Note 10 to the Consolidated Financial Statements.
The Company uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. Foreign exchange contracts, which include spot and forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Exposure to gains and losses on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate.
The Company also utilizes forward contracts to manage market risk associated with certain expected investment securities sales and equity options, which manage its market risk associated with certain customer deposit products.
For additional information on foreign exchange contracts, derivatives and hedging activities, see Note 15 to the Consolidated Financial Statements.
SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA
We have made certain corrections to previously disclosed amounts to correct for errors related to the allowance for credit losses, TDRs, and the classification of subvention payments related to leased vehicles. Refer to Note 1 of the Consolidated Financial Statements for additional information.
| THREE MONTHS ENDED | ||||||||||||||||||||||||||||||||
| December 31, 2015 | September 30, 2015 | June 30, 2015 | March 31, 2015 | December 31, 2014 | September 30, 2014 | June 30, 2014 | March 31, 2014 | |||||||||||||||||||||||||
| (As Restated) | (As Restated) | |||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||
| Total interest income | $ | 2,001,292 | $ | 1,982,824 | $ | 2,059,890 | $ | 1,933,027 | $ | 1,875,471 | $ | 1,895,020 | $ | 1,862,799 | $ | 1,406,206 | ||||||||||||||||
| Total interest expense | 328,320 | 299,562 | 297,575 | 278,868 | 278,313 | 269,544 | 272,765 | 234,101 | ||||||||||||||||||||||||
| Net interest income | 1,672,972 | 1,683,262 | 1,762,315 | 1,654,159 | 1,597,158 | 1,625,476 | 1,590,034 | 1,172,105 | ||||||||||||||||||||||||
| Provision for credit losses | 1,102,669 | 978,604 | 990,413 | 1,044,213 | 803,712 | 805,238 | 560,592 | 325,271 | ||||||||||||||||||||||||
| Net interest income after provision for credit loss | 570,303 | 704,658 | 771,902 | 609,946 | 793,446 | 820,238 | 1,029,442 | 846,834 | ||||||||||||||||||||||||
Gain/(loss) on investment securities, net (1) | (269 | ) | (1,993 | ) | 9,707 | 9,557 | 15,754 | 131 | 9,405 | 2,430,483 | ||||||||||||||||||||||
| Total fees and other income | 509,271 | 713,036 | 687,630 | 569,766 | 648,251 | 605,511 | 570,262 | 401,136 | ||||||||||||||||||||||||
| General and administrative expenses | 1,229,931 | 1,086,506 | 1,039,205 | 963,621 | 949,402 | 881,560 | 811,613 | 708,878 | ||||||||||||||||||||||||
| Other expenses | 4,488,719 | 29,731 | 29,742 | 32,664 | 142,510 | 41,008 | 132,991 | 31,767 | ||||||||||||||||||||||||
| Total expenses | 5,718,650 | 1,116,237 | 1,068,947 | 996,285 | 1,091,912 | 922,568 | 944,604 | 740,645 | ||||||||||||||||||||||||
| Income/(loss) before income taxes | (4,639,345 | ) | 299,464 | 400,292 | 192,984 | 365,539 | 503,312 | 664,505 | 2,937,808 | |||||||||||||||||||||||
| Income tax provision/(benefit) | (1,024,144 | ) | 190,590 | 121,947 | 40,144 | 129,569 | 120,294 | 250,403 | 1,054,091 | |||||||||||||||||||||||
| Net income/(loss) before noncontrolling interest | $ | (3,615,201 | ) | $ | 108,874 | $ | 278,345 | $ | 152,840 | $ | 235,970 | $ | 383,018 | $ | 414,102 | $ | 1,883,717 | |||||||||||||||
(1) This line item includes includes the gain on Change-Control for the three-month period ended March 31, 2014.
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| THREE MONTHS ENDED | ||||||||||||||||||||||||||||
| September 30, 2015 | June 30, 2015 | March 31, 2015 | December 31, 2014 | September 30, 2014 | June 30, 2014 | March 31, 2014 | ||||||||||||||||||||||
| (As Reported) | (As Reported) | |||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||
| Total interest income | $ | 1,982,824 | $ | 2,059,890 | $ | 1,933,027 | $ | 1,875,471 | $ | 1,895,020 | $ | 1,862,799 | $ | 1,406,206 | ||||||||||||||
| Total interest expense | 299,562 | 297,575 | 278,868 | 278,313 | 269,544 | 272,765 | 234,101 | |||||||||||||||||||||
| Net interest income | 1,683,262 | 1,762,315 | 1,654,159 | 1,597,158 | 1,625,476 | 1,590,034 | 1,172,105 | |||||||||||||||||||||
| Provision for credit losses | 854,180 | 1,001,754 | 872,184 | 809,818 | 1,013,357 | 686,034 | 335,330 | |||||||||||||||||||||
| Net interest income after provision for credit loss | 829,082 | 760,561 | 781,975 | 787,340 | 612,119 | 904,000 | 836,775 | |||||||||||||||||||||
| Gain/(loss) on investment securities, net | (1,993 | ) | 9,707 | 9,557 | 15,754 | 131 | 9,405 | 2,430,483 | ||||||||||||||||||||
| Total fees and other income | 837,954 | 793,273 | 655,840 | 720,547 | 643,695 | 628,885 | 430,773 | |||||||||||||||||||||
| General and administrative expenses | 1,211,424 | 1,144,848 | 1,049,696 | 1,019,931 | 919,743 | 870,238 | 738,514 | |||||||||||||||||||||
| Other expenses | 29,731 | 29,742 | 32,664 | 144,178 | 41,008 | 132,991 | 31,767 | |||||||||||||||||||||
| Total expenses | 1,241,155 | 1,174,590 | 1,082,360 | 1,164,109 | 960,751 | 1,003,229 | 770,281 | |||||||||||||||||||||
| Income before income taxes | 423,888 | 388,951 | 365,012 | 359,532 | 295,194 | 539,061 | 2,927,750 | |||||||||||||||||||||
| Income tax provision | 241,764 | 119,971 | 112,973 | 127,369 | 36,102 | 199,746 | 1,050,107 | |||||||||||||||||||||
| Net income before noncontrolling interest | $ | 182,124 | $ | 268,980 | $ | 252,039 | $ | 232,163 | $ | 259,092 | $ | 339,315 | $ | 1,877,643 | ||||||||||||||
(1) For March 31, 2014 this includes the Gain on control due to the investment in SC.
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| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
2015 FOURTH QUARTER RESULTS
SHUSA reported net loss for the fourth quarter of 2015 of $3.6 billion, compared to a net income of $108.9 million for the third quarter of 2015 and $236.0 million for the fourth quarter of 2014. The net loss in the fourth quarter of 2015 was primarily related the impairment on goodwill that was recognized in the fourth quarter of 2015. For further discussion on this matter, see the section of the MD&A captioned Goodwill.
During the fourth quarter of 2015, the Company had a net loss on investment securities of $0.3 million, compared to a net loss of $2.0 million during the third quarter of 2015 and a net gain of $15.8 million during the fourth quarter of 2014. The net gain on investment securities for the fourth quarter of 2014 is primarily due to gains on MBS and EMI investments sold that did not recur in the fourth quarter or third quarter of 2015.
The provision for credit losses was $1.1 billion during the fourth quarter of 2015, compared to $978.6 million during the third quarter of 2015 and $803.7 million during the fourth quarter of 2014. The increase in the provision for credit losses from the third quarter of 2015 and fourth quarter of 2014 to the fourth quarter of 2015 were primarily due the impacts of purchase accounting on the retail installment contract portfolio which resulted in lower provisions during 2014 and higher provisions during 2015. Further information about the accounting for these portfolios is included in Note 1 to the Consolidated Financial Statements. In addition to the purchase accounting impacts, during the third quarter of 2015, the strategic decision was made to begin exiting the personal unsecured lending business and as a result, the personal unsecured loan portfolio was reclassified from LHFI to LHFS. The markdown to fair value of this portfolio was recorded in provision for credit losses during the third quarter of 2015. Subsequent markdowns to fair value on the personal unsecured LHFS portfolio were recorded as a deduction to Miscellaneous income during the fourth quarter of 2015.
Total fees and other income during the fourth quarter of 2015 were $509.3 million, compared to $713.0 million for the third quarter of 2015 and $648.3 million for the fourth quarter of 2014. The decrease from the third quarter of 2015 and fourth quarter 2014 to the fourth quarter of 2015 was primarily due to subsequent markdowns to the fair value of the personal unsecured LHFS portfolio during the fourth quarter of 2015.
General and administrative expenses for the fourth quarter of 2015 were $1.2 billion, compared to $1.1 billion for the third quarter of 2015 and $949.4 million for the fourth quarter of 2014. The increase between the fourth quarter of 2015 compared to the third quarter of 2015 and the fourth quarter of 2014, was primarily due to increases in lease expenses from the continued growth in the Company's lease portfolio over the year. In addition, there was an increase in compensation and benefits in the fourth quarter of 2015 compared to the third quarter of 2015 and the fourth quarter of 2014, due to a one-time $30.0 million severance charge recorded in the fourth quarter of 2015.
Other expenses for the fourth quarter of 2015 were $4.5 billion, compared to $29.7 million for the third quarter of 2015 and $142.5 million in the fourth quarter of 2014. The increases were primarily related to a $4.4 billion goodwill impairment charge in the fourth quarter of 2015, compared to no significant charges in the third quarter of 2015 or fourth quarter of 2014. For further discussion on this matter, see the section of the MD&A captioned Goodwill. Other expenses in the fourth quarter of 2014 did include amortization on intangibles that were fully-amortized in 2015 and a loss on debt extinguishment in the fourth quarter of 2014.
Income tax benefit for the fourth quarter of 2015 was $1.0 billion, compared to an income tax provision of $190.6 million in the third quarter of 2015 and an income tax provision of $129.6 million in the fourth quarter of 2014. The decreases between the fourth quarter of 2015 from the third quarter of 2015 and fourth quarter of 2014 were primarily due to decreases in net taxable income, the components of which are discussed above, but most significantly included a $4.4 billion goodwill impairment charge in the fourth quarter of 2015.
RECENT ACCOUNTING PRONOUNCEMENTS
See Note 2 to the Consolidated Financial Statements for recent accounting pronouncements.
ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference from Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations — Asset and Liability Management above.
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ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS
| Index to Consolidated Financial Statements and Supplementary Data | Page |
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholder of
Santander Holdings USA, Inc.
We have audited the accompanying consolidated balance sheets of Santander Holdings USA, Inc. and subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of operations, comprehensive income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Santander Holdings USA, Inc. and subsidiaries at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting 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 and our report dated April 14, 2016 expressed an adverse opinion on the Company's internal control over financial reporting because of material weaknesses.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
April 14, 2016
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
| December 31, 2015 | December 31, 2014 | ||||||
| (As Restated - Note 1) | |||||||
| (in thousands) | |||||||
| ASSETS | |||||||
| Cash and cash equivalents | $ | 5,025,148 | $ | 2,234,725 | |||
| Investment securities: | |||||||
| Available-for-sale at fair value | 20,851,495 | 15,908,078 | |||||
| Trading securities | — | 833,936 | |||||
| Other investments | 1,024,259 | 816,991 | |||||
Loans held for investment (1) (5) | 79,482,810 | 76,024,114 | |||||
Allowance for loan and lease losses (5) | (3,203,759 | ) | (1,750,643 | ) | |||
| Net loans held for investment | 76,279,051 | 74,273,471 | |||||
Loans held-for-sale (2) | 3,191,762 | 260,252 | |||||
Premises and equipment, net (3) | 942,372 | 854,671 | |||||
Leased vehicles, net (5)(6) | 8,388,830 | 6,638,115 | |||||
Accrued interest receivable (5) | 596,340 | 559,962 | |||||
| Equity method investments | 266,569 | 227,991 | |||||
| Goodwill | 4,444,389 | 8,892,011 | |||||
| Intangible assets, net | 659,355 | 735,488 | |||||
| Bank-owned life insurance | 1,727,096 | 1,686,491 | |||||
Restricted cash (5) | 2,429,729 | 2,024,838 | |||||
Other assets (4) (5) | 1,806,606 | 2,829,850 | |||||
| TOTAL ASSETS | $ | 127,633,001 | $ | 118,776,870 | |||
| LIABILITIES | |||||||
| Accrued expenses and payables | $ | 1,853,696 | $ | 1,902,278 | |||
| Deposits and other customer accounts | 56,114,232 | 52,474,007 | |||||
Borrowings and other debt obligations (5) | 49,086,103 | 39,679,382 | |||||
| Advance payments by borrowers for taxes and insurance | 172,930 | 167,670 | |||||
| Deferred tax liabilities, net | 324,267 | 1,167,081 | |||||
Other liabilities (5) | 512,820 | 673,764 | |||||
| TOTAL LIABILITIES | 108,064,048 | 96,064,182 | |||||
| STOCKHOLDER'S EQUITY | |||||||
| Preferred stock (no par value; $25,000 liquidation preference; 7,500,000 shares authorized; 8,000 shares outstanding at December 31, 2015 and at December 31, 2014) | 195,445 | 195,445 | |||||
| Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 and 530,391,043 shares outstanding at December 31, 2015 and at December 31, 2014, respectively) | 14,717,625 | 14,729,609 | |||||
| Accumulated other comprehensive loss | (139,641 | ) | (96,410 | ) | |||
| Retained earnings | 2,367,925 | 3,837,122 | |||||
| TOTAL SHUSA STOCKHOLDER'S EQUITY | 17,141,354 | 18,665,766 | |||||
| Noncontrolling interest | 2,427,599 | 4,046,922 | |||||
| TOTAL STOCKHOLDER'S EQUITY | 19,568,953 | 22,712,688 | |||||
| TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $ | 127,633,001 | $ | 118,776,870 | |||
(1) Loans held for investment includes $328.7 million and $845.9 million of loans recorded at fair value at December 31, 2015 and December 31, 2014, respectively.
(2) Recorded at the fair value option ("FVO") or lower of cost or fair value.
(3) Net of accumulated depreciation of $844.5 million and $638.0 million at December 31, 2015 and December 31, 2014, respectively.
(4) Includes mortgage servicing rights ("MSRs") of $147.2 million and $145.0 million at December 31, 2015 and December 31, 2014, respectively, for which the Company has elected the FVO. See Note 10 to these Consolidated Financial Statements for additional information.
(5) The Company has interests in certain securitization trusts ("Trusts") that are considered variable interest entities ("VIEs") for accounting purposes. The Company consolidates VIEs where it is deemed the primary beneficiary. See Note 8 to these Consolidated Financial Statements for additional information.
(6) Net of accumulated depreciation of $1.9 billion and $857.7 million at December 31, 2015 and December 31, 2014, respectively.
See accompanying notes to Consolidated Financial Statements.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
| Year Ended December 31, | |||||||||||
| 2015 | 2014 | 2013 | |||||||||
| (As Restated - Note 1) | |||||||||||
| (in thousands) | |||||||||||
| INTEREST INCOME: | |||||||||||
| Loans | $ | 7,586,697 | $ | 6,734,406 | $ | 1,958,908 | |||||
| Interest-earning deposits | 8,556 | 8,468 | 6,494 | ||||||||
| Investment securities: | |||||||||||
| Available-for-sale | 329,556 | 259,701 | 302,820 | ||||||||
| Other investments | 52,224 | 36,921 | 27,669 | ||||||||
| TOTAL INTEREST INCOME | 7,977,033 | 7,039,496 | 2,295,891 | ||||||||
| INTEREST EXPENSE: | |||||||||||
| Deposits and other customer accounts | 260,880 | 209,793 | 211,520 | ||||||||
| Borrowings and other debt obligations | 943,445 | 844,930 | 570,600 | ||||||||
| TOTAL INTEREST EXPENSE | 1,204,325 | 1,054,723 | 782,120 | ||||||||
| NET INTEREST INCOME | 6,772,708 | 5,984,773 | 1,513,771 | ||||||||
| Provision for credit losses | 4,115,899 | 2,494,813 | 46,850 | ||||||||
| NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 2,656,809 | 3,489,960 | 1,466,921 | ||||||||
| NON-INTEREST INCOME: | |||||||||||
| Consumer fees | 444,032 | 377,004 | 228,666 | ||||||||
| Commercial fees | 187,539 | 185,373 | 199,486 | ||||||||
| Mortgage banking income, net | 107,983 | 204,558 | 122,036 | ||||||||
| Equity method investments (loss)/income, net | (8,818 | ) | 7,817 | 426,851 | |||||||
| Bank-owned life insurance | 57,913 | 60,278 | 57,041 | ||||||||
| Capital market revenue | 37,408 | 51,671 | 31,742 | ||||||||
| Lease income | 1,477,739 | 798,346 | — | ||||||||
| Miscellaneous income | 175,907 | 540,113 | 12,807 | ||||||||
| TOTAL FEES AND OTHER INCOME | 2,479,703 | 2,225,160 | 1,078,629 | ||||||||
| OTTI recognized in earnings | (1,092 | ) | — | (63,630 | ) | ||||||
| Gain on Change in Control | — | 2,428,539 | — | ||||||||
| Net gain on sale of investment securities | 18,094 | 27,234 | 73,084 | ||||||||
| Net gain recognized in earnings | 17,002 | 2,455,773 | 9,454 | ||||||||
| TOTAL NON-INTEREST INCOME | 2,496,705 | 4,680,933 | 1,088,083 | ||||||||
| GENERAL AND ADMINISTRATIVE EXPENSES: | |||||||||||
| Compensation and benefits | 1,391,308 | 1,216,111 | 697,876 | ||||||||
| Occupancy and equipment expenses | 541,291 | 470,439 | 381,794 | ||||||||
| Technology expense | 178,078 | 163,015 | 127,748 | ||||||||
| Outside services | 277,296 | 195,313 | 102,356 | ||||||||
| Marketing expense | 80,179 | 52,448 | 55,864 | ||||||||
| Loan expense | 397,942 | 348,231 | 69,269 | ||||||||
| Lease expense | 1,112,555 | 588,062 | — | ||||||||
| Other administrative expenses | 340,614 | 317,834 | 227,156 | ||||||||
| TOTAL GENERAL AND ADMINISTRATIVE EXPENSES | 4,319,263 | 3,351,453 | 1,662,063 | ||||||||
| OTHER EXPENSES: | |||||||||||
| Amortization of intangibles | 76,132 | 67,921 | 27,334 | ||||||||
| Deposit insurance premiums and other expenses | 56,946 | 55,746 | 70,327 | ||||||||
| Loss on debt extinguishment | — | 127,063 | 6,877 | ||||||||
| Investment expense on qualified affordable housing projects | 156 | — | — | ||||||||
| Impairment of capitalized software | — | 97,546 | — | ||||||||
| Impairment of goodwill | 4,447,622 | — | — | ||||||||
| TOTAL OTHER EXPENSES | 4,580,856 | 348,276 | 104,538 | ||||||||
| (LOSS)/INCOME BEFORE INCOME TAXES | (3,746,605 | ) | 4,471,164 | 788,403 | |||||||
| Income tax (benefit)/provision | (671,463 | ) | 1,554,357 | 160,300 | |||||||
| NET (LOSS)/INCOME INCLUDING NONCONTROLLING INTEREST | (3,075,142 | ) | 2,916,807 | 628,103 | |||||||
| LESS: NET (LOSS)/INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST | (1,620,545 | ) | 459,175 | — | |||||||
| NET (LOSS)/INCOME ATTRIBUTABLE TO SHUSA | $ | (1,454,597 | ) | $ | 2,457,632 | $ | 628,103 | ||||
See accompanying notes to Consolidated Financial Statements.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
| Year Ended December 31, | |||||||||||
| 2015 | 2014 | 2013 | |||||||||
(As Restated - Note 1) | |||||||||||
| (in thousands) | |||||||||||
| NET (LOSS)/INCOME INCLUDING NONCONTROLLING INTEREST | $ | (3,075,142 | ) | $ | 2,916,807 | $ | 628,103 | ||||
| OTHER COMPREHENSIVE INCOME / (LOSS), NET OF TAX | |||||||||||
| Net unrealized (losses)/gains on cash flow hedge derivative financial instruments, net of tax | (2,322 | ) | 25,163 | 39,751 | |||||||
| Net unrealized (losses)/gains on available-for-sale investment securities, net of tax | (43,511 | ) | 146,877 | (359,616 | ) | ||||||
| Pension and post-retirement actuarial gains/(losses), net of tax | 2,602 | (14,082 | ) | 11,163 | |||||||
| TOTAL OTHER COMPREHENSIVE (LOSS)/INCOME, NET OF TAX | (43,231 | ) | 157,958 | (308,702 | ) | ||||||
| COMPREHENSIVE (LOSS)/INCOME | $ | (3,118,373 | ) | $ | 3,074,765 | $ | 319,401 | ||||
| COMPREHENSIVE (LOSS)/INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST | (1,620,545 | ) | 459,175 | — | |||||||
| COMPREHENSIVE (LOSS)/INCOME ATTRIBUTABLE TO SHUSA | $ | (1,497,828 | ) | $ | 2,615,590 | $ | 319,401 | ||||
See accompanying notes to Consolidated Financial Statements.
125
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2015 AND 2014
(in thousands)
| Common Shares Outstanding | Preferred Stock | Common Stock and Paid-in Capital | Accumulated Other Comprehensive Income/(Loss) | Retained Earnings | Noncontrolling Interest | Total Stockholder's Equity | ||||||||||||||||||||
| Balance, December 31, 2012 | 520,307 | $ | 195,445 | $ | 12,211,636 | $ | 54,334 | $ | 780,587 | $ | — | $ | 13,242,002 | |||||||||||||
| Comprehensive income/(loss) | — | — | — | (308,702 | ) | 628,103 | — | 319,401 | ||||||||||||||||||
| Stock issued in connection with employees benefit and incentive compensation plans | — | — | (1,820 | ) | — | — | — | (1,820 | ) | |||||||||||||||||
| Dividends paid on preferred stock | — | — | — | — | (14,600 | ) | — | (14,600 | ) | |||||||||||||||||
| Balance, December 31, 2013 | 520,307 | $ | 195,445 | $ | 12,209,816 | $ | (254,368 | ) | $ | 1,394,090 | $ | — | $ | 13,544,983 | ||||||||||||
| (As Restated - Note 1) | Common Shares Outstanding | Preferred Stock | Common Stock and Paid-in Capital | Accumulated Other Comprehensive (Loss) | Retained Earnings | Noncontrolling Interest | Total Stockholder's Equity | |||||||||||||||||||
| Balance, December 31, 2013 | 520,307 | $ | 195,445 | $ | 12,209,816 | $ | (254,368 | ) | $ | 1,394,090 | $ | — | $ | 13,544,983 | ||||||||||||
| Comprehensive income Attributable to SHUSA | — | — | — | 157,958 | 2,457,632 | — | 2,615,590 | |||||||||||||||||||
| Net Income Attributable to NCI | — | — | — | — | — | 459,175 | 459,175 | |||||||||||||||||||
SC Change in Control(1) | — | — | — | — | — | 3,483,446 | 3,483,446 | |||||||||||||||||||
| Issuance of common stock | 10,084 | 2,521,000 | — | — | — | 2,521,000 | ||||||||||||||||||||
| Stock issued in connection with employee benefit and incentive compensation plans | — | — | (1,207 | ) | — | — | — | (1,207 | ) | |||||||||||||||||
| Net stock option activity | — | — | — | — | — | 104,301 | 104,301 | |||||||||||||||||||
| Dividends paid on preferred stock | — | — | — | — | (14,600 | ) | — | (14,600 | ) | |||||||||||||||||
| Balance, December 31, 2014 | 530,391 | $ | 195,445 | $ | 14,729,609 | $ | (96,410 | ) | $ | 3,837,122 | $ | 4,046,922 | $ | 22,712,688 | ||||||||||||
(1) Refer to Note 3 to the Consolidated Financial Statements for further discussion.
126
Common Shares Outstanding | Preferred Stock | Common Stock and Paid-in Capital | Accumulated Other Comprehensive (Loss) | Retained Earnings | Noncontrolling Interest | Total Stockholder's Equity | ||||||||||||||||||||
| Balance, December 31, 2014 | 530,391 | $ | 195,445 | $ | 14,729,609 | $ | (96,410 | ) | $ | 3,837,122 | $ | 4,046,922 | $ | 22,712,688 | ||||||||||||
| Comprehensive loss | — | — | — | (43,231 | ) | (1,454,597 | ) | — | (1,497,828 | ) | ||||||||||||||||
| Net Loss Attributable to Noncontrolling Interest | — | — | — | — | — | (1,620,545 | ) | (1,620,545 | ) | |||||||||||||||||
| Impact of SC Stock Option Activity | — | — | (12,009 | ) | — | — | 1,222 | (10,787 | ) | |||||||||||||||||
| Stock issued in connection with employee benefit and incentive compensation plans | — | — | 25 | — | — | — | 25 | |||||||||||||||||||
| Dividends paid on preferred stock | — | — | — | — | (14,600 | ) | — | (14,600 | ) | |||||||||||||||||
| Balance, December 31, 2015 | 530,391 | $ | 195,445 | $ | 14,717,625 | $ | (139,641 | ) | $ | 2,367,925 | $ | 2,427,599 | $ | 19,568,953 | ||||||||||||
See accompanying notes to Consolidated Financial Statements.
127
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Year Ended December 31, | |||||||||||
| 2015 | 2014 | 2013 | |||||||||
| (As Restated - Note 1) | |||||||||||
| (in thousands) | |||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net (loss)/income including noncontrolling interest | $ | (3,075,142 | ) | $ | 2,916,807 | $ | 628,103 | ||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Gain on SC Change in Control | — | (2,291,003 | ) | — | |||||||
| Net gain on sale of SC shares | — | (137,536 | ) | — | |||||||
| Gain on sale of branches | — | (10,648 | ) | — | |||||||
| Impairment of goodwill | 4,447,622 | — | — | ||||||||
| Impairment of capitalized software | — | 97,546 | — | ||||||||
| Provision for credit losses | 4,115,899 | 2,494,813 | 46,850 | ||||||||
| Deferred tax (benefit)/expense | (828,643 | ) | 1,792,462 | 234,274 | |||||||
| Depreciation, amortization and accretion | 290,231 | (155,137 | ) | 286,304 | |||||||
| Net loss/(gain) on sale of loans | 99,069 | (263,853 | ) | (47,128 | ) | ||||||
| Net gain on sale of investment securities | (18,094 | ) | (27,234 | ) | (73,084 | ) | |||||
| Gain on residential loan securitizations | (21,570 | ) | (48,373 | ) | — | ||||||
| Net gain on sale of leased vehicles | (22,636 | ) | (4,570 | ) | — | ||||||
| OTTI recognized in earnings | 1,092 | — | 63,630 | ||||||||
| Loss on debt extinguishment | — | 127,063 | 6,877 | ||||||||
| Net (gain)/loss on real estate owned and premises and equipment | (11,490 | ) | (32,101 | ) | 5,238 | ||||||
| Stock-based compensation | 2,532 | 5,922 | (1,820 | ) | |||||||
| Equity loss/(earnings) on equity method investments | 8,818 | (7,817 | ) | (426,851 | ) | ||||||
| Dividends from equity method investments | — | — | 182,113 | ||||||||
| Originations of loans held-for-sale, net of repayments | (7,649,733 | ) | (4,630,564 | ) | (3,317,480 | ) | |||||
| Purchases of loans held-for-sale | — | — | (17,151 | ) | |||||||
| Proceeds from sales of loans held-for-sale | 6,818,163 | 5,132,693 | 4,063,312 | ||||||||
| Purchases of trading securities | (390,192 | ) | (525,485 | ) | — | ||||||
| Proceeds from sales of trading securities | 823,801 | 85,240 | — | ||||||||
| Net change in: | |||||||||||
| Loans held for sale | (107,947 | ) | — | — | |||||||
| Other assets and bank-owned life insurance | 351,925 | (246,408 | ) | 175,810 | |||||||
| Other liabilities | 301,678 | (64,295 | ) | (471,957 | ) | ||||||
| Other | — | (8,786 | ) | 24,545 | |||||||
| NET CASH PROVIDED BY OPERATING ACTIVITIES | 5,135,383 | 4,198,736 | 1,361,585 | ||||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | |||||||||||
| Proceeds from sales of available-for-sale investment securities | 2,809,779 | 341,513 | 8,050,028 | ||||||||
| Proceeds from prepayments and maturities of available-for-sale investment securities | 5,149,941 | 2,594,981 | 3,206,799 | ||||||||
| Purchases of available-for-sale investment securities | (12,331,663 | ) | (5,209,870 | ) | (4,854,061 | ) | |||||
| Proceeds from sales of other investments | 325,594 | 366,382 | 310,466 | ||||||||
| Proceeds from maturities of other investments | — | 20,000 | — | ||||||||
| Purchases of other investments | (506,469 | ) | (382,840 | ) | (76,949 | ) | |||||
| Net change in restricted cash | (555,917 | ) | (286,164 | ) | 391,058 | ||||||
| Proceeds from sales of loans held for investment | 2,710,078 | 3,653,267 | 119,621 | ||||||||
| Proceeds from the sales of equity method investments | 14,988 | 8,615 | — | ||||||||
| Distributions from equity method investments | 11,881 | 7,990 | — | ||||||||
| Contributions to equity method and other investments | (101,018 | ) | (111,788 | ) | — | ||||||
| Purchases of loans held for investment | (1,978,145 | ) | (1,266,322 | ) | (1,530,178 | ) | |||||
| Net change in loans other than purchases and sales | (9,460,729 | ) | (9,855,823 | ) | 3,584,077 | ||||||
| Purchases of leased vehicles | (5,749,720 | ) | (6,175,393 | ) | — | ||||||
| Proceeds from the sale and termination of leased vehicles | 2,014,797 | 463,843 | — | ||||||||
| Manufacturer incentives | 1,197,106 | 1,139,209 | — | ||||||||
| Proceeds from sales of real estate owned and premises and equipment | 89,331 | 119,088 | 47,673 | ||||||||
| Purchases of premises and equipment | (304,754 | ) | (288,336 | ) | (222,756 | ) | |||||
| Net cash transferred on the sale of branches | — | (151,286 | ) | — | |||||||
| Proceeds from sale of SC shares | — | 320,145 | — | ||||||||
| Cash acquired in SC Change in Control | — | 11,076 | — | ||||||||
| NET CASH (USED IN)/PROVIDED BY INVESTING ACTIVITIES | (16,664,920 | ) | (14,681,713 | ) | 9,025,778 | ||||||
| CASH FLOWS FROM FINANCING ACTIVITIES: | |||||||||||
| Net change in deposits and other customer accounts | 3,640,225 | 3,227,076 | (1,268,632 | ) | |||||||
| Net change in short-term borrowings | (5,250,000 | ) | 2,481,770 | (6,142,617 | ) | ||||||
| Net proceeds from long-term borrowings | 51,840,502 | 37,894,392 | 528,749 | ||||||||
| Repayments of long-term borrowings | (45,669,188 | ) | (34,767,052 | ) | (958,162 | ) | |||||
| Proceeds from FHLB advances (with terms greater than 3 months) | 16,350,000 | — | 1,500,000 | ||||||||
| Repayments of FHLB advances (with terms greater than 3 months) | (6,670,000 | ) | (2,082,796 | ) | (2,040,494 | ) | |||||
| Net change in advance payments by borrowers for taxes and insurance | 5,260 | (14,901 | ) | 14,529 | |||||||
| Cash dividends paid to preferred stockholders | (14,600 | ) | (14,600 | ) | (14,600 | ) | |||||
| Dividends paid to noncontrolling interest | — | (20,667 | ) | — | |||||||
| Proceeds from the issuance of common stock | 87,761 | 1,787,533 | — | ||||||||
| NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES | 14,319,960 | 8,490,755 | (8,381,227 | ) | |||||||
| NET INCREASE/(DECREASE) IN CASH AND CASH EQUIVALENTS | 2,790,423 | (1,992,222 | ) | 2,006,136 | |||||||
| CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 2,234,725 | 4,226,947 | 2,220,811 | ||||||||
| CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 5,025,148 | $ | 2,234,725 | $ | 4,226,947 | |||||
| SUPPLEMENTAL DISCLOSURES | |||||||||||
| Income taxes (received)/paid, net | $ | (247,211 | ) | $ | (122,589 | ) | $ | 1,489 | |||
| Interest paid | 1,238,519 | 1,191,326 | 1,004,926 | ||||||||
NON-CASH TRANSACTIONS(1) | |||||||||||
| Loans transferred to other real estate owned | 77,034 | 53,618 | 75,158 | ||||||||
| Loans transferred from held for investment to held for sale, net | 2,886,766 | 226,170 | — | ||||||||
| Unsettled purchases of investment securities | 697,057 | 254,065 | — | ||||||||
| Unsettled sales of investment securities | — | 573,290 | — | ||||||||
| Conversion of debt to common equity | — | 750,000 | — | ||||||||
| Liquidation of common equity securities | — | 24,742 | — | ||||||||
| Residential loan securitizations | 395,163 | 2,136,022 | — | ||||||||
| (1) The first quarter 2014 change in control and consolidation of SC (the "Change in Control") was accounted for as a non-cash transaction. See Note 3 to the Consolidated Financial Statements for detail on the Change in Control. | |||||||||||
See accompanying notes to audited Consolidated Financial Statements
128
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Introduction
Santander Holdings USA, Inc. ("SHUSA") is the parent company of Santander Bank, National Association, (the "Bank" or "SBNA"), a national banking association, and Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SC"), a consumer finance company focused on vehicle finance. SHUSA is headquartered in Boston, Massachusetts and the Bank's main office is in Wilmington, Delaware. SHUSA is a wholly-owned subsidiary of Banco Santander, S.A. ("Santander").
The Bank’s primary business consists of attracting deposits and providing other retail banking services through its network of retail branches, and originating small business loans, middle market, large and global commercial loans, multifamily loans, residential mortgage loans, home equity loans and lines of credit, and auto and other consumer loans throughout the Mid-Atlantic and Northeastern areas of the United States, focused throughout Pennsylvania, New Jersey, New York, New Hampshire, Massachusetts, Connecticut, Rhode Island, and Delaware. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios.
SC wholly owns Santander Consumer USA Inc., which is headquartered in Dallas, Texas, and is a specialized consumer finance company focused on vehicle finance and third-party servicing. SC Common Stock is listed for trading on the New York Stock Exchange under the trading symbol "SC".
Basis of Presentation
These Consolidated Financial Statements include the accounts of the Company and its subsidiaries, including the Bank, SC, and certain special purpose financing trusts utilized in financing transactions that are considered variable interest entities ("VIEs"). The Company generally consolidates VIEs for which it is deemed to be the primary beneficiary and generally consolidates VOEs in which the Company has a controlling financial interest. The Consolidated Financial Statements have been prepared by the Company pursuant to SEC regulations. All significant intercompany balances and transactions have been eliminated in consolidation. Additionally, where applicable, the Company's accounting policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. However, in the opinion of management, the accompanying Consolidated Financial Statements reflect all adjustments of a normal and recurring nature necessary to present fairly the Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Income, Statements of Stockholder's Equity and Statements of Cash Flows for the periods indicated, and contain adequate disclosure to make the information presented not misleading.
Corrections to Previously Reported Amounts
We have made certain corrections to previously disclosed amounts to correct for errors related to the allowance for credit losses, troubled debt restructurings (TDRs), and the classification of subvention payments related to leased vehicles.
The corrections to the allowance for credit losses are a result of an error in our historical methodology for estimating the credit loss allowance for individually acquired retail installment contracts, specifically in regard to not estimating impairment on TDRs separately from a general credit loss allowance on loans not classified as TDRs, and incorrectly applying a loss emergence period to the entire portfolio rather than only to loans not classified as TDRs. We have corrected the allowance methodology accordingly, and have determined that based on the corrected methodology, the allowance for credit losses was overstated by $358.2 million at December 31, 2014. In addition, we incorrectly identified the population of loans that should be classified as TDRs and, separately, incorrectly estimated the impairment on these loans, as of December 31, 2014. SC has corrected its TDR population accordingly, and has determined that based on the corrected population, TDRs were overstated by $109.5 million for the year ended December 31, 2014.
The Company has also determined that subvention payments related to leased vehicles were incorrectly classified, within the Consolidated Statements of Operations, as an addition to Leased vehicle income rather than a reduction of Leased vehicle expense. There was no impact to net income as a result of this change.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Certain footnote disclosures herein have been restated to reflect the effects of the corrections related to allowance methodology, as well as other corrections made in order for the footnote disclosure amounts to be in accordance with GAAP. Footnote disclosures that have been corrected are denoted with “As restated.” Footnote disclosures not affected are unchanged and reflect the disclosures made at the time of the previous filing.
The following table summarizes the impact of the corrections on the Company's Consolidated Balance Sheet for the year ended December 31, 2014.
| As Reported | Corrections | As Restated | |||||||||
| (in thousands) | |||||||||||
| ASSETS | |||||||||||
| Loans held for investment | $ | 76,032,562 | $ | (8,448 | ) | $ | 76,024,114 | ||||
| Allowance for loan and lease losses | (2,108,817 | ) | 358,174 | (1,750,643 | ) | ||||||
| Net loans held for investment | 73,923,745 | 349,726 | 74,273,471 | ||||||||
| TOTAL ASSETS | 118,427,144 | 349,726 | 118,776,870 | ||||||||
| LIABILITIES | |||||||||||
| Deferred tax liabilities, net | 1,025,948 | 141,133 | 1,167,081 | ||||||||
| TOTAL LIABILITIES | 95,923,049 | 141,133 | 96,064,182 | ||||||||
| STOCKHOLDER'S EQUITY | |||||||||||
| Retained earnings | 3,714,642 | 122,480 | 3,837,122 | ||||||||
| TOTAL SHUSA STOCKHOLDER'S EQUITY | 18,543,286 | 122,480 | 18,665,766 | ||||||||
| Noncontrolling interest | 3,960,809 | 86,113 | 4,046,922 | ||||||||
| TOTAL STOCKHOLDER'S EQUITY | 22,504,095 | 208,593 | 22,712,688 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $ | 118,427,144 | $ | 349,726 | $ | 118,776,870 | |||||
The following table summarizes the impact of the corrections on the Company's Consolidated Statement of Operations for the year ended December 31, 2014.
| As Reported | Corrections | As Restated | |||||||||
| (in thousands) | |||||||||||
| Provision for credit losses | $ | 2,844,539 | $ | (349,726 | ) | $ | 2,494,813 | ||||
| NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 3,140,234 | 349,726 | 3,489,960 | ||||||||
| Lease income | 997,086 | (198,740 | ) | 798,346 | |||||||
| TOTAL FEES AND OTHER INCOME | 2,423,900 | (198,740 | ) | 2,225,160 | |||||||
| TOTAL NON-INTEREST INCOME | 4,879,673 | (198,740 | ) | 4,680,933 | |||||||
| Lease expense | 786,802 | (198,740 | ) | 588,062 | |||||||
| TOTAL GENERAL AND ADMINISTRATIVE EXPENSES | 3,550,193 | (198,740 | ) | 3,351,453 | |||||||
| INCOME BEFORE INCOME TAXES | 4,121,438 | 349,726 | 4,471,164 | ||||||||
| Income tax provision | 1,413,224 | 141,133 | 1,554,357 | ||||||||
| NET INCOME INCLUDING NONCONTROLLING INTEREST | 2,708,214 | 208,593 | 2,916,807 | ||||||||
| LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST | 373,062 | 86,113 | 459,175 | ||||||||
| NET INCOME ATTRIBUTABLE TO SHUSA | $ | 2,335,152 | $ | 122,480 | $ | 2,457,632 | |||||
The following table reflects a summary of the impact of the allowance for credit losses and subvention payment corrections on the Company's Statements of Stockholder's Equity for the year ended December 31, 2014.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
| Retained Earnings | Non-controlling Interest | Total Stock-holder's Equity | Retained Earnings | Non-controlling Interest | Total Stock-holder's Equity | Retained Earnings | Non-controlling Interest | Total Stock-holder's Equity | ||||||||||||||||||||||||||||
| As Reported | Corrections | As Restated | ||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||
| Balance, Beginning of period | $ | 1,394,090 | $ | — | $ | 13,544,983 | $ | — | $ | — | $ | — | $ | 1,394,090 | $ | — | $ | 13,544,983 | ||||||||||||||||||
| Comprehensive income attributable to SHUSA | 2,335,152 | — | 2,493,110 | 122,480 | — | 122,480 | 2,457,632 | — | 2,615,590 | |||||||||||||||||||||||||||
| Net income attributable to NCI | — | 373,062 | 373,062 | — | 86,113 | 86,113 | — | 459,175 | 459,175 | |||||||||||||||||||||||||||
| Balance, End of period | $ | 3,714,642 | $ | 3,960,809 | $ | 22,504,095 | $ | 122,480 | $ | 86,113 | $ | 208,593 | 3,837,122 | 4,046,922 | 22,712,688 | |||||||||||||||||||||
The following table summarizes the impact of the corrections on the Company's Consolidated Statement of Cash Flows for the year ended December 31, 2014.
| As Reported | Corrections | As Restated | |||||||||
| (in thousands) | |||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income including noncontrolling interest | $ | 2,708,214 | $ | 208,593 | $ | 2,916,807 | |||||
| Provision for credit losses | 2,844,539 | (349,726 | ) | 2,494,813 | |||||||
| Deferred tax expense | 1,651,329 | 141,133 | 1,792,462 | ||||||||
The following corrections of certain footnote disclosures of the Company are as a result of the error identified in the allowance for credit losses and the error identified in TDRs. The following corrections made compared to what was previously reported are presented by line item as follows:
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Allowance for Credit Losses Rollforward by Portfolio Segment (as restated compared to as reported)
The activity in the allowance for credit losses by portfolio segment as restated for the year ended December 31, 2014 was as follows:
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (As Restated) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 443,074 | $ | 363,647 | $ | 27,616 | $ | 834,337 | |||||||
Provision for loan and lease losses(3) | 13,088 | 2,558,317 | 5,408 | 2,576,813 | |||||||||||
Other (1) | (61,220 | ) | — | (61,220 | ) | ||||||||||
Charge-offs(3) | (109,704 | ) | (2,697,290 | ) | — | (2,806,994 | ) | ||||||||
| Recoveries | 40,379 | 1,167,328 | — | 1,207,707 | |||||||||||
| Charge-offs, net of recoveries | (69,325 | ) | (1,529,962 | ) | — | (1,599,287 | ) | ||||||||
| Allowance for loan and lease losses, end of period | $ | 386,837 | $ | 1,330,782 | $ | 33,024 | $ | 1,750,643 | |||||||
| Reserve for unfunded lending commitments, beginning of period | 220,000 | — | — | 220,000 | |||||||||||
| Provision for unfunded lending commitments | (82,000 | ) | — | — | (82,000 | ) | |||||||||
| Loss on unfunded lending commitments | (5,359 | ) | — | — | (5,359 | ) | |||||||||
| Reserve for unfunded lending commitments, end of period | 132,641 | — | — | 132,641 | |||||||||||
| Total allowance for credit losses, end of period | 519,478 | 1,330,782 | 33,024 | 1,883,284 | |||||||||||
Ending balance, individually evaluated for impairment(2)(3) | 80,701 | 55,182 | — | 135,883 | |||||||||||
Ending balance, collectively evaluated for impairment(3) | 306,136 | 1,275,600 | 33,024 | 1,614,760 | |||||||||||
| Financing receivables: | |||||||||||||||
| Ending balance | 36,640,761 | 39,643,605 | — | 76,284,366 | |||||||||||
| Ending balance, evaluated under the fair value option or lower of cost or fair value | 19,094 | 1,087,068 | — | 1,106,162 | |||||||||||
Ending balance, individually evaluated for impairment(2)(3) | 492,606 | 337,390 | — | 829,996 | |||||||||||
Ending balance, collectively evaluated for impairment(3) | 36,129,061 | 38,219,147 | — | 74,348,208 | |||||||||||
| (1) | 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 year. |
| (2) | Consists of loans in TDR status. |
| (3) | Certain balances within this line item have been corrected as part of the restatement. |
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
The activity in the allowance for credit losses by portfolio segment as previously reported for the year ended December 31, 2014 was as follows:
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (As Reported) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 443,074 | $ | 363,647 | $ | 27,616 | $ | 834,337 | |||||||
| Provision for loan and lease losses | 22,740 | 2,898,391 | 5,408 | 2,926,539 | |||||||||||
Other (1) | — | (61,220 | ) | — | (61,220 | ) | |||||||||
| Charge-offs | (109,704 | ) | (2,688,842 | ) | — | (2,798,546 | ) | ||||||||
| Recoveries | 40,379 | 1,167,328 | — | 1,207,707 | |||||||||||
| Charge-offs, net of recoveries | (69,325 | ) | (1,521,514 | ) | — | (1,590,839 | ) | ||||||||
| Allowance for loan and lease losses, end of period | $ | 396,489 | $ | 1,679,304 | $ | 33,024 | $ | 2,108,817 | |||||||
| Reserve for unfunded lending commitments, beginning of period | 220,000 | — | — | 220,000 | |||||||||||
| Provision for unfunded lending commitments | (82,000 | ) | — | — | (82,000 | ) | |||||||||
| Loss on unfunded lending commitments | (5,359 | ) | — | — | (5,359 | ) | |||||||||
| Reserve for unfunded lending commitments, end of period | 132,641 | — | — | 132,641 | |||||||||||
| Total allowance for credit losses, end of period | 529,130 | 1,679,304 | 33,024 | 2,241,458 | |||||||||||
Ending balance, individually evaluated for impairment(2) | 80,968 | 230,727 | — | 311,695 | |||||||||||
| Ending balance, collectively evaluated for impairment | 315,521 | 1,448,577 | 33,024 | 1,797,122 | |||||||||||
| Financing receivables: | |||||||||||||||
| Ending balance | 36,640,761 | 39,652,053 | — | 76,292,814 | |||||||||||
| Ending balance, evaluated under the fair value option or lower of cost or fair value | 19,094 | 1,087,069 | — | 1,106,163 | |||||||||||
Ending balance, individually evaluated for impairment(2) | 491,015 | 2,085,552 | — | 2,576,567 | |||||||||||
| Ending balance, collectively evaluated for impairment | 36,130,652 | 36,479,432 | — | 72,610,084 | |||||||||||
| (1) | 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 year. |
| (2) | Consists of loans in TDR status |
133
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Impaired Loans (as restated compared to as reported)
The following table reflects a summary of the restated amounts on the Company's impaired loans as of December 31, 2014.
Recorded Investment(1) | Unpaid Principal Balance | Related Specific Reserves | Average Recorded Investment | |||||||||||||
| (As Restated) | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
Commercial and industrial(3) | $ | 7,925 | $ | 17,732 | $ | — | $ | 10,528 | ||||||||
| Consumer: | ||||||||||||||||
Retail installment contracts and auto loans(3) | 1,787,123 | 2,040,785 | — | 893,562 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
Commercial and industrial(3) | 64,184 | 72,488 | 35,849 | 82,204 | ||||||||||||
| Consumer: | ||||||||||||||||
Retail installment contracts and auto loans(3) | 56,844 | 58,229 | 16,819 | 28,422 | ||||||||||||
| Total: | ||||||||||||||||
Commercial(3) | $ | 395,035 | $ | 476,780 | $ | 80,701 | $ | 437,192 | ||||||||
Consumer(3) | 2,124,513 | 2,421,514 | 55,221 | 1,439,163 | ||||||||||||
| Total | $ | 2,519,548 | $ | 2,898,294 | $ | 135,922 | $ | 1,876,355 | ||||||||
| (1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
| (2) | Includes LHFS. |
| (3) | Certain balances within this line item have been corrected as part of the restatement. |
The Company recognized interest income of $115.5 million for the year ended December 31, 2014 on approximately $2.0 billion of TDRs that were returned to performing status as of December 31, 2014.
134
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
The following table reflects a summary of the previously reported amounts on the Company's impaired loans as of December 31, 2014.
Recorded Investment(1) | Unpaid Principal Balance | Related Specific Reserves | Average Recorded Investment | |||||||||||||
| (As Reported) | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | $ | 6,027 | $ | 15,580 | $ | — | $ | 9,580 | ||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 148,347 | 189,663 | — | 74,173 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | 66,186 | 74,737 | 36,115 | 83,205 | ||||||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 1,805,006 | 2,031,134 | 192,325 | 902,504 | ||||||||||||
| Total: | ||||||||||||||||
| Commercial | $ | 395,139 | $ | 476,877 | $ | 80,968 | $ | 437,245 | ||||||||
| Consumer | 2,233,899 | 2,543,297 | 230,727 | 1,493,856 | ||||||||||||
| Total | $ | 2,629,038 | $ | 3,020,174 | $ | 311,695 | $ | 1,931,101 | ||||||||
| (1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
| (2) | Includes LHFS. |
The Company recognized interest income of $86.1 million for the year ended December 31, 2014 on approximately $2.1 billion of TDRs that were returned to performing status as of December 31, 2014.
Troubled Debt Restructurings (as restated compared to as reported)
The following table reflects a summary of the restated amounts on the Company's performing and non-performing TDRs as of December 31, 2014.
| December 31, 2014 | ||||
| (As Restated) | ||||
| (in thousands) | ||||
| Performing | $ | 2,041,973 | ||
| Non-performing | 343,533 | |||
| Total | $ | 2,385,506 | ||
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
The following table reflects a summary of the previously reported amounts on the Company's performing and non-performing TDRs as of December 31, 2014.
| December 31, 2014 | ||||
| (As Reported) | ||||
| (in thousands) | ||||
| Performing | $ | 2,117,789 | ||
| Non-performing | 377,239 | |||
| Total | $ | 2,495,028 | ||
The following table details the restated amounts of activity of the Company's TDRs for the year ended December 31, 2014.
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | |||||||||
| (As Restated) | |||||||||||
| (in thousands) | |||||||||||
| Commercial: | |||||||||||
| Commercial and industrial | 72 | $ | 2,169 | $ | 2,166 | ||||||
| Consumer: | |||||||||||
| Retail installment contracts and auto loans | 142,900 | 1,976,877 | 1,966,916 | ||||||||
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.
| (2) | Post-TDR modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred. |
The following table details the previously reported amounts of activity of the Company's TDRs for the year ended December 31, 2014.
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | |||||||||
| (As Reported) | |||||||||||
| (in thousands) | |||||||||||
| Commercial: | |||||||||||
| Commercial and industrial | 97 | $ | 2,921 | $ | 2,243 | ||||||
| Consumer: | |||||||||||
| Retail installment contracts and auto loans | 155,916 | 2,169,193 | 2,023,649 | ||||||||
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.
| (2) | Post-TDR modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred. |
136
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
The following table details the restated amounts of the subsequently defaulted activity of the Company's TDRs for the year ended December 31, 2014.
| Number of Contracts | Recorded Investment(1) | ||||||
| (As Restated) | |||||||
| (in thousands) | |||||||
| Commercial: | |||||||
| Commercial and industrial | 1 | $ | 52 | ||||
| Consumer: | |||||||
| Retail installment contracts and auto loans | 6,398 | 87,019 | |||||
| (1) | The recorded investment represents the period-end balance at December 31, 2014. Does not include Chapter 7 bankruptcy TDRs. |
The following table details the previously reported amounts of the subsequently defaulted activity of the Company's TDRs for the year ended December 31, 2014.
| Number of Contracts | Recorded Investment(1) | ||||||
| (As Reported) | |||||||
| (in thousands) | |||||||
| Commercial: | |||||||
| Commercial and industrial | — | $ | — | ||||
| Consumer: | |||||||
| Retail installment contracts and auto loans | 10,232 | 72,822 | |||||
| (1) | The recorded investment represents the period-end balance at December 31, 2014. Does not include Chapter 7 bankruptcy TDRs. |
Income Taxes
The following table summarizes the impact of the corrections on the Company's income taxes for the year ended December 31, 2014. See Note 16 for additional detail regarding these corrections.
| As Reported | Corrections | As Restated | ||||||||||
| (in thousands) | ||||||||||||
| Income tax expense | $ | 1,413,224 | $ | 141,133 | $ | 1,554,357 | ||||||
| Income before income taxes | 4,121,438 | 349,726 | 4,471,164 | |||||||||
| Effective tax rate | 34.3 | % | 0.5 | % | 34.8 | % | ||||||
137
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Fair Value
The following table summarizes the impact of the corrections on the Company's carrying value of net loans held for investment as of December 31, 2014.
| As Reported | Corrections | As Restated | ||||||||||
| (in thousands) | ||||||||||||
| Loans held for investment, net | $ | 73,923,745 | $ | 349,726 | $ | 74,273,471 | ||||||
Parent Company Financial Information
The following tables summarize the impact of the corrections on the Company's parent company financials for the year ended December 31, 2014.
| BALANCE SHEET | |||||||||||
| As Reported | Corrections | As Restated | |||||||||
| (in thousands) | |||||||||||
| ASSETS | |||||||||||
| Investment in subsidiaries: Non-bank subsidiaries | $ | 9,967,067 | $ | 131,699 | $ | 10,098,766 | |||||
Premises and equipment, net(1) | — | 122 | 122 | ||||||||
Other assets(2) | 275,437 | (4,635 | ) | 270,802 | |||||||
| TOTAL ASSETS | 21,728,386 | 127,186 | 21,855,572 | ||||||||
| LIABILITIES | |||||||||||
Borrowings and other debt obligations(2) | 1,808,810 | (4,513 | ) | 1,804,297 | |||||||
| Deferred tax liabilities, net | 1,143,965 | 9,219 | 1,153,184 | ||||||||
| TOTAL LIABILITIES | 3,185,100 | 4,706 | 3,189,806 | ||||||||
| TOTAL STOCKHOLDER'S EQUITY | 18,543,286 | 122,480 | 18,665,766 | ||||||||
| TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $ | 21,728,386 | $ | 127,186 | $ | 21,855,572 | |||||
(1) Amount in correction column represents amount previously reported within Other assets
(2) Amount in correction column represents re-classification of debt issuance costs from Other assets to Borrowings and other debt obligations in accordance with the adoption of ASU 2015-03.
| STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME | |||||||||||
| As Reported | Corrections | As Restated | |||||||||
| (in thousands) | |||||||||||
| Income tax provision | $ | 818,289 | $ | 9,219 | $ | 827,508 | |||||
| Income before equity in earnings of subsidiaries | 1,453,507 | (9,219 | ) | 1,444,288 | |||||||
| Equity in undistributed earnings of: Non-bank subsidiaries | 577,941 | 131,699 | 709,640 | ||||||||
| Net income | 2,335,152 | 122,480 | 2,457,632 | ||||||||
| Comprehensive income | $ | 2,493,110 | $ | 122,480 | $ | 2,615,590 | |||||
| STATEMENT OF CASH FLOWS | |||||||||||
| As Reported | Corrections | As Restated | |||||||||
| (in thousands) | |||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | |||||||||||
| Net income | $ | 2,335,152 | $ | 122,480 | $ | 2,457,632 | |||||
| Deferred tax expense | 960,277 | 9,219 | 969,496 | ||||||||
| Undistributed earnings of: Non-bank subsidiaries | (577,941 | ) | (131,699 | ) | (709,640 | ) | |||||
138
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Segments
The following table details the restated amounts of the Company's segments for the year ended December 31, 2014.
SC(1) | SC Purchase Price Adjustments(1) | Eliminations | Total(2) | |||||||||||||
| Non-GAAP measures | ||||||||||||||||
| (As Restated) | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| Net interest income | $ | 4,329,683 | $ | 421,102 | $ | (344,514 | ) | $ | 5,984,773 | |||||||
| Total non-interest income | 1,042,661 | 343,513 | (107,502 | ) | 2,252,394 | |||||||||||
| Gain on change in control | 2,428,539 | 2,428,539 | ||||||||||||||
| Provision for credit losses | 2,680,527 | 41,739 | (225,454 | ) | 2,494,813 | |||||||||||
| Total expenses | 1,547,694 | 144,086 | (270,245 | ) | 3,699,729 | |||||||||||
| Income before income taxes | 1,144,123 | 3,007,329 | 43,683 | 4,471,164 | ||||||||||||
| Total average assets | 27,694,566 | — | — | 108,576,551 | ||||||||||||
(1) Certain balances within this line item have been corrected as part of the restatement.
(2) Column represents the consolidated results of SHUSA including segments not disclosed in this table. Refer to Note 24 of the Consolidated Financial Statements for the complete segmentation.
The following table details the previously reported amounts of the Company's segments for the year ended December 31, 2014.
| SC | SC Purchase Price Adjustments | Eliminations | Total(1) | |||||||||||||
| Non-GAAP measures | ||||||||||||||||
| (As Reported) | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| Net interest income | $ | 4,329,683 | $ | 421,102 | $ | (344,514 | ) | $ | 5,984,773 | |||||||
| Total non-interest income | 1,311,913 | 271,277 | (105,778 | ) | 2,451,134 | |||||||||||
| Gain on change in control | 2,428,539 | 2,428,539 | ||||||||||||||
| Provision for credit losses | 2,614,661 | 457,331 | (225,454 | ) | 2,844,539 | |||||||||||
| Total expenses | 1,816,946 | 71,850 | (268,521 | ) | 3,898,469 | |||||||||||
| Income before income taxes | 1,209,989 | 2,591,737 | 43,683 | 4,121,438 | ||||||||||||
| Total average assets | 27,519,703 | — | — | 108,423,958 | ||||||||||||
(1) Column represents the consolidated results of SHUSA including segments not disclosed in this table. Refer to Note 24 of the Consolidated Financial Statements for the complete segmentation.
Significant Accounting Policies
Management identified accounting for consolidation, business combinations, the allowance for loan and lease losses and the reserve for unfunded lending commitments, loan modifications and troubled debt restructurings, goodwill, derivatives and hedging activities, 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 of operations and require management's most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Changes in Accounting Policies
During the first quarter of 2015, the Company adopted the following Financial Accounting Standards Board (the "FASB") Accounting Standards Updates ("ASUs"), none of which had a material impact to the Company's Consolidated Financial Statements:
| • | The Company adopted the FASB ASU 2014-01, Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects, which allows an entity to make an accounting policy election to account for its investments in qualified affordable housing projects using the proportional amortization method, if certain conditions are met. Under this method, an investor would amortize the cost of its investments in proportion to the tax credits and other tax benefits received and will recognize the amortization, net of tax credits and other tax benefits, in the income statement as a component of income tax expense. This ASU is required to be adopted on a retrospective basis for all periods presented. The adoption of this ASU did not have a material effect on the Company’s prior periods’ consolidated financial statements to warrant retrospective application. The cumulative effect of the adoption was recognized in the first quarter of 2015 and was not material to the Company’s Consolidated Financial Statements. |
| • | The Company adopted FASB ASU 2014-04, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40) - Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, on a prospective basis. Under this ASU, an in-substance repossession or foreclosure occurs when the creditor obtains legal title to the residential real estate property or the borrower conveys all interest in the residential real estate property to the creditor to satisfy the loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. The Company’s adoption of this ASU did not have a material effect on its Consolidated Financial Statements. |
| • | The Company adopted FASB ASU 2014-14, Receivables - Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure. This ASU requires that a government-guaranteed mortgage loan be de-recognized, and that a separate other receivable be recognized, upon foreclosure if the three criteria identified in the ASU are met. Upon foreclosure and meeting the three criteria, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) that is expected to be recovered from the guarantor. The Company’s adoption of this ASU did not have a material effect on its Consolidated Financial Statements. |
During the third quarter of 2015, the Company early adopted FASB ASU 2015-03, Interest- Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, on a retrospective basis. This ASU simplifies the presentation of debt issuance costs and requires that debt issuance costs be presented as a deduction from the recognized debt liability, and eliminates prior guidance which required that debt issuance costs be recorded as a deferred charge. The Company’s adoption of this ASU resulted in the re-classification of $59.0 million and $30.3 million in debt issuance costs from Other assets to Borrowings as of December 31, 2015 and December 31, 2014, respectively.
The following is a description of the significant accounting policies of the Company during the year.
Consolidation
The Consolidated Financial Statements include Voting Rights Entities (VOEs) and VIEs in which the Company has a controlling financial interest. In accordance with the applicable accounting guidance for consolidations, the Company generally consolidates a VIE if the Company is considered to be the primary beneficiary because it has: (i) a variable interest in the entity; (ii) the power to direct activities of the VIE that most significantly impact the entity's economic performance; and (iii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE (i.e., the Company is considered to be the primary beneficiary). The Company generally consolidates its VOEs if the Company, directly or indirectly, owns more than 50% of the outstanding voting shares of the entity and the noncontrolling shareholders do not hold any substantive participating or controlling rights. 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
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 is a VIE. The reassessment process considers whether the Company has acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The reassessment also considers whether the Company has acquired or disposed of a financial interest that could be significant to the VIE, or whether an interest in the VIE has become significant or is no longer significant. The consolidation status of the 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 interest entities if the Company has significant influence over the entity's operating and financing decisions but does not maintain a controlling financial interest. Unconsolidated investments in voting interest entities or VIEs in which the Company has a voting or economic interest of less than 20% generally are carried at cost. These investments are included in "Equity method investments" on the Consolidated Balance Sheets, and the Company's proportionate share of income or loss is included in "Equity method investments" within the Consolidated Statements of Operations.
Business Combinations
The Company records the identifiable assets acquired, the liabilities assumed, and any non-controlling interests of companies that are acquired at their estimated fair value at the date of acquisition, and includes the results of operations of the acquired companies in the Consolidated Statement of Operations from the date of acquisition. The Company recognizes as goodwill the excess of the acquisition price over the estimated fair value of the net assets acquired. As discussed above, the Company has accounted for its acquisition of SC as a business combination. See Note 3 for a detailed discussion of this transaction.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant estimates pertain to consolidation, fair value measurements, allowance for loan and lease losses and reserve for unfunded lending commitments, estimates of expected residual values of leased vehicles subject to operating leases, goodwill, derivatives and hedge activities, and income taxes. Actual results may differ from the estimates, and the differences may be material to the Consolidated Financial Statements.
Subsequent Events
The Company evaluated events from the date of the Consolidated Financial Statements on December 31, 2015 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, 2015 other than the transactions disclosed within Note 4, Note 5, Note 12 and Note 20 of these Consolidated Financial Statements, and the possible impact of the share price decline in SC that is disclosed in Note 9.
Revenue Recognition
The Company primarily earns interest and non-interest income from various sources, including:
| • | Lending |
| • | Investment securities |
| • | Customer deposit and loan fees |
| • | BOLI |
| • | Loan sales and servicing |
| • | Leases |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
The principal source of revenue is interest income from loans and investment securities. Interest income is recognized on an accrual basis primarily according to non-discretionary formulas in written contracts, such as loan agreements or securities contracts. Revenue earned on interest-earning assets, including unearned income and the accretion of discounts recognized on acquired or purchased loans, is recognized based on the constant effective yield of such interest-earning assets. Unearned income pertains to the net of fees collected and certain costs incurred from loan originations.
Revenue on leases is generated through monthly lease payments and fees.
Gains or losses on sales of investment securities are recognized on the trade date.
The Company recognizes revenue from servicing commercial mortgages and consumer loans as earned. Mortgage banking income, net includes fees associated with servicing loans for third parties based on the specific contractual terms and changes in the fair value of MSRs. Gains or losses on sales of residential mortgage, multifamily and home equity loans are included within mortgage banking revenues and are recognized when the sale is complete.
Service charges on deposit accounts are recognized when earned.
Income from BOLI represents increases in the cash surrender value of the policies, as well as insurance proceeds and interest.
Income from finance leases is recognized as part of interest income over the term of the lease using the constant effective yield method; while income arising from operating leases is recognized as part of other non-interest income over the term of the lease on a straight-line basis.
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 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.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Cash and Cash Equivalents
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 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 related required reserve accounts are 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 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 in the near term are classified as trading securities and carried at fair value, with changes in fair value recorded as a component of the Mortgage banking income, net, line of the Consolidated Statements of Operations. Securities expected to be held for an indefinite period of time are classified as available for sale 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.
Available-for-sale securities are reviewed quarterly for possible OTTI. 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 the Company has the intent to sell or 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 accumulated other comprehensive income.
Realized gains and losses on sales of investments securities are recognized on the trade date and included in earnings within Net gain on sale of investment securities which is a component of non-interest income. Unamortized premiums and discounts are recognized in interest income over the contractual life of the security using the interest method.
Trading securities are carried at fair value, with changes in fair value recorded in non-interest income.
Other investments primarily include the Company's investment in the stock of the Federal Home Loan Bank ("FHLB") of Pittsburgh and the Federal Reserve Bank ("FRB"). Although FHLB and FRB stock is an equity interest in the FHLB and FRB, respectively, it does not have a readily determinable fair value, because its ownership is restricted and it is not readily marketable. FHLB stock can be sold back only at its par value of $100 per share and only to FHLBs or to another member institution. Accordingly, FHLB stock is carried at cost. The Company evaluates this investment for impairment on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.
See Note 4 to the Consolidated Financial Statements for detail on the Company's investments.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Loans held for investment
Loans held for investment include commercial and consumer loans originated by the Company as well as RIC and personal unsecured loans acquired in connection with the Change in Control and originated for investment after the Change in Control.
Loans held for investment Pre Change in Control
Loans held for investment are reported net of loan origination fees, direct origination costs and discounts and premiums associated with purchased loans and unearned income. Interest on loans is credited to income as it is earned. Loan origination fees and certain direct loan origination costs are deferred and recognized as adjustments to interest income in the Consolidated Statements of Operations over the contractual life of the loan generally utilizing the interest method using estimated prepayment speeds, which are updated on a quarterly basis. Premiums and discounts associated with loans purchased by the Bank are deferred and amortized as adjustments to interest income generally utilizing the interest method using estimated prepayment speeds, which are updated 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 and consumer loans 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 LHFS, any specific and allocated allowance for credit losses is charged-off to reduce the basis of the loans to the extent that the estimated fair value is lower than the loan's recorded investment.
Included in loans held for investment are RIC and personal unsecured loans that were acquired in the Change in Control as well as those originated after the Change in Control and which the Company intends to hold for the foreseeable future or until maturity. RIC consist largely of nonprime automobile finance receivables that are acquired individually from dealers at a nonrefundable discount. RIC 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.
Pre-Change in Control RIC and Personal Unsecured Loans and Allowance for Loan and Lease Losses
As discussed above, the Company has accounted for its consolidation of SC as a business combination. The RIC and personal unsecured loans were adjusted to fair value and their related allowance for loan and lease losses that existed as of the Change in Control was eliminated. The 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 will be accreted over the remaining expected lives of the loans to their par values using the effective interest rate method, while the purchase discount on the personal unsecured loans given their revolving nature will be amortized on a straight-line basis in accordance with ASC 310-20. 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 inherent in the portfolio. The Company recognizes an allowance for loan and lease losses through a charge to provision expense when the recorded investment amounts would exceed unpaid principal balances net of estimated incurred losses.
The Company has 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 will not recognize interest income for these RIC and will recognize 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 will separately recognize interest income from the total fair value adjustment. No allowance for loan and lease losses will be recognized for loans that the Company has elected to account for at fair value.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Post-Change in Control RIC and Personal Unsecured Loans and Allowance for Loan and Lease Losses
RIC and personal unsecured loans originated since the Change in Control are carried at amortized cost, net of allowance for loan and lease losses. Provisions for loan and lease losses are charged to operations in amounts sufficient to maintain the allowance for loan and lease losses at levels considered adequate to cover probable credit losses inherent in our post acquisition finance receivables.
Interest from these loans is accrued when earned in accordance with the terms of the RIC. The accrual of interest is discontinued and reversed once a RIC or personal term becomes more than 60 days past due, and is resumed if a delinquent account subsequently becomes 60 days or less past due. Personal revolving loans continue to accrue interest until they are 180 days past due, at which point they are charged off.
Non-accrual loans
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 a loan is placed on non-accrual status, all accrued yet uncollected interest is reversed from income. 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 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.
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 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. 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; and loans (closed end), automobile loans and retail installment contracts are charged-off when they become 120 days past due. 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.
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 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Impaired loans
A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay (e.g., less than 61 days for retail installment contracts or less than 90 days for all of the Company's other loans) or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired.
The Company considers all of its loans identified as TDRs as well as 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 that have been modified at least once, deferred for a period of 90 days or more, or deferred at least twice as TDRs.
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, 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.
Loans Held for Sale
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 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 income, net. For residential mortgages where the FVO is selected, direct loan origination costs and fees are recorded in Mortgage banking 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, if the recorded investment of the loan exceeds its market value at the time of initial designation as held for sale, the Company will recognize a direct write-down of the excess of the recorded investment over market through miscellaneous income. 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.
Allowance for Loan and Lease Losses and Reserve for Unfunded Lending Commitments
The allowance for loan and lease losses and reserve for Unfunded Lending Commitments are 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 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 allowance for credit losses ("ACL") may be necessary if conditions differ substantially from the assumptions used in making the evaluations.
The allowance for loan and lease losses 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.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
For the commercial loan portfolio segment, the Company has specialized credit officers and workout units that identify and manage potential problem loans. Changes in management factors, financial and operating performance, company behavior, industry factors and external events and circumstances are evaluated on an ongoing basis to determine whether potential impairment is evident and additional analysis is needed. For the commercial loan portfolio segment, risk ratings are assigned to each loan to differentiate risk within the portfolio, and are reviewed on an ongoing basis by credit risk management and revised, if needed, to reflect the borrower's current risk profile and the related collateral positions. The risk ratings consider factors such as financial condition, debt capacity and coverage ratios, market presence and quality of management. Generally, credit officers reassess a borrower's risk rating on no less than an annual basis, and more frequently if warranted. This reassessment process is managed on a continual basis by the Credit Risk Review group to ensure consistency and accuracy in risk ratings as well as appropriate frequency of risk rating review by the Company's credit officers. The Company's Credit Risk Review group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings.
When a loan's risk rating is downgraded beyond a certain level, the Company's Workout Department becomes responsible for managing the credit risk. Risk rating actions are generally reviewed formally by one or more credit committees, depending on the size of the loan and the type of risk rating action being taken. Detailed analyses are completed that support the risk rating and management's strategies for the customer relationship going forward.
The consumer loan portfolio segment and small business loans are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, loan-to-value ("LTV") ratio, and credit scores. The Bank evaluates the consumer portfolios throughout their life cycle 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, date of the most recent valuation, and whether any liens exist, to determine the value to compare against the committed loan amount.
For non-TDR RIC and personal unsecured loans, the Company estimates the allowance for loan and lease losses at a level considered adequate to cover probable credit losses inherent in 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.
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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.
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 Indexes.
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, 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.
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, 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.
See Note 5 to the Consolidated Financial Statements for detail on the Company's loans and related allowance.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
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 Change in Control, leased vehicles under operating leases were carried at amortized cost net of accumulated depreciation and any impairment charges and are presented as Leased Vehicles, net in the Company’s Consolidated Balance Sheets. As a result of the Change in Control, the assets acquired were adjusted to 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 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 decline in used vehicle values, indicate that impairment may exist.
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 income, while valuation adjustments on lease residuals are included in Other administrative expense in the Consolidated Statements of Operations.
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 30 years | |
Leasehold improvements(1) | 10 to 30 years | |
Software(2) | 3 to 5 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 depreciable period for software is three years. However, for certain software implementation projects, a five-year period is utilized.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
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." Investments accounted for under the equity method or cost method of accounting above are included in the caption "Equity method investments" 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.
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, 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 entity's goodwill impairment 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 is worth noting that 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 goodwill impairment test.
The first step required by ASC 350 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 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
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 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 charged 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 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.
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
The Company's intangible assets consist of assets purchased or acquired through business combinations, including trade names, dealer networks, and core deposit intangibles. 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.
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 $11.7 million relating to the trade name within amortization of intangible assets for the year ended December 31, 2015. There were no impairments of these intangible assets during 2014.
MSRs
The Company has elected to measure 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
As a benchmark for the reasonableness of the residential MSRs fair value, opinions of value from independent third parties ("Brokers") are obtained. Brokers provide a range of values based upon their own 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 MSRs value is considered to represent a reasonable estimate of fair value.
See Note 10 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 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 at the initial measurement date. Subsequent to the acquisition date, OREO and repossessed assets are carried at the lower of cost or fair value less 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. OREO and other repossessed assets are recorded within Other assets on the Consolidated Balance Sheets and totaled $243.5 million and $202.3 million at December 31, 2015 and December 31, 2014, respectively.
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, fair value of assets and liabilities, and cash flows. The Company also enters into derivatives with customers to facilitate their risk management activities.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
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, net of tax, recorded in accumulated other comprehensive income within stockholder's equity in the accompanying Consolidated Balance Sheets. Amounts are reclassified from accumulated other comprehensive income 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 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 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 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. See Note 15 to the Consolidated Financial Statements for further discussion.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to reverse or be realized. The effect of a change in tax rates
on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.
A valuation allowance will be established if the Company determines that it is more likely than not that a deferred tax asset will not be realized. This requires periodic analysis of the carrying amount of deferred tax assets and when the deferred tax assets will be realized in future periods. Consideration is given to all positive and negative evidence related to the realization of deferred tax assets. 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of inherently complex tax laws of the U.S. 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.
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 16 to the Consolidated Financial Statements for details on the Company's income taxes.
Asset Securitizations
The Company, through SC, transfers RIC into newly formed Trusts which then issue one or more classes of notes payable backed by the RIC. The Company’s continuing involvement with the credit facilities and Trusts are in the form of servicing loans held by the special purpose entities (SPEs) and, generally, through holding a residual interest in the SPE. These transactions are structured without recourse. The Trusts are considered VIEs under 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, and the associated RIC, borrowings under credit facilities and securitization notes payable remain on the Consolidated Balance Sheets. Securitizations involving Trusts in which the Company does not retain a residual interest or any other debt or equity interests are treated as sales of the associated retail installment contracts. While these Trusts are included in our consolidated financial statements, these Trusts are separate legal entities; thus, the finance receivables and other assets sold to these Trusts are legally owned by these Trusts, are available only to satisfy the notes payable related to the securitized retail installment contracts, and are not available to our creditors or our other subsidiaries.
See further discussion on the Company's securitizations in Note 8 to these Consolidated Financial Statements.
Stock-Based Compensation
The Company, through Santander, sponsors stock plans under which incentive and non-qualified stock options and non-vested stock may be granted periodically to certain employees. The Company recognizes compensation expense related to stock options and non-vested stock awards based upon the fair value of the awards on the date of the grant, adjusted for expected forfeitures, which is charged to earnings over the requisite service period (e.g., vesting period). Additionally, the Company estimates the number of awards for which it is probable that service will be rendered and adjusts compensation cost accordingly. Estimated forfeitures are subsequently adjusted to reflect actual forfeitures. Amounts in the Consolidated Statements of Operations associated with the Bank'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 and the portion relating to any remaining post business combination service is recognized as stock compensation expense over the remaining vesting period of the awards in the Company’s post-business combination financial statements. Refer to further discussion of stock-based compensation in Note 17 to these Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
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 contingent liability. 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.
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.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)
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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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 this update supersedes the current lease accounting guidance for both the lessees and lessors under ASC 840, Leases. The new guidance requires lessees to evaluate whether 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 asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to today’s guidance for operating leases. The new guidance will require lessors to account for leases using an approach that is substantially similar to the existing guidance for sales-type, direct financing leases and operating leases. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2018, with earlier adoption permitted. Adoption of the amendment must be applied on a modified retrospective approach. The Company is in the process of evaluating the impacts of the adoption of this ASU.
In March 2016, the FASB issued ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships. The new guidance clarifies that a change in the counterparties to a derivative contract, i.e., a novation, in and of itself, does not require the de-designation of a hedging relationship. An entity will, however, still need to evaluate whether it is probable that the counterparty will perform under the contract as part of its ongoing effectiveness assessment for hedge accounting. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2016, with earlier adoption permitted. Adoption of the new guidance can be applied on a modified retrospective or prospective basis. The Company is in the process of evaluating the impacts of the adoption of this ASU.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)
Additionally, in March 2016, the FASB issued ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323). 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 the use of the equity method of accounting. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2016, with earlier adoption permitted. Adoption of the new guidance can be applied only a prospective basis for investments those qualify for the equity method of accounting after the effective date. The Company is in the process of evaluating the impacts of the adoption of this ASU.
In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718). The new guidance simplifies certain aspects related to income taxes, statement of cash flows, and forfeitures when accounting 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.
NOTE 3. BUSINESS COMBINATIONS
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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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. BUSINESS COMBINATIONS (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 | 16,399 | |||
| Borrowings and other debt obligations | (24,497,607 | ) | ||
| Accounts payable and accrued liabilities | (520,568 | ) | ||
| Total identifiable net assets | 3,079,745 | |||
| Goodwill | $ | 5,467,582 | ||
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. BUSINESS COMBINATIONS (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. | ||||
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. | |||||
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 | 2,291,003 | |||
| Total pre-tax gain | $ | 2,428,539 | ||
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. BUSINESS COMBINATIONS (continued)
Proforma Financial Information
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 | |||||||
| (As Restated) | ||||||||
Total Revenue, Net of Total Interest Expense (a) | $ | 5,684,942 | $ | 8,402,844 | ||||
| Net Income including Noncontrolling Interest | 1,111,696 | 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. INVESTMENT SECURITIES
Investments Available-for-sale
Investment Securities Summary - Available-for-sale
The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of securities available-for-sale at the dates indicated:
| 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 | ||||||
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.
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.
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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 and 2014, the Company had investment securities available-for-sale with an estimated fair value of $3.5 billion and $3.5 billion, respectively, pledged as collateral, which was comprised of the following: $2.9 billion and $2.6 billion, respectively, were pledged to secure public fund deposits; $117.6 million and $301.6 million, respectively, were pledged at various independent parties ("Brokers") to secure repurchase agreements, support hedging relationships, and for recourse on loan sales; and $395.8 million and $560.6 million, respectively, were pledged to secure the Company's customer overnight sweep product.
At December 31, 2015 and 2014, the Company had $65.1 million and $66.9 million, respectively, of accrued interest related to investment securities which is included in the Accrued interest receivable line of the Company's Consolidated Balance Sheet.
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 debt securities available-for-sale at December 31, 2015 are 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 | ||||||||||||
(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%.
Actual maturities may differ from contractual maturities when there is a right to call or prepay obligations with or without call or prepayment penalties.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. INVESTMENT SECURITIES (continued)
Gross Unrealized Loss and Fair Value of Securities Available-for-Sale
The following tables present the aggregate amount of unrealized losses as of December 31, 2015 and 2014 on securities in the Company’s available-for-sale investment portfolio 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, 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 | ) | ||||||||
164
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. 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 scores and weighted average loan-to-value ("LTV") ratio, rating or scoring, credit ratings and market spreads, as applicable.
The Company assesses and recognizes OTTI in accordance with applicable accounting standards. Under these standards, if the Company determines that impairment on its debt securities exists and it has made the decision to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, it recognizes the entire portion of the unrealized loss in earnings. If the Company has not made a decision to sell the security and it does not expect that it will be required to sell the security prior to the recovery of the amortized cost basis but the Company has determined that OTTI exists, it recognizes the credit-related portion of the decline in value of the security in earnings.
During the second quarter of 2015, the Company began implementing a strategy 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 or 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 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.
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 individual securities at December 31, 2015) are temporary in nature since (1) they are not related to the underlying credit quality of the issuers, (2) the entire contractual principal and interest due on these securities is currently expected to be recoverable, (3) the Company does not intend to sell these investments at a loss and (4) it is more likely than not that the Company will not be required to sell the investments before recovery of the amortized cost basis, which for the Company's debt securities, may be at maturity. Accordingly, the Company has concluded that the impairment on these securities is not other-than-temporary.
Gains (Losses) and Proceeds on Sales of Securities
Proceeds from sales of investment securities and the realized gross gains and losses from those sales are as follows:
| 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 | ||||||
| Gross realized gains | $ | 23,786 | $ | 28,473 | $ | 115,540 | ||||||
| Gross realized losses | (5,692 | ) | (1,239 | ) | (42,456 | ) | ||||||
| OTTI | (1,092 | ) | — | (63,630 | ) | |||||||
| Net realized gains | $ | 17,002 | $ | 27,234 | $ | 9,454 | ||||||
The Company uses the specific identification method to determine the cost of the securities sold and the gain or loss recognized.
165
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. INVESTMENT SECURITIES (continued)
The Company recognized $17.0 million, $27.2 million, and $9.5 million for the years ended December 31, 2015, 2014 and 2013, respectively, in gains on sale of investment securities 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 of the sale 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.
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.
Trading Securities
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 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 only to FHLBs or to another member institution. Accordingly, these stocks are carried at cost. During the year ended December 31, 2015, the Company purchased $501.5 million of FHLB stock at par, and redeemed $325.6 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. Other investments also includes $26.4 million of Low Income Housing Tax Credit ("LIHTC") investments as of December 31, 2015.
The Company evaluates these investments for impairment based on the ultimate recoverability of the carrying value, rather than by recognizing temporary declines in value.
166
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Overall
The Company's loans are reported at their outstanding principal balances net of any unearned income, cumulative charge-offs, unamortized deferred fees and costs on originated loans and unamortized premiums or discounts on purchased loans. The Company maintains an ACL to provide for losses inherent in its portfolios. Certain loans are pledged as collateral for borrowings, securitizations, or special purpose entities ("SPEs"). These loans totaled $59.4 billion at December 31, 2015 and $52.5 billion at December 31, 2014.
Loans that the Company intends to sell are classified as LHFS. The LHFS portfolio balance at December 31, 2015 was $3.2 billion, compared to $260.3 million at December 31, 2014. LHFS in the residential mortgage portfolio are reported at fair value. All other LHFS are accounted for at the lower of cost or fair value. For a discussion on the valuation of LHFS at fair value, see Note 19 to the Consolidated Financial Statements. During the third quarter of 2015, the Company determined that it no longer intended to hold certain personal lending assets at SC for investment. The Company adjusted the credit loss allowance associated with SC's personal loan portfolio to value the portfolio at the lower of cost or market, and the adjusted credit loss allowance was released through the provision for credit losses; reflected as a charge-off against the credit loss allowance. Future loan originations and purchases under SC’s personal lending platform will also be classified as held for sale. As of December 31, 2015, the value of the held for sale personal unsecured loan portfolio was $2.0 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 the contractual interest rate and the principal amount outstanding, except for those loans classified as non-accrual. At December 31, 2015 and December 31, 2014, accrued interest receivable on the Company's loans was $531.2 million and $492.7 million, respectively.
167
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Loan and Lease Portfolio Composition
The following table presents the composition of the gross loans held for investment by type of loan and by fixed and variable rates at the dates indicated:
| December 31, 2015 | December 31, 2014 | ||||||||||||
| Amount | Percent | Amount | Percent | ||||||||||
| (As Restated) | |||||||||||||
| (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 | 19,785,446 | 24.9 | % | 17,092,312 | 22.5 | % | |||||||
| Multifamily loans | 9,438,463 | 11.9 | % | 8,705,890 | 11.5 | % | |||||||
Other commercial(2) | 2,676,506 | 3.4 | % | 2,084,232 | 2.7 | % | |||||||
| Total commercial loans held for investment | 40,623,332 | 51.2 | % | 36,621,667 | 48.2 | % | |||||||
| Consumer loans secured by real estate: | |||||||||||||
| Residential mortgages | 6,230,995 | 7.8 | % | 6,773,575 | 8.9 | % | |||||||
| Home equity loans and lines of credit | 6,146,913 | 7.7 | % | 6,206,980 | 8.2 | % | |||||||
| Total consumer loans secured by real estate | 12,377,908 | 15.5 | % | 12,980,555 | 17.1 | % | |||||||
| Consumer loans not secured by real estate: | |||||||||||||
| Retail installment contracts and auto loans | 24,763,523 | 31.2 | % | 22,421,793 | 29.5 | % | |||||||
| Personal unsecured loans | 685,467 | 0.9 | % | 2,696,820 | 3.5 | % | |||||||
Other consumer(3) | 1,032,580 | 1.2 | % | 1,303,279 | 1.7 | % | |||||||
| Total consumer loans | 38,859,478 | 48.8 | % | 39,402,447 | 51.8 | % | |||||||
Total loans held for investment(1) | $ | 79,482,810 | 100.0 | % | $ | 76,024,114 | 100.0 | % | |||||
| Total loans held for investment: | |||||||||||||
| Fixed rate | $ | 46,833,363 | 58.9 | % | $ | 45,416,960 | 59.7 | % | |||||
| Variable rate | 32,649,447 | 41.1 | % | 30,607,154 | 40.3 | % | |||||||
Total loans held for investment(1) | $ | 79,482,810 | 100.0 | % | $ | 76,024,114 | 100.0 | % | |||||
(1)Total loans held for investment 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 loan balances of $131.2 million as of December 31, 2015 and a net decrease in loan balances of $1.5 billion as of December 31, 2014, respectively.
(2)Other commercial primarily includes CEVF leveraged leases and loans.
(3)Other consumer primarily includes recreational vehicles and marine loans.
Portfolio segments and classes
GAAP requires that entities disclose information about the credit quality of their financing receivables at disaggregated levels, specifically defined as “portfolio segments” and “classes,” based on management’s systematic methodology for determining the ACL. The Company utilizes an alternate categorization, compared to the financial statement categorization of loans, to model and calculate the ACL and track the credit quality, delinquency and impairment status of the underlying loan populations. In disaggregating its financing receivables portfolio, the Company’s methodology begins with the commercial and consumer segments.
168
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
The commercial segmentation reflects line of business distinctions. The three commercial real estate lines of business distinctions include “Corporate banking,” which includes commercial and industrial owner-occupied real estate, “Middle market real estate,” which represents the portfolio of specialized lending for investment real estate, including financing for continuing care retirement communities and “Santander real estate capital”, which is the commercial real estate portfolio of the specialized lending group. "Commercial and industrial" includes non-real estate-related commercial and industrial loans. "Multifamily" represents loans for multifamily residential housing units. “Other commercial” primarily represents the CEVF business.
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 | $ | 3,218,151 | ||||
| Middle Market Real Estate | 4,223,359 | 3,743,100 | ||||||
| Santander Real Estate Capital | 1,550,469 | 1,777,982 | ||||||
| Total commercial real estate | 8,722,917 | 8,739,233 | ||||||
Commercial and industrial (3) | 19,785,446 | 17,092,312 | ||||||
| Multifamily | 9,438,463 | 8,705,890 | ||||||
| Other commercial | 2,676,506 | 2,084,232 | ||||||
| Total commercial loans held for investment | $ | 40,623,332 | $ | 36,621,667 | ||||
| (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 are substantially the same as its financial statement categorization of loans for the consumer loan populations. “Residential mortgages” includes mortgages on residential property including single family and 1-4 family units. "Home equity loans and lines of credit” include all organic home equity contracts and purchased home equity portfolios. "RIC and auto loans" includes the Company's direct automobile loan portfolios, but excludes RV and marine retail installment contracts. "Personal unsecured loans" includes personal revolving loans and credit cards. “Other consumer” includes an acquired portfolio of marine and RV contracts as well as indirect auto loans.
Consumer Portfolio Segment(2) | ||||||||
Major Loan Classifications(1) | December 31, 2015 | December 31, 2014 | ||||||
| (As Restated) | ||||||||
| (in thousands) | ||||||||
| Consumer loans secured by real estate: | ||||||||
Residential mortgages(3) | $ | 6,230,995 | $ | 6,773,575 | ||||
| Home equity loans and lines of credit | 6,146,913 | 6,206,980 | ||||||
| Total consumer loans secured by real estate | 12,377,908 | 12,980,555 | ||||||
| Consumer loans not secured by real estate: | ||||||||
Retail installment contracts and auto loans(4) | 24,763,523 | 22,421,793 | ||||||
Personal unsecured loans(5) | 685,467 | 2,696,820 | ||||||
| Other consumer | 1,032,580 | 1,303,279 | ||||||
| Total consumer loans held for investment | $ | 38,859,478 | $ | 39,402,447 | ||||
| (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. |
169
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
ACL Rollforward by Portfolio Segment
The activity in the ACL by portfolio segment for the years ended December 31, 2015, 2014, and 2013 was as follows:
| Year Ended December 31, 2015 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 386,837 | $ | 1,330,782 | $ | 33,024 | $ | 1,750,643 | |||||||
| Provision for loan and lease losses | 150,859 | 3,937,980 | 12,304 | 4,101,143 | |||||||||||
Other(1) | — | (27,117 | ) | — | (27,117 | ) | |||||||||
| Charge-offs | (165,546 | ) | (4,543,646 | ) | — | (4,709,192 | ) | ||||||||
| Recoveries | 61,364 | 2,026,918 | — | 2,088,282 | |||||||||||
| Charge-offs, net of recoveries | (104,182 | ) | (2,516,728 | ) | — | (2,620,910 | ) | ||||||||
| Allowance for loan and lease losses, end of period | $ | 433,514 | $ | 2,724,917 | $ | 45,328 | $ | 3,203,759 | |||||||
| 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 | $ | 580,911 | $ | 2,724,917 | $ | 45,328 | $ | 3,351,156 | |||||||
Ending balance, individually evaluated for impairment(2) | $ | 51,743 | $ | 847,672 | $ | — | $ | 899,415 | |||||||
| Ending balance, collectively evaluated for impairment | 381,771 | 1,877,245 | 45,328 | 2,304,344 | |||||||||||
| Financing receivables: | |||||||||||||||
| Ending balance | $ | 40,709,731 | $ | 41,964,841 | $ | — | $ | 82,674,572 | |||||||
| Ending balance, evaluated under the fair value option or lower of cost or fair value | 86,399 | 3,529,120 | — | 3,615,519 | |||||||||||
Ending balance, individually evaluated for impairment(2) | 403,728 | 4,115,277 | — | 4,519,005 | |||||||||||
| Ending balance, collectively evaluated for impairment | 40,219,604 | 34,320,444 | — | 74,540,048 | |||||||||||
(2) Consists of loans in TDR status
170
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
| Year Ended December 31, 2014 | |||||||||||||||
| (As Restated) | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 443,074 | $ | 363,647 | $ | 27,616 | $ | 834,337 | |||||||
| Provision for loan and lease losses | 13,088 | 2,558,317 | 5,408 | 2,576,813 | |||||||||||
Other(1) | — | (61,220 | ) | — | (61,220 | ) | |||||||||
| Charge-offs | (109,704 | ) | (2,697,290 | ) | — | (2,806,994 | ) | ||||||||
| Recoveries | 40,379 | 1,167,328 | — | 1,207,707 | |||||||||||
| Charge-offs, net of recoveries | (69,325 | ) | (1,529,962 | ) | — | (1,599,287 | ) | ||||||||
| Allowance for loan and lease losses, end of period | $ | 386,837 | $ | 1,330,782 | $ | 33,024 | $ | 1,750,643 | |||||||
| Reserve for unfunded lending commitments, beginning of period | $ | 220,000 | $ | — | $ | — | $ | 220,000 | |||||||
| Provision for unfunded lending commitments | (82,000 | ) | — | — | (82,000 | ) | |||||||||
| Loss on unfunded lending commitments | (5,359 | ) | — | — | (5,359 | ) | |||||||||
| Reserve for unfunded lending commitments, end of period | 132,641 | — | — | 132,641 | |||||||||||
| Total allowance for credit losses, end of period | $ | 519,478 | $ | 1,330,782 | $ | 33,024 | $ | 1,883,284 | |||||||
Ending balance, individually evaluated for impairment(2) | $ | 80,701 | $ | 55,182 | $ | — | $ | 135,883 | |||||||
| Ending balance, collectively evaluated for impairment | 306,136 | 1,275,600 | 33,024 | 1,614,760 | |||||||||||
| Financing receivables: | |||||||||||||||
| Ending balance | $ | 36,640,761 | $ | 39,643,605 | $ | — | $ | 76,284,366 | |||||||
Ending balance, evaluated under the fair value option or lower of cost or fair value(1) | 19,094 | 1,087,068 | — | 1,106,162 | |||||||||||
Ending balance, individually evaluated for impairment(2) | 492,606 | 337,390 | — | 829,996 | |||||||||||
| Ending balance, collectively evaluated for impairment | 36,129,061 | 38,219,147 | — | 74,348,208 | |||||||||||
(1) | 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 year. |
| (2) | Consists of loans in TDR status |
171
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (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 LHFSS 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.
172
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Non-accrual loans by Class of Financing Receivable
The recorded investment in non-accrual loans disaggregated by class of financing receivables and other non-performing assets is summarized as follows:
| December 31, 2015 | December 31, 2014 | ||||||
| (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 | 85,928 | 54,658 | |||||
| Multifamily | 9,162 | 9,639 | |||||
| Other commercial | 2,982 | 4,136 | |||||
| Total commercial loans | 211,250 | 236,213 | |||||
| Consumer: | |||||||
| Residential mortgages | 173,780 | 231,316 | |||||
| Home equity loans and lines of credit | 127,171 | 142,026 | |||||
| Retail installment contracts and auto loans | 1,104,986 | 960,293 | |||||
| Personal unsecured loans | 895 | 14,007 | |||||
| Other consumer | 22,072 | 12,654 | |||||
| Total consumer loans | 1,428,904 | 1,360,296 | |||||
| Total non-accrual loans | 1,640,154 | 1,596,509 | |||||
| Other real estate owned ("OREO") | 38,959 | 65,051 | |||||
| Repossessed vehicles | 172,375 | 136,136 | |||||
| Foreclosed and other repossessed assets | 374 | 11,375 | |||||
| Total OREO and other repossessed assets | 211,708 | 212,562 | |||||
| Total non-performing assets | $ | 1,851,862 | $ | 1,809,071 | |||
173
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Age Analysis of Past Due Loans
For reporting of past due loans, a payment of 90% or more of the amount due will be considered to meet the contractual requirements.
For certain RICs, the Company considers 50% of a single payment due sufficient to qualify as a payment for past due classification purposes. The Company aggregates partial payments in determination of whether a full payment has been missed in computing past due status.
The age of recorded investments in past due loans and accruing loans greater than 90 days past due disaggregated by class of financing receivables is summarized as follows:
| As of December 31, 2015 | ||||||||||||||||||||||||
| 30-89 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables(1) | Recorded Investment > 90 Days and Accruing | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||
| Commercial real estate: | ||||||||||||||||||||||||
| Corporate banking | $ | 18,085 | $ | 30,000 | $ | 48,085 | $ | 2,901,004 | $ | 2,949,089 | $ | — | ||||||||||||
| Middle market commercial real estate | 575 | 21,063 | 21,638 | 4,201,721 | 4,223,359 | — | ||||||||||||||||||
| Santander real estate capital | — | 654 | 654 | 1,549,815 | 1,550,469 | — | ||||||||||||||||||
| Commercial and industrial | 31,488 | 44,101 | 75,589 | 19,796,256 | 19,871,845 | — | ||||||||||||||||||
| Multifamily | 2,951 | 4,537 | 7,488 | 9,430,975 | 9,438,463 | — | ||||||||||||||||||
| Other commercial | 3,968 | 2,079 | 6,047 | 2,670,459 | 2,676,506 | — | ||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||
| Residential mortgages | 140,323 | 142,510 | 282,833 | 6,184,922 | 6,467,755 | — | ||||||||||||||||||
| Home equity loans and lines of credit | 28,166 | 79,715 | 107,881 | 6,039,032 | 6,146,913 | — | ||||||||||||||||||
| Retail installment contracts and auto loans | 3,354,728 | 317,008 | 3,671,736 | 21,997,496 | 25,669,232 | — | ||||||||||||||||||
| Personal unsecured loans | 78,741 | 83,686 | 162,427 | 2,485,934 | 2,648,361 | 79,346 | ||||||||||||||||||
| Other consumer | 38,418 | 32,228 | 70,646 | 961,934 | 1,032,580 | — | ||||||||||||||||||
| Total | $ | 3,697,443 | $ | 757,581 | $ | 4,455,024 | $ | 78,219,548 | $ | 82,674,572 | $ | 79,346 | ||||||||||||
| (1) | Financing receivables include LHFS. |
174
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
| As of December 31, 2014 | ||||||||||||||||||||||||
| (As Restated) | ||||||||||||||||||||||||
| 30-89 Days Past Due | Greater Than 90 Days | Total Past Due | Current | Total Financing Receivables(1) | Recorded Investment > 90 Days and Accruing | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Commercial: | ||||||||||||||||||||||||
| Commercial real estate: | ||||||||||||||||||||||||
| Corporate banking | $ | 18,363 | $ | 37,708 | $ | 56,071 | $ | 3,162,080 | $ | 3,218,151 | $ | — | ||||||||||||
| Middle market commercial real estate | 3,179 | 33,604 | 36,783 | 3,706,317 | 3,743,100 | — | ||||||||||||||||||
| Santander real estate capital | 4,329 | 2,115 | 6,444 | 1,771,538 | 1,777,982 | — | ||||||||||||||||||
| Commercial and industrial | 27,071 | 23,469 | 50,540 | 17,060,866 | 17,111,406 | — | ||||||||||||||||||
| Multifamily | 13,810 | 5,512 | 19,322 | 8,686,568 | 8,705,890 | — | ||||||||||||||||||
| Other commercial | 5,054 | 1,245 | 6,299 | 2,077,933 | 2,084,232 | — | ||||||||||||||||||
| Consumer: | ||||||||||||||||||||||||
| Residential mortgages | 165,270 | 200,818 | 366,088 | 6,603,221 | 6,969,309 | — | ||||||||||||||||||
| Home equity loans and lines of credit | 36,074 | 86,749 | 122,823 | 6,084,157 | 6,206,980 | — | ||||||||||||||||||
| Retail installment contracts and auto loans | 3,046,943 | 259,534 | 3,306,477 | 19,160,740 | 22,467,217 | — | ||||||||||||||||||
| Personal unsecured loans | 92,905 | 111,917 | 204,822 | 2,491,998 | 2,696,820 | 93,152 | ||||||||||||||||||
| Other consumer | 47,696 | 30,653 | 78,349 | 1,224,930 | 1,303,279 | — | ||||||||||||||||||
| Total | $ | 3,460,694 | $ | 793,324 | $ | 4,254,018 | $ | 72,030,348 | $ | 76,284,366 | $ | 93,152 | ||||||||||||
| (1) | Financing receivables include LHFS. |
175
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Impaired Loans by Class of Financing Receivable
Impaired loans are generally defined as all TDRs plus commercial non-accrual loans in excess of $1.0 million.
Impaired loans disaggregated by class of financing receivables are summarized as follows:
| December 31, 2015 | ||||||||||||||||
Recorded Investment(1) | Unpaid Principal Balance | Related Specific Reserves | Average Recorded Investment | |||||||||||||
| (in thousands) | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial real estate: | ||||||||||||||||
| Corporate banking | $ | 40,843 | $ | 43,582 | $ | — | $ | 39,289 | ||||||||
| Middle market commercial real estate | 78,325 | 123,495 | — | 103,059 | ||||||||||||
| Santander real estate capital | 2,815 | 2,815 | — | 2,899 | ||||||||||||
| Commercial and industrial | 3,635 | 5,046 | — | 5,780 | ||||||||||||
| Multifamily | 9,467 | 10,488 | — | 15,980 | ||||||||||||
| Other commercial | 239 | 239 | — | 164 | ||||||||||||
| Consumer: | ||||||||||||||||
| Residential mortgages | 26,808 | 26,808 | — | 25,108 | ||||||||||||
| Home equity loans and lines of credit | 31,080 | 31,080 | — | 29,155 | ||||||||||||
| Retail installment contracts and auto loans | 87,138 | 110,575 | — | 937,131 | ||||||||||||
Personal unsecured loans(2) | 12,865 | 12,865 | — | 6,729 | ||||||||||||
| Other consumer | 2,210 | 2,210 | — | 3,905 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial real estate: | ||||||||||||||||
| Corporate banking | 31,376 | 32,650 | 6,413 | 45,663 | ||||||||||||
| Middle market commercial real estate | 38,046 | 43,745 | 5,624 | 49,072 | ||||||||||||
| Santander real estate capital | 654 | 782 | 98 | 2,266 | ||||||||||||
| Commercial and industrial | 113,451 | 142,308 | 38,416 | 88,818 | ||||||||||||
| Multifamily | 5,653 | 5,658 | 443 | 5,816 | ||||||||||||
| Other commercial | 3,216 | 4,465 | 749 | 2,574 | ||||||||||||
| Consumer: | ||||||||||||||||
| Residential mortgages | 172,265 | 200,176 | 25,034 | 151,539 | ||||||||||||
| Home equity loans and lines of credit | 71,847 | 86,355 | 3,757 | 65,990 | ||||||||||||
| Retail installment contracts and auto loans | 3,790,551 | 4,133,121 | 815,226 | 1,923,700 | ||||||||||||
| Personal unsecured loans | 1,839 | 2,226 | 430 | 9,158 | ||||||||||||
| Other consumer | 18,663 | 23,790 | 3,225 | 17,479 | ||||||||||||
| Total: | ||||||||||||||||
| Commercial | $ | 327,720 | $ | 415,273 | $ | 51,743 | $ | 361,380 | ||||||||
| Consumer | 4,215,266 | 4,629,206 | 847,672 | 3,169,894 | ||||||||||||
| Total | $ | 4,542,986 | $ | 5,044,479 | $ | 899,415 | $ | 3,531,274 | ||||||||
| (1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
| (2) | Includes LHFS. |
The Company recognized interest income, not including the impact of purchase accounting adjustments, of $439.6 million for the year ended December 31, 2015 on approximately $3.8 billion of TDRs that were returned to performing status as of December 31, 2015.
176
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
| December 31, 2014 | ||||||||||||||||
| (As Restated) | ||||||||||||||||
Recorded Investment(1) | Unpaid Principal Balance | Related Specific Reserves | Average Recorded Investment | |||||||||||||
| (in thousands) | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial real estate: | ||||||||||||||||
| Corporate banking | $ | 37,735 | $ | 40,453 | $ | — | $ | 40,610 | ||||||||
| Middle market commercial real estate | 127,792 | 172,766 | — | 114,465 | ||||||||||||
| Santander real estate capital | 2,982 | 2,982 | — | 1,867 | ||||||||||||
| Commercial and industrial | 7,925 | 17,732 | — | 10,528 | ||||||||||||
| Multifamily | 22,492 | 22,492 | — | 24,762 | ||||||||||||
| Other commercial | 88 | 88 | — | 44 | ||||||||||||
| Consumer: | ||||||||||||||||
| Residential mortgages | 23,408 | 23,408 | — | 57,776 | ||||||||||||
| Home equity loans and lines of credit | 27,230 | 27,230 | — | 29,152 | ||||||||||||
| Retail installment contracts and auto loans | 1,787,123 | 2,040,785 | — | 893,562 | ||||||||||||
| Personal unsecured loans | 592 | 592 | — | 296 | ||||||||||||
| Other consumer | 5,600 | 5,600 | — | 6,973 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Corporate banking | 59,950 | 66,328 | 25,322 | 56,856 | ||||||||||||
| Middle market commercial real estate | 60,098 | 66,024 | 17,004 | 89,472 | ||||||||||||
| Santander real estate capital | 3,878 | 6,356 | 364 | 6,630 | ||||||||||||
| Commercial and industrial | 64,184 | 72,488 | 35,849 | 82,204 | ||||||||||||
| Multifamily | 5,979 | 7,076 | 1,475 | 8,699 | ||||||||||||
| Other commercial | 1,932 | 1,995 | 687 | 1,055 | ||||||||||||
| Consumer: | ||||||||||||||||
| Residential mortgages | 130,813 | 156,669 | 23,628 | 339,071 | ||||||||||||
| Home equity loans and lines of credit | 60,132 | 69,374 | 5,002 | 57,516 | ||||||||||||
| Retail installment contracts and auto loans | 56,844 | 58,229 | 16,819 | 28,422 | ||||||||||||
| Personal unsecured loans | 16,476 | 16,815 | 6,508 | 9,506 | ||||||||||||
| Other consumer | 16,295 | 22,812 | 3,264 | 16,889 | ||||||||||||
| Total: | ||||||||||||||||
| Commercial | $ | 395,035 | $ | 476,780 | $ | 80,701 | $ | 437,192 | ||||||||
| Consumer | 2,124,513 | 2,421,514 | 55,221 | 1,439,163 | ||||||||||||
| Total | $ | 2,519,548 | $ | 2,898,294 | $ | 135,922 | $ | 1,876,355 | ||||||||
(1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
The Company recognized interest income of $115.5 million for the year ended December 31, 2014 on approximately $2.0 billion of TDRs that were returned to performing status as of December 31, 2014.
177
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Commercial Lending Asset Quality Indicators
Commercial credit quality disaggregated by class of financing receivables is summarized according to standard regulatory classifications as follows:
PASS. Asset is well-protected by the current net worth and paying capacity of the obligor or guarantors, if any, or by the fair value less costs to acquire and sell any underlying collateral in a timely manner.
SPECIAL MENTION. Asset has potential weaknesses that deserve management’s close attention, which, if left uncorrected, may result in deterioration of the repayment prospects for an asset at some future date. Special Mention assets are not adversely classified.
SUBSTANDARD. Asset is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. A well-defined weakness or weaknesses exist that jeopardize the liquidation of the debt. The loans are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.
DOUBTFUL. Exhibits the inherent weaknesses of a substandard credit. Additional characteristics exist that make collection or liquidation in full highly questionable and improbable, on the basis of currently known facts, conditions and values. Possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the credit, an estimated loss cannot yet be determined.
LOSS. Credit is considered uncollectible and of such little value that it does not warrant consideration as an active asset. There may be some recovery or salvage value, but there is doubt as to whether, how much or when the recovery would occur.
Commercial loan credit quality indicators by class of financing receivables are summarized as follows:
| Commercial Real Estate | ||||||||||||||||||||||||||||
| December 31, 2015 | Corporate banking | Middle market commercial real estate | Santander real estate capital | Commercial and industrial | Multifamily | Remaining commercial | Total(1) | |||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||
| Regulatory Rating: | ||||||||||||||||||||||||||||
| Pass | $ | 2,627,159 | $ | 4,055,622 | $ | 1,363,031 | $ | 18,878,763 | $ | 9,114,466 | $ | 2,631,935 | $ | 38,670,976 | ||||||||||||||
| Special Mention | 99,090 | 29,621 | 144,597 | 492,127 | 249,165 | 28,686 | 1,043,286 | |||||||||||||||||||||
| Substandard | 208,785 | 117,571 | 42,187 | 467,983 | 74,410 | 15,601 | 926,537 | |||||||||||||||||||||
| Doubtful | 14,055 | 20,545 | 654 | 32,972 | 422 | 284 | 68,932 | |||||||||||||||||||||
| Total commercial loans | $ | 2,949,089 | $ | 4,223,359 | $ | 1,550,469 | $ | 19,871,845 | $ | 9,438,463 | $ | 2,676,506 | $ | 40,709,731 | ||||||||||||||
| (1) | Financing receivables include LHFS. |
| Commercial Real Estate | ||||||||||||||||||||||||||||
| December 31, 2014 | Corporate banking | Middle market commercial real estate | Santander real estate capital | Commercial and industrial | Multifamily | Remaining commercial | Total(1) | |||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||
| Regulatory Rating: | ||||||||||||||||||||||||||||
| Pass | $ | 2,910,957 | $ | 3,472,448 | $ | 1,564,983 | $ | 16,495,319 | $ | 8,533,427 | $ | 2,064,947 | $ | 35,042,081 | ||||||||||||||
| Special Mention | 83,122 | 61,166 | 133,950 | 237,331 | 131,677 | 8,475 | 655,721 | |||||||||||||||||||||
| Substandard | 192,911 | 174,882 | 76,232 | 358,782 | 40,355 | 10,311 | 853,473 | |||||||||||||||||||||
| Doubtful | 31,161 | 34,604 | 2,817 | 19,974 | 431 | 499 | 89,486 | |||||||||||||||||||||
| Total commercial loans | $ | 3,218,151 | $ | 3,743,100 | $ | 1,777,982 | $ | 17,111,406 | $ | 8,705,890 | $ | 2,084,232 | $ | 36,640,761 | ||||||||||||||
| (1) | Financing receivables include LHFS. |
178
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Consumer Lending Asset Quality Indicators-Credit Score
In early 2015, the Company increased its origination volume of loans to borrowers with limited credit bureau attributes, such as less than 36 months of 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. Origination volume of these loans was $3.8 billion and $2.2 billion for the years ended December 31, 2015 and 2014, respectively. The Company's credit loss allowance forecasting models are not calibrated for this higher concentration of loans with limited bureau attributes and, accordingly, as of December 31, 2015, the Company recorded a qualitative adjustment of $157.8 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 credit loss allowance for additional charge offs expected on this portfolio, based on loss performance information available to date, which evidences higher losses in the first months after origination for these loans in comparison to loans with standard bureau attributes.
During the third quarter of 2015, the Company determined that it no longer intended to hold certain personal unsecured loans. As a result, the Company adjusted the credit loss allowance associated with these loans to the lower of cost or fair value. The remaining personal unsecured loan portfolio was held-for-investment at December 31, 2015. The allowance model for these loans does not consider credit scores.
Consumer financing receivables for which either an internal or external credit score is a core component of the allowance model are summarized by credit score as follows:
| December 31, 2015 | December 31, 2014 | |||||||||||||
| (As Restated) | ||||||||||||||
Credit Score Range(2) | Retail installment contracts and auto loans(3) | Percent | Retail installment contracts and auto loans(3) | Percent | ||||||||||
| (dollars in thousands) | ||||||||||||||
No FICOs(1) | $ | 4,932,840 | 19.2 | % | $ | 2,670,336 | 12.0 | % | ||||||
| <600 | $ | 13,436,588 | 52.3 | % | $ | 11,690,013 | 52.0 | % | ||||||
| 600-639 | 4,280,902 | 16.7 | % | 4,053,434 | 18.0 | % | ||||||||
| 640-679 | 3,018,902 | 11.8 | % | 4,053,434 | 18.0 | % | ||||||||
| Total | $ | 25,669,232 | 100.0 | % | $ | 22,467,217 | 100.0 | % | ||||||
(1) Consists primarily of loans for which credit scores are not considered in the ALLL model.
(2) Credit scores updated quarterly.
(3) RICs loans include $905.7 million and $45.4 million of LHFS at December 31, 2015 and December 31, 2014 that do not have an allowance.
(4) Defined as borrowers with greater than 36 months of credit history or four or more trade lines
(5) Defined as borrowers with less than 36 months of credit history or less than four trade lines.
179
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
| December 31, 2014 | |||||||
Credit Score Range(2) | Personal unsecured loans balance | Percent | |||||
| (dollars in thousands) | |||||||
| <600 | $ | 479,537 | 17.8 | % | |||
| 600-639 | 440,476 | 16.3 | % | ||||
| 640-679 | 1,135,068 | 42.1 | % | ||||
N/A(1) | 641,739 | 23.8 | % | ||||
| Total | $ | 2,696,820 | 100.0 | % | |||
Consumer Lending Asset Quality Indicators-FICO and Loan-to-Value (LTV)
For both residential and home equity loans, loss severity assumptions are incorporated in the loan and lease loss reserve models to estimate loan balances that will ultimately charge-off. These assumptions are based on recent loss experience within various current LTV bands within these portfolios. LTVs are refreshed quarterly by applying Federal Housing Finance Agency Home Price Index changes at a state-by-state level to the last known appraised value of the property to estimate the current LTV. The Company's allowance for loan and lease losses incorporates the refreshed LTV information to update the distribution of defaulted loans by LTV as well as the associated loss given default for each LTV band. Reappraisals on a recurring basis at the individual property level are not considered cost-effective or necessary; however, reappraisals are performed on certain higher risk accounts to support line management activities, default servicing decisions, or when other situations arise for which the Company believes the additional expense is warranted.
Residential mortgage and home equity financing receivables by LTV and FICO range are summarized as follows:
Residential Mortgages(1)(3) | ||||||||||||||||||||||||||||||||
| December 31, 2015 | N/A | LTV<=70% | 70.01-80% | 80.01-90% | 90.01-100% | 100.01-110% | LTV>110% | Grand Total | ||||||||||||||||||||||||
| FICO Score | (dollars in thousands) | |||||||||||||||||||||||||||||||
N/A(2) | $ | 461,839 | $ | 12,250 | $ | 2,769 | $ | — | $ | — | $ | — | $ | — | $ | 476,858 | ||||||||||||||||
| <600 | 128 | 226,185 | 69,698 | 30,491 | 18,279 | 8,441 | 9,602 | 362,824 | ||||||||||||||||||||||||
| 600-639 | 1 | 158,290 | 43,002 | 23,281 | 15,585 | 5,238 | 7,579 | 252,976 | ||||||||||||||||||||||||
| 640-679 | 230 | 252,727 | 81,552 | 35,001 | 29,125 | 9,101 | 12,034 | 419,770 | ||||||||||||||||||||||||
| 680-719 | 19 | 462,180 | 183,568 | 62,670 | 51,659 | 9,194 | 22,770 | 792,060 | ||||||||||||||||||||||||
| 720-759 | 339 | 681,473 | 341,934 | 72,729 | 55,461 | 11,024 | 20,982 | 1,183,942 | ||||||||||||||||||||||||
| >=760 | 84 | 2,049,268 | 717,671 | 112,721 | 57,385 | 21,580 | 20,616 | 2,979,325 | ||||||||||||||||||||||||
| Grand Total | $ | 462,640 | $ | 3,842,373 | $ | 1,440,194 | $ | 336,893 | $ | 227,494 | $ | 64,578 | $ | 93,583 | $ | 6,467,755 | ||||||||||||||||
(1) Includes LHFS.
(2) Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO score primarily represent the unpaid principal balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable.
(3) Allowance model considers LTV for financing receivables in first lien position for the Company and combined LTV (CLTV) for financing receivables in second lien position for the Company.
180
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Home Equity Loans and Lines of Credit(2) | ||||||||||||||||||||||||
| December 31, 2015 | N/A | LTV<=70% | 70.01-90% | 90.01-110% | LTV>110% | Grand Total | ||||||||||||||||||
| FICO Score | (dollars in thousands) | |||||||||||||||||||||||
N/A(1) | $ | 188,060 | $ | 390 | $ | 305 | $ | — | $ | — | $ | 188,755 | ||||||||||||
| <600 | 11,110 | 155,306 | 79,389 | 22,373 | 22,261 | 290,439 | ||||||||||||||||||
| 600-639 | 8,871 | 140,277 | 83,548 | 20,766 | 12,525 | 265,987 | ||||||||||||||||||
| 640-679 | 12,534 | 254,481 | 174,223 | 32,925 | 26,565 | 500,728 | ||||||||||||||||||
| 680-719 | 14,273 | 431,818 | 317,260 | 56,589 | 31,722 | 851,662 | ||||||||||||||||||
| 720-759 | 12,673 | 614,748 | 425,744 | 63,840 | 39,981 | 1,156,986 | ||||||||||||||||||
| >=760 | 34,579 | 1,644,168 | 1,007,561 | 135,571 | 70,477 | 2,892,356 | ||||||||||||||||||
| Grand Total | $ | 282,100 | $ | 3,241,188 | $ | 2,088,030 | $ | 332,064 | $ | 203,531 | $ | 6,146,913 | ||||||||||||
(1) Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO score primarily represent the unpaid principal balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable.
(2) Allowance model considers LTV for financing receivables in first lien position for the Company and combined LTV (CLTV) for financing receivables in second lien position for the Company.
Residential Mortgages(1)(3) | ||||||||||||||||||||||||||||||||
| December 31, 2014 | N/A | LTV<=70% | 70.01-80% | 80.01-90% | 90.01-100% | 100.01-110% | LTV>110% | Grand Total | ||||||||||||||||||||||||
| FICO Score | (dollars in thousands) | |||||||||||||||||||||||||||||||
N/A(2) | $ | 437,215 | $ | 14,801 | $ | 643 | $ | 8,676 | $ | 14,934 | $ | — | $ | — | $ | 476,269 | ||||||||||||||||
| <600 | 94 | 279,197 | 91,037 | 41,341 | 17,271 | 15,017 | 16,327 | 460,284 | ||||||||||||||||||||||||
| 600-639 | 200 | 154,557 | 50,238 | 25,861 | 13,218 | 6,337 | 13,446 | 263,857 | ||||||||||||||||||||||||
| 640-679 | — | 303,319 | 87,055 | 40,863 | 26,618 | 11,456 | 19,530 | 488,841 | ||||||||||||||||||||||||
| 680-719 | 25 | 528,979 | 161,023 | 66,898 | 40,456 | 11,503 | 34,473 | 843,357 | ||||||||||||||||||||||||
| 720-759 | 314 | 758,315 | 271,983 | 80,077 | 42,872 | 16,344 | 39,927 | 1,209,832 | ||||||||||||||||||||||||
| >=760 | 124 | 2,328,907 | 633,004 | 132,640 | 60,434 | 29,738 | 42,022 | 3,226,869 | ||||||||||||||||||||||||
| Grand Total | $ | 437,972 | $ | 4,368,075 | $ | 1,294,983 | $ | 396,356 | $ | 215,803 | $ | 90,395 | $ | 165,725 | $ | 6,969,309 | ||||||||||||||||
(1) Includes LHFS.
(2) Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO score primarily represent the unpaid principal balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable.
(3) Allowance model considers LTV for financing receivables in first lien position for the Company and combined LTV (CLTV) for financing receivables in second lien position for the Company.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Home Equity Loans and Lines of Credit(1) | ||||||||||||||||||||||||
| December 31, 2014 | N/A | LTV<=70% | 70.01-90% | 90.01-110% | LTV>110% | Grand Total | ||||||||||||||||||
| FICO Score | (dollars in thousands) | |||||||||||||||||||||||
N/A(1) | $ | 213,289 | $ | 2,265 | $ | 863 | $ | 336 | $ | 148 | $ | 216,901 | ||||||||||||
| <600 | 13,543 | 158,712 | 69,381 | 24,069 | 20,989 | 286,694 | ||||||||||||||||||
| 600-639 | 9,748 | 154,887 | 76,431 | 23,410 | 14,118 | 278,594 | ||||||||||||||||||
| 640-679 | 14,717 | 279,397 | 157,214 | 38,057 | 25,117 | 514,502 | ||||||||||||||||||
| 680-719 | 15,984 | 488,982 | 272,083 | 56,560 | 33,714 | 867,323 | ||||||||||||||||||
| 720-759 | 15,643 | 672,971 | 381,828 | 64,993 | 45,810 | 1,181,245 | ||||||||||||||||||
| >=760 | 36,962 | 1,736,574 | 885,774 | 125,773 | 76,638 | 2,861,721 | ||||||||||||||||||
| Grand Total | $ | 319,886 | $ | 3,493,788 | $ | 1,843,574 | $ | 333,198 | $ | 216,534 | $ | 6,206,980 | ||||||||||||
(1) Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO score primarily represent the unpaid principal balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable.
(2) Allowance model considers LTV for financing receivables in first lien position for the Company and combined LTV (CLTV) for financing receivables in second lien position for the Company.
TDR Loans
The following table summarizes the Company’s performing and non-performing TDRs at the dates indicated:
| December 31, 2015 | December 31, 2014 | ||||||
| (As Restated) | |||||||
| (in thousands) | |||||||
| Performing | $ | 3,807,751 | $ | 2,041,973 | |||
| Non-performing | 603,496 | 343,533 | |||||
| Total | $ | 4,411,247 | $ | 2,385,506 | |||
Commercial Loan TDRs
All of the Company’s commercial loan modifications are based on the circumstances of the individual customer, including specific customers' complete relationships with the Company. Loan terms are modified to meet each borrower’s specific circumstances at a point in time and may allow for modifications such as term extensions, interest rate reductions, etc. Modifications for commercial loan TDRs generally, although not always, result in bifurcation of the original loan into A and B notes. The A note is restructured to allow for upgraded risk rating and return to accrual status after a sustained period of payment performance has been achieved (typically six months for monthly payment schedules). The B note, if any, is structured as a deficiency note; the balance is charged off but the debt is usually not forgiven. Commercial TDRs are generally placed on non-accrual status until the Company believes repayment under the revised terms is reasonably assured and a sustained period of repayment performance has been achieved (typically six months for a monthly amortizing loan). As TDRs, they will be subject to analysis for specific reserves by either calculating the present value of expected future cash flows or, if collateral-dependent, calculating the fair value of the collateral less its estimated cost to sell. The TDR classification will remain on the loan until it is paid in full or liquidated.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Consumer Loan TDRs
The primary modification program for the Company’s residential mortgage and home equity portfolios is a proprietary program designed to keep customers in their homes and, when appropriate, prevent them from entering into foreclosure. The program is available to all customers facing a financial hardship regardless of their delinquency status. The main goal of the modification program is to review the customer’s entire financial condition to ensure that the proposed modified payment solution is affordable according to a specific debt-to-income ("DTI") ratio range. The main modification benefits of the program allow for term extensions, interest rate reductions, and/or deferment of principal. The Company reviews each customer on a case-by-case basis to determine which benefit or combination of benefits will be offered to achieve the target DTI range.
For the Company’s other consumer portfolios, including RIC and autos, 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 or principal forgiveness.
Consumer TDRs excluding RIC are generally placed on non-accrual status until the Company believes repayment under the revised terms is reasonably assured and a sustained period of repayment performance has been achieved (typically six months for a monthly amortizing loan). Any loan that has remained current for the six months immediately prior to modification will remain on accrual status after the modification is implemented. RIC resume interest accrual as soon as they become current and continue to accrue interest as long as they remain in performing status. The TDR classification will remain on the loan until it is paid in full or liquidated.
In addition to those identified as TDRs above, the guidance also requires loans discharged under Chapter 7 bankruptcy proceedings to be considered TDRs and collateral-dependent, regardless of delinquency status. TDRs that are collateral-dependent loans must be written down to fair market value and classified as non-accrual/non-performing for the remaining life of the loan. During the third quarter of 2015, the Company reassessed its TDR definition and has determined that certain modifications should not be reported as a TDR. An example of that is RIC that have received modifications under the Servicemembers Civil Relief Act (the "SCRA"). The inclusion of these modified loans was not material to prior periods.
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, 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 original effective interest rate or fair value of collateral, less costs to sell. The amount of the required allowance for loan and lease loss is equal to the difference between the loan’s impaired value and the recorded investment.
When a consumer TDR subsequently defaults, the Company generally measures impairment based on the fair value of the collateral, if applicable, less its estimated cost to sell.
Typically, commercial loans whose terms are modified in a TDR will have been identified as impaired prior to modification and accounted for generally using a present value of expected future cash flows methodology, unless the loan is considered collateral-dependent. Loans considered collateral-dependent are measured for impairment based on their fair values of collateral less its estimated cost to sell. Accordingly, upon TDR modification or if a TDR modification subsequently defaults, the allowance methodology remains unchanged.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Financial Impact and TDRs by Concession Type
The following tables detail the activity of TDRs for the years ended December 31, 2015 and December 31, 2014, respectively:
| Year Ended December 31, 2015 | |||||||||||||||||||
| Number of Contracts | Pre-TDR Recorded Investment(1) | Term Extension | Principal Forbearance | Other(4) | Post-TDR Recorded Investment(2) | ||||||||||||||
| (dollars in thousands) | |||||||||||||||||||
| Commercial: | |||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||
| Corporate Banking | 21 | $ | 40,931 | $ | (1,027 | ) | $ | (2,716 | ) | $ | (194 | ) | $ | 36,994 | |||||
| Middle market | 2 | 17,024 | — | — | (2,110 | ) | $ | 14,914 | |||||||||||
| Santander real estate capital | 1 | 4,977 | — | — | (7 | ) | $ | 4,970 | |||||||||||
| Commercial and industrial | 595 | 19,218 | — | — | — | $ | 19,218 | ||||||||||||
| Consumer: | |||||||||||||||||||
Residential mortgages(3) | 513 | 69,563 | 10 | (680 | ) | 265 | $ | 69,158 | |||||||||||
| Home equity loans and lines of credit | 470 | 31,848 | — | — | (256 | ) | $ | 31,592 | |||||||||||
| Retail installment contracts and auto loans | 254,356 | 3,911,124 | (4,957 | ) | — | (1,105 | ) | $ | 3,905,062 | ||||||||||
| Personal unsecured loans | 15,492 | 18,870 | — | (110 | ) | (96 | ) | $ | 18,664 | ||||||||||
| Other consumer | 55 | 3,218 | (1 | ) | — | (217 | ) | $ | 3,000 | ||||||||||
| Total | 271,505 | $ | 4,116,773 | $ | (5,975 | ) | $ | (3,506 | ) | $ | (3,720 | ) | $ | 4,103,572 | |||||
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.
(2) Post-TDR modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred.
(3) The post-TDR modification outstanding recorded investment amounts for residential mortgages exclude interest reserves.
(4) Other modifications may include modifications such as interest rate reductions, fee waivers, or capitalization of fees.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
| Year Ended December 31, 2014 | |||||||||||||||||||
| (As Restated) | |||||||||||||||||||
| Number of Contracts | Pre-TDR Recorded Investment(1) | Term Extension | Principal Forbearance | Other(4) | Post-TDR Recorded Investment(2) | ||||||||||||||
| (dollars in thousands) | |||||||||||||||||||
| Commercial: | |||||||||||||||||||
| Commercial real estate: | |||||||||||||||||||
| Corporate Banking | 30 | $ | 73,246 | $ | (355 | ) | $ | (529 | ) | $ | (670 | ) | $ | 71,692 | |||||
| Middle Market | 7 | 70,353 | — | — | (2,900 | ) | 67,453 | ||||||||||||
| Commercial and industrial | 72 | 2,169 | (3 | ) | — | — | 2,166 | ||||||||||||
| Other commercial | 5 | 2,503 | (33 | ) | 2 | — | 2,472 | ||||||||||||
| Consumer: | |||||||||||||||||||
Residential mortgages(3) | 266 | 47,643 | (18 | ) | (118 | ) | 987 | 48,494 | |||||||||||
| Home equity loans and lines of credit | 115 | 10,509 | — | — | — | 10,509 | |||||||||||||
| Retail installment contracts and auto loans | 142,900 | 1,976,877 | (7,504 | ) | — | (2,457 | ) | 1,966,916 | |||||||||||
| Personal unsecured loans | 13,999 | 15,810 | — | — | (127 | ) | 15,683 | ||||||||||||
| Other consumer | 13 | 863 | (1 | ) | — | 30 | 892 | ||||||||||||
| Total | 157,407 | $ | 2,199,973 | $ | (7,914 | ) | $ | (645 | ) | $ | (5,137 | ) | $ | 2,186,277 | |||||
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.
| (2) | Post-TDR modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred. |
| (3) | The post-TDR modification outstanding recorded investment amounts for residential mortgages exclude interest reserves. |
| (4) | Other modifications may include modifications such as interest rate reductions, fee waivers, or capitalization of fees. |
TDRs Which Have Subsequently Defaulted
A TDR is generally considered to have subsequently defaulted if, after modification, the loan becomes 90 days past due. For RIC, a TDR is considered to have subsequently defaulted after modification at the earlier of the date of repossession or 120 days past due. The following table details TDRs that became TDRs during the past twelve-month period and have subsequently defaulted during the years ended December 31, 2015 and December 31, 2014, respectively.
| Year Ended December 31, | |||||||||||||
| 2015 | 2014 | ||||||||||||
| (As Restated) | |||||||||||||
| Number of Contracts | Recorded Investment(1) | Number of Contracts | Recorded Investment(1) | ||||||||||
| (dollars in thousands) | |||||||||||||
| Commercial | |||||||||||||
| Commercial and industrial | 61 | $ | 1,961 | 1 | $ | 52 | |||||||
| Consumer: | |||||||||||||
| Residential mortgages | 22 | 2,840 | 28 | 4,214 | |||||||||
| Home equity loans and lines of credit | 15 | 1,789 | 9 | 785 | |||||||||
RIC and auto loans(2) | 51,202 | 792,721 | 6,398 | 87,019 | |||||||||
Unsecured loans(3) | 3,662 | 4,083 | 2,404 | 2,480 | |||||||||
| Other consumer | 2 | 244 | 1 | 27 | |||||||||
| Total | 54,964 | $ | 803,638 | 8,841 | $ | 94,577 | |||||||
| (1) | The recorded investment represents the period-end balance at December 31, 2015 and 2014. Does not include Chapter 7 bankruptcy TDRs. |
185
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. LEASED VEHICLES, NET
The Company has operating leases which are included in the Company's Consolidated Balance Sheet as Leased vehicles, net. The leased vehicle portfolio consists primarily of leases originated under a ten-year private label financing agreement signed by the Company with Fiat Chrysler Automobiles US LLC ("FCA"), formerly Chrysler Group LLC, to be a preferred lender (the "Chrysler Agreement"). Under the Chrysler Agreement, the Company has the first right to review and approve all prime Chrysler Capital consumer vehicle lease applications. SC provides servicing on all leases originated under this agreement.
In April 2015, the Company and SC decided not to renew this direct origination agreement which expired by its terms on May 9, 2015. Refer to further discussion of the impact of the expiration of this agreement in Note 19.
Leased vehicles, net consisted of the following as of December 31, 2015 and December 31, 2014:
| December 31, 2015 | December 31, 2014 | |||||||
| (in thousands) | ||||||||
| Leased vehicles | $ | 11,332,226 | $ | 8,314,356 | ||||
| Origination fees and other costs | 29,798 | 20,628 | ||||||
| Manufacturer subvention payments, net of accretion | (1,061,501 | ) | (839,150 | ) | ||||
| Leased vehicles, gross | 10,300,523 | 7,495,834 | ||||||
| Less: accumulated depreciation | (1,911,693 | ) | (857,719 | ) | ||||
| Leased vehicles, net | $ | 8,388,830 | $ | 6,638,115 | ||||
For the year ended December 31, 2015, the Company executed bulk sales of leases originated under the Chrysler Capital program ("Chrysler Capital"), the trade name used in providing services under the Chrysler Agreement, with depreciated net capitalized costs of $1.3 billion, respectively, and a net book value of $1.2 billion, to a third party. The bulk sales agreements included certain provisions under which SC agreed to share in residual losses for lease terminations with losses over a specific percentage threshold. SC retained servicing on the leases sold. Due to the accelerated depreciation permitted for tax purposes, these sales generated taxable gains of $784.4 million that SC deferred through a qualified like-kind exchange program. Taxable gains of $0.3 million that did not qualify for deferral were recognized upon expiration of the reinvestment period.
The following summarizes the future minimum rental payments due to the Company as lessor under operating leases as of December 31, 2015 (in thousands):
| 2016 | $ | 1,443,815 | ||
| 2017 | 938,157 | |||
| 2018 | 298,241 | |||
| 2019 | 8,289 | |||
| Thereafter | — | |||
| Total | $ | 2,688,502 | ||
Lease income and expense for the year ended December 31, 2015 were $1.5 billion and $1.1 billion, respectively, compared to $0.8 billion and $0.6 billion, respectively, for the year ended December 31, 2014. There was no material lease income or expense recorded for the year ended December 31, 2013. 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.
186
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. PREMISES AND EQUIPMENT
A summary of premises and equipment, less accumulated depreciation, follows:
| AT DECEMBER 31, | ||||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Land | $ | 46,835 | $ | 50,835 | ||||
| Office buildings | 193,313 | 206,601 | ||||||
| Furniture, fixtures, and equipment | 324,717 | 258,351 | ||||||
| Leasehold improvements | 457,266 | 413,218 | ||||||
| Computer software | 763,578 | 563,139 | ||||||
| Automobiles and other | 1,164 | 480 | ||||||
| Total premises and equipment | 1,786,873 | 1,492,624 | ||||||
| Less accumulated depreciation | (844,501 | ) | (637,953 | ) | ||||
| Total premises and equipment, net | $ | 942,372 | $ | 854,671 | ||||
Depreciation expense for premises and equipment, included in occupancy and equipment expenses in the Consolidated Statements of Operations, was $239.5 million, $199.5 million, and $154.8 million for the years ended December 31, 2015, 2014, and 2013, respectively.
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 $97.5 million of capitalized software for the year ended December 31, 2014.
During the fourth quarter of 2015, the Company sold one major property for a $13.3 million gain. Gain on sale of premises and equipment is included in the Consolidated Statement of Operations within "Miscellaneous income." In 2014, the Company sold two properties, which resulted in the recognition of a $22.0 million gain.
NOTE 8. VARIABLE INTEREST ENTITIES AND EQUITY METHOD INVESTMENTS
VIEs
The Company transfers RIC and leases into newly-formed Trusts that then issue one or more classes of notes payable backed by collateral. The Company’s continuing involvement with the Trusts is in the form of servicing assets held by the Trusts and, generally, through holding residual interests in the Trusts. These transactions are structured without recourse. The Trusts are considered VIEs under GAAP and, when the Company holds the residual interest, are consolidated because the Company has: (a) power over the significant activities of the entity as servicer of its financial assets and (b) residual interest and, in some cases of debt securities held by the Company, an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE. When the Company does not retain any debt or equity interests in its securitizations or subsequently sells such interests it records these transactions as sales of the associated RIC.
Revolving credit facilities generally also utilize Trusts that are considered VIEs. The collateral, borrowings under credit facilities and securitization notes payable of the Company's consolidated VIEs remain on the Company's Consolidated Balance Sheets. The Company recognizes finance charges and fee income on the RIC and leased vehicles and interest expense on the debt, and records a provision for loan and lease losses to cover probable inherent losses on the contracts. All of the Trusts are separate legal entities and the collateral and other assets held by these subsidiaries are owned by them and not available to other creditors.
The Company also uses a titling trust to originate and hold its leased vehicles and the associated leases, in order to facilitate the pledging of leases to financing facilities or the sale of leases to other parties without incurring the costs and administrative burden of retitling the lease vehicles. This titling trust is considered a VIE.
187
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. VARIABLE INTEREST ENTITIES AND EQUITY METHOD INVESTMENTS (continued)
On-balance sheet VIEs
The following table summarizes the assets and liabilities related to the above mentioned VIEs that are included in the Company's Consolidated Financial Statements as of the date indicated:
| December 31, 2015 | December 31, 2014 | |||||||
| (As Restated) | ||||||||
| (in thousands) | ||||||||
| Restricted cash | $ | 1,842,877 | $ | 1,626,257 | ||||
Loans(1) | 23,726,979 | 19,996,551 | ||||||
| Leased vehicles, net | 6,516,030 | 4,862,783 | ||||||
| Various other assets | 620,482 | 1,282,879 | ||||||
| Notes payable | 30,628,837 | 27,867,494 | ||||||
| Various other liabilities | 5,379 | — | ||||||
(1) Includes $1.5 billion and $18.7 million of RICs held for sale at December 31, 2015 and December 31, 2014, respectively.
The Company retains servicing responsibility for receivables transferred to the Trusts and receives a monthly servicing fee on the outstanding principal balance. Supplemental fees, such as late charges, for servicing the receivables are reflected in miscellaneous income. As of December 31, 2015 and December 31, 2014, the Company was servicing $27.3 billion and $23.2 billion, respectively, of RIC that have been transferred to consolidated Trusts. The remainder of the Company’s RIC remains unpledged.
Below is a summary of the cash flows received from the Trusts for the period indicated:
| Year Ended December 31, 2015 | Period from January 28, 2014 to December 31, 2014 | |||||||
| (in thousands) | ||||||||
| Receivables securitized | $ | 18,282,363 | $ | 12,509,094 | ||||
Net proceeds from new securitizations (1) | 15,232,692 | 10,452,530 | ||||||
Cash received for servicing fees (2) | 704,374 | 585,115 | ||||||
Cash received upon release from reserved and restricted cash accounts (2) | — | 225 | ||||||
Net distributions from Trusts (2) | 1,283,850 | 1,307,223 | ||||||
| Total cash received from securitization trusts | $ | 17,220,916 | $ | 12,345,093 | ||||
(1) Includes additional advances on existing securitizations.
(2) These amounts are not reflected in the accompanying consolidated statements of cash flows because the cash flows are between the VIEs and other entities included in the consolidation
Off-balance sheet VIEs
The Company has completed sales to VIEs that met sale accounting treatment in accordance with the applicable guidance. Due to the nature, purpose, and activity of these transactions, the Company determined for consolidation purposes that it 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. For such transactions, the transferred financial assets are removed from the Company's Consolidated Balance Sheets. In certain situations, the Company remains the servicer of the financial assets and receives servicing fees that represent adequate compensation. The Company also recognizes a gain or loss in the amount of the difference between the cash proceeds and carrying value of the assets sold.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. VARIABLE INTEREST ENTITIES AND EQUITY METHOD INVESTMENTS (continued)
During the year ended December 31, 2015, the Company sold $1.6 billion of gross RICs in an off-balance sheet securitization for a gain of approximately $60.0 million. For the period from January 28, 2014 to December 31, 2014, the Company sold $1.8 billion, respectively, of gross RICs in off-balance sheet securitizations for a gain of approximately $72.4 million.
As of December 31, 2015 and December 31, 2014, the Company was servicing $2.7 billion and $2.2 billion, respectively, of gross RICs that have been sold in the off-balance sheet Chrysler Capital securitizations. Other than repurchases of sold assets due to standard representations and warranties, the Company has no exposure to loss as a result of its involvement with these VIEs.
A summary of the cash flows received from the off-balance Trusts for the periods indicated is as follows:
| Year Ended December 31, | Period from January 28, 2014 to December 31, | ||||||
| 2015 | 2014 | ||||||
| (in thousands) | |||||||
| Receivables securitized | $ | 1,557,099 | $ | 1,802,461 | |||
| Net proceeds from new securitizations | $ | 1,578,320 | $ | 1,894,052 | |||
| Cash received for servicing fees | 23,848 | 16,141 | |||||
| Total cash received from securitization trusts | $ | 1,602,168 | $ | 1,910,193 | |||
During the year ended December 31, 2015, the Company settled a transaction to sell its residual interests in certain Trusts and certain retained bonds in those Trusts to an unrelated third party. The Company received cash proceeds of $661.7 million for the year ended December 31, 2015 related to the sale of these residual interests and retained bonds.
Each of these Trusts was previously determined to be a VIE. Prior to the sale of these residual interests, the associated Trusts were consolidated by the Company because the Company held a variable interest in each VIE and had determined that it was the primary beneficiary of the VIE. Although the Company will continue to service the loans in the associated Trusts and, therefore, will have the power to direct the activities that most significantly impact the economic performance of the Trusts, the Company concluded that it was no longer the primary beneficiary of the Trusts upon the sale of its residual interests. As a result, the Company deconsolidated the assets and liabilities of the corresponding Trusts upon their sale.
Upon settlement of these transactions as of December 31, 2015, the Company de-recognized $1.9 billion in assets and $1.2 billion in notes payable and other liabilities of the trust. For the year ended December 31, 2015, the Company received cash of $17.3 million for servicing fees from the related trusts that were de-consolidated.
In December 2015, the Company delivered notice of its intent to exercise the optional clean-up call on SDART 2011-3, a non-consolidated securitization Trust, as permitted by the applicable servicing agreement. Once the conditions of exercise of the clean-up call were met, the Company is considered to have regained effective control of the assets due to its unilateral ability to exercise the call and, therefore, recognized the assets, which had an unpaid principal balance of $95.6 million, and recognized a corresponding liability for the purchase price.
The Company also makes certain equity investments in various limited partnerships which are considered VIEs that invest in and lend to affordable housing designated real estate properties which qualify for federal tax credits under the LIHTC and NMTC programs. The Company acts only in a limited partner capacity in connection with these partnerships, so it has determined that it is not the primary beneficiary of these partnerships because it does not have the power to direct the activities of the partnership that most significantly impact the partnership's economic performance.
As of December 31, 2015, the Company's risk of loss is limited to its investment in the partnerships, which totaled $59.5 million, compared to $55.3 million as of December 31, 2014. The Company does not provide financial or other support to the partnerships that is not contractually required.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. VARIABLE INTEREST ENTITIES AND EQUITY METHOD INVESTMENTS (continued)
The aggregate of the assets and liabilities held by the LIHTC investments was approximately $330.5 million and $166.1 million, respectively, at December 31, 2014. Aggregate assets and aggregate liabilities are based on limited financial information available associated with certain of the partnerships. December 31, 2015 information is currently not available; however, management is not aware of any significant changes occurring in 2015.
Equity Method Investments
Investments in unconsolidated entities as of December 31, 2015 and 2014 include the following:
| Ownership Interest | December 31, 2015 | December 31, 2014 | |||||||
| (in thousands) | |||||||||
| Community reinvestment projects | 2.0 - 99.9% | $ | 33,103 | $ | 55,313 | ||||
| Tax credit investments | various | 197,113 | 113,462 | ||||||
| Other | various | 36,353 | 59,216 | ||||||
| Total | $ | 266,569 | $ | 227,991 | |||||
Equity method investments (loss)/income, net for the years ended December 31, 2015 , 2014 and 2013 was ($8.8 million), $7.8 million and $426.9 million, respectively. The Change in Control of SC resulted in the significant decline of income from equity method investments from 2013 to 2014 as SC was previously accounted for as an equity method investment.
Community reinvestment projects are investments in partnerships that are involved in construction and development of NMTC. The Company has a significant interest in the partnerships, but does not have a controlling interest in the entities.
In 2014, the Company committed to invest in two entities which own wind power generating projects in Texas. In 2014, the Company invested $92.5 million in Stephens Ranch Wind Energy Holdco, LLC. In 2015, the Company invested $88.3 million in First Wind Route 66 Portfolio. These tax credit investments are accounted for as equity method investments.
Other equity method investments primarily consist of small investments in capital trusts and other joint ventures in which the Company has an interest in the partnerships, but does not have a controlling interest. It also includes $5.1 million and $15.5 million of investments accounted for as cost method investments as of December 31, 2015 and 2014, respectively.
190
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. GOODWILL AND OTHER INTANGIBLES
Goodwill
The following table presents activity in the Company's goodwill by its reportable segments for the year ended December 31, 2015:
| Retail Banking | Auto Finance & Business Banking(2) | Real Estate and Commercial Banking | Global Corporate Banking(1) | SC | Total | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Goodwill at December 31, 2014 | $ | 1,815,729 | $ | 71,522 | $ | 1,406,048 | $ | 131,130 | $ | 5,467,582 | $ | 8,892,011 | ||||||||||||
| Disposals during the period | — | — | — | — | — | — | ||||||||||||||||||
| Additions during the period | — | — | — | — | — | — | ||||||||||||||||||
| Impairment during the period | — | — | — | — | (4,447,622 | ) | (4,447,622 | ) | ||||||||||||||||
| Re-allocations during the period | (265,408 | ) | 374,401 | (108,993 | ) | — | — | — | ||||||||||||||||
| Goodwill at December 31, 2015 | $ | 1,550,321 | $ | 445,923 | $ | 1,297,055 | $ | 131,130 | $ | 1,019,960 | $ | 4,444,389 | ||||||||||||
(1) The Global Corporate Banking ("GCB") was formerly designated as the Global Corporate Banking & Market & Large Corporate Banking ("GBM") segment and was renamed during the third quarter of 2015.
(2) The Auto Finance & Business Banking was formerly designated as the Auto Finance and Alliances segment and was renamed during the third quarter of 2015.
As more fully described in Note 24 to the Consolidated Financial Statements, during the third quarter of 2015, 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 and reporting units to provide greater focus on each of its core businesses:
| • | The small business banking business unit, formerly included in the Retail Banking reportable segment, was combined with the Auto Finance and Alliances business unit. |
| • | The commercial business banking business unit, formerly included in the Real Estate and Commercial Banking reportable segment, was combined with the Auto Finance and Alliances business unit. |
| • | A new reportable segment named Auto Finance & Business Banking was created from the small business banking unit, the commercial business banking unit, and the Auto Finance and Alliances unit. |
In connection with these organizational changes, the Company engaged a valuation consultant to assist with the re-allocation of goodwill across its reporting units based on the fair value of the lines of business affected by the re-organization.
Previously, the Company reorganized its management reporting in 2014 in order to improve its structure and focus by better aligning management teams and resources with the business goals of the Company and to provide enhanced customer service to its clients. As a result of the change in segment reporting, the Company re-evaluated its conclusions related to goodwill reporting units, including the following:
| • | The Investment Services business unit was combined into the Retail Banking business unit. The amount of goodwill reallocated was $126.7 million. |
| • | The CEVF line, formerly included in the Specialty and Government Banking business unit, was moved into the Auto |
Finance and Alliances business unit. There was no material goodwill associated with this change in reporting.
| • | The Specialty and Government Banking business unit was combined into the Real Estate and Commercial Banking business unit. The amount of goodwill reallocated was $242.9 million. |
191
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. GOODWILL AND OTHER INTANGIBLES (continued)
Also during 2014, the Company recorded a reduction of approximately $7.1 million of goodwill in connection with certain business disposal activities.
The Company conducted its annual goodwill impairment test as of October 1, 2015 using the generally accepted valuation methods. After conducting an analysis of the fair valuation of each reporting unit as of October 1, 2015, the Company determined that there was no impairment of goodwill identified as a result of the annual impairment analysis.
At December 31, 2015, given the decline in SC's stock price between the 2015 annual goodwill impairment analysis and year-end, the Company concluded that the fair value of our SC reporting unit was more likely than not less than its carrying value including goodwill, As a result, the Company conducted an interim goodwill impairment analysis as of December 31, 2015. Based on the Company's Step 1 analysis at December 31, 2015, the Company concluded that the carrying amount of the SC reporting unit goodwill exceeded its estimated fair value. As a result, the Company performed Step 2 of the goodwill impairment analysis to determine the implied estimated fair value of assets and liabilities of the reporting unit. The following information is presented on a provisional basis based upon all information available to the Company at the present time and is subject to change, and such changes could be material. The Company continues to review the underlying assumptions utilized to calculate the fair value of certain indefinite-lived and definite-lived intangibles. Based on the results of the Company's Step 2 analysis, the Company concluded that goodwill related to the SC reporting unit was impaired at December 31, 2015 and recorded impairment of $4.4 billion, which resulted in an after-tax non-cash impairment charge attributable to the Company of $1.6 billion. At the time the interim impairment test was complete, the share price of SC had declined from the interim testing date. The Company is currently assessing the SC reporting unit goodwill for potential impairment during the first quarter of 2016. 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 first quarter.
Other Intangible Assets
The following table details amounts related to the Company's finite-lived and indefinite-lived intangible assets for the dates indicated.
| December 31, 2015 | December 31, 2014 | ||||||||||||||
Net Carrying Amount | Accumulated Amortization | Net Carrying Amount | Accumulated Amortization | ||||||||||||
| (in thousands) | |||||||||||||||
| Intangibles subject to amortization: | |||||||||||||||
| Dealer networks | $ | 504,839 | $ | (75,161 | ) | $ | 544,054 | $ | (35,946 | ) | |||||
| Chrysler relationship | 110,000 | (28,750 | ) | 125,000 | (13,750 | ) | |||||||||
| Core deposit intangibles | 763 | (295,079 | ) | 7,779 | (288,063 | ) | |||||||||
| Other intangibles | 5,453 | (24,455 | ) | 8,655 | (21,253 | ) | |||||||||
| Total intangibles subject to amortization | 621,055 | (423,445 | ) | 685,488 | (359,012 | ) | |||||||||
| Intangibles not subject to amortization: | |||||||||||||||
| Trade name | 38,300 | — | 50,000 | — | |||||||||||
| Total Intangibles | $ | 659,355 | $ | (423,445 | ) | $ | 735,488 | $ | (359,012 | ) | |||||
Amortization expense on intangible assets for the years ended December 31, 2015, December 31, 2014, and December 31, 2013 was $76.1 million, $67.9 million, and $27.3 million, respectively.
As part of the Step 2 goodwill impairment analysis, the Company performed a valuation of the intangible assets allocated to the SC reporting unit as of December 31, 2015. The following information is presented on a provisional basis based upon all information available to the Company at the present time and is subject to change, and such changes could be material. The Company continues to review the underlying assumptions utilized to calculate the fair value of certain indefinite-lived and definite-lived intangibles. The Company's impairment analysis concluded that the estimated fair value of the indefinite-lived trade name was lower than its carrying value. As such, the Company recorded an impairment charge of $11.7 million relating to the trade name within amortization expense of intangible assets for the year ended December 31, 2015.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. GOODWILL AND OTHER INTANGIBLES (continued)
The estimated aggregate amortization expense related to intangibles for each of the five succeeding calendar years ending December 31 is:
| Year | Calendar Year Amount | |||
| (in thousands) | ||||
| 2016 | $ | 57,162 | ||
| 2017 | 55,055 | |||
| 2018 | 54,702 | |||
| 2019 | 54,501 | |||
| 2020 | 54,441 | |||
| Thereafter | 345,194 | |||
NOTE 10. OTHER ASSETS
The following is a detail of items that comprise other assets at December 31, 2015 and December 31, 2014:
| December 31, 2015 | December 31, 2014 | |||||||
| (in thousands) | ||||||||
| Income tax receivables | $ | 607,817 | $ | 936,365 | ||||
| Derivative assets at fair value | 355,169 | 366,061 | ||||||
| Other repossessed assets | 204,494 | 137,201 | ||||||
| MSRs, at fair value | 147,233 | 145,047 | ||||||
| Prepaid expenses | 162,879 | 159,250 | ||||||
| OREO | 38,959 | 65,051 | ||||||
| Miscellaneous assets and receivables | 290,055 | 1,020,875 | ||||||
| Total other assets | $ | 1,806,606 | $ | 2,829,850 | ||||
Refer to Note 16 to the Consolidated Financial Statements for further details about income tax receivables and Note 15 to the Consolidated Financial Statements for further details about derivative assets.
Other repossessed assets primarily consist of SC's vehicle inventory, which is obtained through repossession. OREO consists primarily of the Bank's foreclosed properties.
Miscellaneous assets and receivables includes, but is not limited to subvention receivables in connection with the Chrysler Agreement, investment and capital market receivables, and unapplied payments. The decrease in miscellaneous assets and receivables during 2015 was primarily the result of an unsettled sale of available for sale investment securities at the end of 2014 that did not settle until 2015.
Mortgage Servicing
Residential real estate
The Company maintains an MSR asset for sold residential real estate loans serviced for others. At December 31, 2015, 2014 and 2013, the balance of these loans serviced for others was $15.9 billion, $15.9 billion and $14.5 billion, respectively. The Company accounts for residential MSRs using the FVO. Changes in fair value are recorded through the Mortgage banking income, net line of the Consolidated Statements of Operations. The fair value of the MSRs at December 31, 2015, 2014 and 2013 was $147.2 million, $145.0 million and $141.8 million, respectively. See further discussion on the valuation of the MSRs in Note 19. As deemed appropriate, the Company economically hedges MSRs using interest rate swaps and forward contracts to purchase MBS. See further discussion on these derivative activities in Note 15 to these Consolidated Financial Statements.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. OTHER ASSETS (continued)
For the years ended December 31, 2015, 2014 and 2013, the Company recorded net changes in the fair value of MSRs due to valuation totaling $3.9 million, $(2.8) million and $36.5 million, respectively. The MSR asset fair value increase during 2015 was primarily the result of increased interest rates.
The following table presents a summary of year to date activity for the Company's residential MSRs that are included in the Consolidated Balance Sheet.
| Year Ended December 31, | |||||||||||
| 2015 | 2014 | 2013 | |||||||||
| (in thousands) | |||||||||||
| Fair value at beginning of period | $ | 145,047 | $ | 141,787 | $ | 92,512 | |||||
| Mortgage servicing assets recognized | 22,964 | 28,058 | 35,805 | ||||||||
| Principal reductions | (24,726 | ) | (21,981 | ) | (23,009 | ) | |||||
| Change in fair value due to valuation assumptions | 3,948 | (2,817 | ) | 36,479 | |||||||
| Fair value at end of period | $ | 147,233 | $ | 145,047 | $ | 141,787 | |||||
Fee income and gain/loss on sale of mortgage loans
Included in Mortgage banking income, net on the Consolidated Statements of Operations was mortgage servicing fee income of $45.2 million, $44.2 million and $45.4 million for the years ended December 31, 2015, 2014 and 2013, respectively. The Company had gains on sales of mortgage loans included in Mortgage banking income, net on the Consolidated Statements of Operations of $47.6 million, $144.9 million and $54.4 million for the years ended December 31, 2015, 2014 and 2013, respectively.
NOTE 11. DEPOSITS AND OTHER CUSTOMER ACCOUNTS
Deposits and other customer accounts are summarized as follows:
| AT DECEMBER 31, | ||||||||||||
| 2015 | 2014 | |||||||||||
| Balance | Percent of total deposits | Balance | Percent of total deposits | |||||||||
| (in thousands) | ||||||||||||
| Interest-bearing demand deposits | $ | 10,253,948 | 18.3 | % | 10,864,395 | 20.7 | % | |||||
| Non-interest-bearing demand deposits | 8,240,023 | 14.7 | % | 7,998,870 | 15.2 | % | ||||||
| Savings | 3,956,165 | 7.0 | % | 3,863,064 | 7.4 | % | ||||||
| Customer repurchase accounts | 896,736 | 1.6 | % | 988,790 | 1.9 | % | ||||||
| Money market | 24,254,357 | 43.2 | % | 21,447,579 | 40.9 | % | ||||||
| Certificates of deposit | 8,513,003 | 15.2 | % | 7,311,309 | 13.9 | % | ||||||
Total Deposits (1) | $ | 56,114,232 | 100 | % | 52,474,007 | 100 | % | |||||
(1) Includes foreign deposits of $495.9 million and $633.0 million at December 31, 2015 and 2014, respectively.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. DEPOSITS AND OTHER CUSTOMER ACCOUNTS (continued)
Interest expense on deposits and other customer accounts is summarized as follows:
| YEAR ENDED DECEMBER 31, | |||||||||
| 2015 | 2014 | 2013 | |||||||
| (in thousands) | |||||||||
| Interest-bearing demand deposits | $ | 53,266 | 36,242 | 11,697 | |||||
| Savings | 4,768 | 5,280 | 5,377 | ||||||
| Customer repurchase accounts | 1,979 | 1,890 | 3,584 | ||||||
| Money market | 127,215 | 89,043 | 78,198 | ||||||
| Certificates of deposit | 73,652 | 77,338 | 112,664 | ||||||
| Total Deposits | $ | 260,880 | 209,793 | 211,520 | |||||
The following table sets forth the maturity of the Company's CDs of $100,000 or more at December 31, 2015 as scheduled to mature contractually:
| (in thousands) | |||
| Three months or less | $ | 1,403,554 | |
| Over three through six months | 563,199 | ||
| Over six through twelve months | 250,823 | ||
| Over twelve months | 453,953 | ||
| Total | $ | 2,671,529 | |
Certificates of deposit included $1.5 billion and $993.4 million of CD in denominations of greater than $250,000 as of December 31, 2015 and 2014, respectively.
The following table sets forth the maturity of all of the Company's CDs at December 31, 2015 as scheduled to mature contractually:
| (in thousands) | |||
| 2016 | $ | 7,002,884 | |
| 2017 | 875,679 | ||
| 2018 | 378,881 | ||
| 2019 | 29,265 | ||
| 2020 | 223,074 | ||
| Thereafter | 3,220 | ||
| Total | $ | 8,513,003 | |
Deposits collateralized by investment securities, loans, and other financial instruments totaled $2.9 billion and $2.6 billion at December 31, 2015 and 2014, respectively.
Demand deposit overdrafts that have been reclassified as loan balances were $25.2 million and $51.3 million at December 31, 2015 and 2014, respectively.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. BORROWINGS
Total borrowings and other debt obligations at December 31, 2015 was $49.1 billion, compared to $39.7 billion at December 31, 2014. The Company's debt agreements impose certain limitations on dividends and other payments and transactions. The Company is currently in compliance with these limitations.
Periodically, as part of the Company's wholesale funding management, it opportunistically repurchases outstanding borrowings in the open market and subsequently retires the obligations. The Company did not repurchase any outstanding borrowings during the year ended December 31, 2015. During the year ended December 31, 2014, the Company repurchased $0.6 million of outstanding borrowings in the open market.
On January 12, 2015, the Bank completed the offer and sale of $750.0 million in aggregate principal amount of its 2.00% Senior Notes due 2018 and $250.0 million in aggregate principal amount of its Senior Floating Rate Notes due 2018. On April 17, 2015, the Company completed the public offer and sale of $1.0 billion in aggregate principal amount of 2.65% Senior Notes due 2020. On July 17, 2015, the Company completed the public offer and sale of $1.1 billion aggregate principal amount of 4.50% Senior Notes due 2025.
On February 22, 2016, the Company issued $1.5 billion of Senior Unsecured Floating Rate Notes to Santander. The notes have a floating rate of LIBOR plus 218 basis points with a maturity of August 22, 2017. The proceeds of the note will be used for general corporate purposes. The Company has the ability to call this note at par with no prepayment penalty.
The following table presents information regarding the parent holding company ("Holding Company") borrowings and other debt obligations at the dates indicated:
| December 31, 2015 | December 31, 2014 | ||||||||||||
| Balance | Effective Rate | Balance | Effective Rate | ||||||||||
| (dollars in thousands) | |||||||||||||
| 3.00% senior notes, due September 2015 | $ | — | — | % | $ | 598,788 | 3.28 | % | |||||
| 4.625% senior notes, due April 2016 | 475,723 | 4.85 | % | 474,718 | 4.85 | % | |||||||
| 3.45% senior notes, due August 2018 | 497,800 | 3.62 | % | 497,025 | 3.62 | % | |||||||
| 2.65% senior notes, due April 2020 | 993,151 | 2.82 | % | — | — | % | |||||||
| 4.50% senior notes, due July 2025 | 1,094,483 | 4.56 | % | — | — | % | |||||||
| Junior subordinated debentures - Capital Trust VI, due June 2036 | 69,775 | 7.91 | % | 69,751 | 7.91 | % | |||||||
| Common securities - Capital Trust VI | 10,000 | 7.91 | % | 10,000 | 7.91 | % | |||||||
| Junior subordinated debentures - Capital Trust IX, due July 2036 | 149,404 | 2.18 | % | 149,375 | 2.04 | % | |||||||
| Common securities - Capital Trust IX | 4,640 | 2.18 | % | 4,640 | 2.04 | % | |||||||
| Total holding company borrowings and other debt obligations | $ | 3,294,976 | 3.91 | % | $ | 1,804,297 | 3.89 | % | |||||
196
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. BORROWINGS (continued)
The following table presents information regarding the Bank's borrowings and other debt obligations at the dates indicated:
| December 31, 2015 | December 31, 2014 | ||||||||||||
| Balance | Effective Rate | Balance | Effective Rate | ||||||||||
| (dollars in thousands) | |||||||||||||
| 2.00% senior notes, due January 2018 | $ | 746,381 | 2.24 | % | $ | — | — | % | |||||
Senior notes, due January 2018(1) | 249,415 | 1.31 | % | — | — | % | |||||||
| 8.750% subordinated debentures, due May 2018 | 498,175 | 8.92 | % | 497,530 | 8.92 | % | |||||||
| FHLB advances, maturing through July 2019 | 13,885,000 | 1.40 | % | 9,455,000 | 2.06 | % | |||||||
| Subordinated term loan, due February 2019 | 130,899 | 6.15 | % | 139,180 | 6.00 | % | |||||||
REIT (2) preferred, due May 2020 | 154,930 | 13.66 | % | 153,417 | 13.64 | % | |||||||
| Subordinated term loan, due August 2022 | 30,344 | 7.89 | % | 31,428 | 7.77 | % | |||||||
| Total Bank borrowings and other debt obligations | $ | 15,695,144 | 1.85 | % | $ | 10,276,555 | 2.64 | % | |||||
(1) These notes will bear interest at a rate equal to three-month London Interbank Offered Rate ("LIBOR") plus 93 basis points per annum.
(2) Real estate investment trust ("REIT")
At December 31, 2015 and 2014, FHLB advances included $650 million of advances for which the FHLB of Pittsburgh has the ability to convert the advances from a fixed rate to a floating rate. If, and when, these advances are converted, the Bank has the ability to call these advances at par with no prepayment penalty every 3 months.
Revolving Credit Facilities
The following tables present information regarding SC's credit facilities as of December 31, 2015 and December 31, 2014:
| December 31, 2015 | ||||||||||||||
| Balance | Effective Rate | Assets Pledged | Restricted Cash Pledged | |||||||||||
| (dollars in thousands) | ||||||||||||||
Warehouse line, maturing on various dates(1) | $ | 808,135 | 1.29 | % | $ | 1,137,257 | $ | 24,942 | ||||||
| Warehouse line, due June 2016 | 378,301 | 1.48 | % | 535,737 | — | |||||||||
Warehouse line, due November 2016(2) | 175,000 | 1.90 | % | — | — | |||||||||
Warehouse line, due November 2016(2) | 250,000 | 1.90 | % | — | 2,501 | |||||||||
Warehouse line, due July 2017(3) | 682,720 | 1.35 | % | 809,185 | 20,852 | |||||||||
Warehouse line, due July 2017(4) | 2,247,443 | 1.41 | % | 3,412,321 | 48,589 | |||||||||
| Warehouse line, due September 2017 | 565,399 | 1.20 | % | 824,327 | 15,759 | |||||||||
Warehouse line, due December 2017(5) | 944,877 | 1.56 | % | 1,345,051 | 32,038 | |||||||||
Repurchase facility, due December 2016(6) | 850,904 | 2.07 | % | — | 34,166 | |||||||||
Line of credit with related party, due December 2016(7) | 500,000 | 2.65 | % | — | — | |||||||||
Line of credit with related party, due December 2016(7) | 1,000,000 | 2.61 | % | — | — | |||||||||
Line of credit with related party, due December 2018(7) | 800,000 | 2.84 | % | — | — | |||||||||
| Total SC revolving credit facilities | $ | 9,202,779 | 1.81 | % | $ | 8,063,878 | $ | 178,847 | ||||||
(1) As of December 31, 2015, half of the outstanding balance on this facility matured in March 2016 and half matured in March 2017. On March 29, 2016, the facility was amended to, among other changes, extend the maturity for half of the balance to March 2017 and half to March 2018.
(2) These lines are collateralized by residuals retained by SC
(3) This line is held exclusively for financing Chrysler loans.
(4) This line is held exclusively for financing Chrysler leases.
(5) In December 2015, the commitment on this warehouse was amended to extend the commitment termination date to December 2017.
(6) This repurchase facility is collateralized by securitization notes payable retained by SC. No portion of this facility is unsecured. This facility has rolling 30-day and 90 -day maturities.
(7) These lines are also collateralized by securitization notes payable and residuals retained by SC. As of December 31, 2015, $1.4 billion of the aggregate outstanding balances on these credit facilities was unsecured.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. BORROWINGS (continued)
| December 31, 2014 | ||||||||||||||
| Balance | Effective Rate | Assets Pledged | Restricted Cash Pledged | |||||||||||
| (dollars in thousands) | ||||||||||||||
Warehouse line, maturing on various dates(1) | $ | 397,452 | 1.26 | % | $ | 589,529 | $ | 20,661 | ||||||
Warehouse line, due March 2015(2) | 250,594 | 0.98 | % | — | — | |||||||||
| Warehouse line, due June 2015 | 243,736 | 1.17 | % | 344,822 | — | |||||||||
Warehouse line, due September 2015(3) | 199,980 | 1.96 | % | 351,755 | 13,169 | |||||||||
| Warehouse line, due December 2015 | 468,565 | 0.93 | % | 641,709 | 16,467 | |||||||||
Warehouse line, due June 2016(4) | 2,201,511 | 0.98 | % | 3,249,263 | 65,414 | |||||||||
| Warehouse line, due June 2016 | 1,051,777 | 1.06 | % | 1,481,135 | 28,316 | |||||||||
Warehouse line, due October 2016(3) | 240,487 | 2.02 | % | 299,195 | 17,143 | |||||||||
Warehouse line, due November 2016(5) | 175,000 | 1.71 | % | — | — | |||||||||
Warehouse line, due November 2016(5) | 250,000 | 1.71 | % | — | 2,500 | |||||||||
Repurchase facility, maturing on various dates(6) | 923,225 | 1.63 | % | — | 34,184 | |||||||||
Line of credit with related party, due December 2016(7) | 500,000 | 2.46 | % | 1,340 | — | |||||||||
Line of credit with related party, due December 2016(7) | 1,750,000 | 2.33 | % | — | — | |||||||||
Line of credit with related party, due December 2018(7) | 1,140,000 | 2.85 | % | 9,701 | — | |||||||||
| Total SC revolving credit facilities | $ | 9,792,327 | 1.68 | % | $ | 6,968,449 | $ | 197,854 | ||||||
(1) Half of the outstanding balance on this facility had maturity dates in March 2015 and half matures in March 2016.
(2) This line is collateralized by securitization notes payable retained by SC.
(3) These lines are held exclusively for personal consumer term loans.
(4) This line is held exclusively for Chrysler Capital retail loan and lease financing.
(5) These lines are collateralized by residuals retained by SC.
(6) This repurchase facility is collateralized by securitization notes payable retained by SC. No portion of this facility is unsecured. This facility has rolling 30-day and 90-day maturities.
(7) These lines are also collateralized by securitization notes payable and residuals retained by SC. As of December 31, 2014, $2.2 billion of the aggregate outstanding balances on these credit facilities was unsecured.
Secured Structured Financings
The following tables present information regarding SC's secured structured financings as of December 31, 2015 and December 31, 2014:
| December 31, 2015 | |||||||||||||||||
| Balance | Initial Note Amounts Issued | Initial Weighted Average Interest Rate Range | Collateral | Restricted Cash | |||||||||||||
| (dollars in thousands) | |||||||||||||||||
SC public securitizations, maturing on various dates(1) | $ | 12,679,987 | $ | 24,923,292 | 0.89% - 2.29% | $ | 16,256,067 | $ | 1,242,857 | ||||||||
SC privately issued amortizing notes, maturing on various dates(1) | 8,213,217 | 11,729,171 | 0.88% - 2.81% | 11,495,352 | 457,840 | ||||||||||||
| Total SC secured structured financings | $ | 20,893,204 | $ | 36,652,463 | 0.88% - 2.81% | $ | 27,751,419 | $ | 1,700,697 | ||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. BORROWINGS (continued)
| December 31, 2014 | |||||||||||||||||
| Balance | Initial Note Amounts Issued | Initial Weighted Average Interest Rate Range | Collateral | Restricted Cash | |||||||||||||
| (dollars in thousands) | |||||||||||||||||
SC public securitizations, maturing on various dates(1) | $ | 11,523,729 | $ | 26,682,930 | 0.89% - 2.80% | $ | 14,345,242 | $ | 1,184,047 | ||||||||
SC privately issued amortizing notes, maturing on various dates(1) | 6,282,474 | 8,499,111 | 1.05% - 1.85% | 9,114,997 | 281,038 | ||||||||||||
| Total SC secured structured financings | $ | 17,806,203 | $ | 35,182,041 | 0.89% - 2.80% | $ | 23,460,239 | $ | 1,465,085 | ||||||||
(1) SC has entered into various securitization transactions involving its retail automotive installment loans and leases. These transactions are accounted for as secured financings and therefore both the securitized RIC and the related securitization debt issued by SPEs, remain on the Consolidated Balance Sheet. The maturity of this debt is based on the timing of repayments from the securitized assets.
Most of the Company's secured structured financings are in the form of public, SEC-registered securitizations. The Company also executes private securitizations under Rule 144A of the Securities Act of 1933, as amended (the "Securities Act"), and periodically issues private term amortizing notes, which are structured similarly to securitizations but are acquired by banks and conduits. The Company's securitizations and private issuances are collateralized by vehicle retail installment contracts and loans or leases.
The following table sets forth the maturities of the Company’s consolidated borrowings and debt obligations at December 31, 2015:
| (in thousands) | |||
| 2016 | $ | 13,998,347 | |
| 2017 | 9,308,024 | ||
| 2018 | 8,013,391 | ||
| 2019 | 6,270,718 | ||
| 2020 | 5,403,368 | ||
| Thereafter | 6,092,255 | ||
| Total | $ | 49,086,103 | |
NOTE 13. STOCKHOLDER'S EQUITY
On February 21, 2014, the Company issued 7.0 million shares of common stock to Santander in exchange for cash in the amount of $1.75 billion. Also on February 21, 2014, the Company raised $750.0 million of capital by issuing 3.0 million shares of common stock to Santander in exchange for canceling debt of an equivalent amount.
On May 28, 2014, the Company issued 84,000 shares of common stock to Santander in exchange for cash in the amount of $21.0 million.
There were no shares issued during 2015.
Following these transactions and as of December 31, 2015, the Company had 530,391,043 shares of common stock outstanding.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS)
The following table presents the components of accumulated other comprehensive income/(loss), net of related tax, for the years ended December 31, 2015, 2014 and 2013, respectively.
| Total Other Comprehensive Income/(Loss) | Total Accumulated Other Comprehensive Income/(Loss) | ||||||||||||||||||||||
| For the Year Ended December 31, 2015 | December 31, 2014 | December 31, 2015 | |||||||||||||||||||||
| Pretax Activity | Tax Effect | Net Activity | Beginning Balance | Net Activity | Ending Balance | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Change in accumulated (losses)/gains on cash flow hedge derivative financial instruments | $ | (15,074 | ) | $ | 5,013 | $ | (10,061 | ) | |||||||||||||||
Reclassification adjustment for net gains/(losses) on cash flow hedge derivative financial instruments (1) | 11,595 | (3,856 | ) | 7,739 | |||||||||||||||||||
| Net unrealized (losses)/gains on cash flow hedge derivative financial instruments | (3,479 | ) | 1,157 | (2,322 | ) | $ | (14,260 | ) | $ | (2,322 | ) | $ | (16,582 | ) | |||||||||
| Change in unrealized (losses)/gains on investment securities available-for-sale | (53,390 | ) | 20,388 | (33,002 | ) | ||||||||||||||||||
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities (2) | (18,094 | ) | 6,910 | (11,184 | ) | ||||||||||||||||||
Reclassification adjustment for net losses/(gains) included in net income/(expense) on OTTI securities (3) | 1,092 | (417 | ) | 675 | |||||||||||||||||||
| Total reclassification adjustment for net (gains)/losses included in net income | (17,002 | ) | 6,493 | (10,509 | ) | ||||||||||||||||||
| Net unrealized (losses)/gains on investment securities available-for-sale | (70,392 | ) | 26,881 | (43,511 | ) | (52,515 | ) | (43,511 | ) | (96,026 | ) | ||||||||||||
Pension and post-retirement actuarial gain/(loss) (4) | 4,487 | (1,885 | ) | 2,602 | (29,635 | ) | 2,602 | (27,033 | ) | ||||||||||||||
| As of December 31, 2015 | $ | (69,384 | ) | $ | 26,153 | $ | (43,231 | ) | $ | (96,410 | ) | $ | (43,231 | ) | $ | (139,641 | ) | ||||||
(1) Net losses reclassified into Interest on borrowings and other debt obligations in the Consolidated Statement of Operations for settlements of interest rate swap contracts designated as cash flow hedges.
(2) Net gains reclassified into Net gain on sale of investment securities in the Consolidated Statement of Operations for the sale of available-for-sale securities.
(3) Unrealized losses previously recognized in accumulated other comprehensive income on securities for which OTTI was recognized during the period. See further discussion in Note 4 to the Consolidated Financial Statements.
(4) Included in the computation of net periodic pension costs.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS) (continued)
| Total Other Comprehensive Income/(Loss) | Total Accumulated Other Comprehensive Income/(Loss) | ||||||||||||||||||||||
| For the Year Ended December 31, 2014 | December 31, 2013 | December 31, 2014 | |||||||||||||||||||||
| Pretax Activity | Tax Effect | Net Activity | Beginning Balance | Net Activity | Ending Balance | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Change in accumulated gains/(losses) on cash flow hedge derivative financial instruments | $ | (13,788 | ) | $ | 5,038 | $ | (8,750 | ) | |||||||||||||||
Reclassification adjustment for net gains/(losses) on cash flow hedge derivative financial instruments (1) | 53,440 | (19,527 | ) | 33,913 | |||||||||||||||||||
| Net unrealized gains/(losses) on cash flow hedge derivative financial instruments | 39,652 | (14,489 | ) | 25,163 | $ | (39,423 | ) | $ | 25,163 | $ | (14,260 | ) | |||||||||||
| Change in unrealized gains/(losses) on investment securities available-for-sale | 268,050 | (104,563 | ) | 163,487 | |||||||||||||||||||
Reclassification adjustment for net gains included in net income/(expense) on non-OTTI securities(2) | (27,234 | ) | 10,624 | (16,610 | ) | ||||||||||||||||||
| Net unrealized gains/(losses) on investment securities available-for-sale | 240,816 | (93,939 | ) | 146,877 | (199,392 | ) | 146,877 | (52,515 | ) | ||||||||||||||
Pension and post-retirement actuarial gain/(loss)(3) | (23,799 | ) | 9,717 | (14,082 | ) | (15,553 | ) | (14,082 | ) | (29,635 | ) | ||||||||||||
| As of December 31, 2014 | $ | 256,669 | $ | (98,711 | ) | $ | 157,958 | $ | (254,368 | ) | $ | 157,958 | $ | (96,410 | ) | ||||||||
(1) Net losses reclassified into Interest on borrowings and other debt obligations in the Consolidated Statement of Operations for settlements of interest rate swap contracts designated as cash flow hedges.
(2) Net gains reclassified into Net gain on sale of investment securities in the Consolidated Statement of Operations for the sale of available-for-sale securities.
(3) Included in the computation of net periodic pension costs.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS) (continued)
| Total Other Comprehensive Income/(Loss) | Total Accumulated Other Comprehensive Income/(Loss) | ||||||||||||||||
| For the Year Ended December 31, 2013 | December 31, 2012 | December 31, 2013 | |||||||||||||||
| Pretax Activity | Tax Effect | Net Activity | Beginning Balance | Net Activity | Ending Balance | ||||||||||||
| (in thousands) | |||||||||||||||||
| Change in accumulated gains/(losses) on cash flow hedge derivative financial instruments | 2,041 | (655 | ) | 1,386 | |||||||||||||
Reclassification adjustment for net gains/(losses) on cash flow hedge derivative financial instruments (1) | 65,145 | (26,780 | ) | 38,365 | |||||||||||||
| Net unrealized gains/(losses) on cash flow hedge derivative financial instruments | 67,186 | (27,435 | ) | 39,751 | (79,174 | ) | 39,751 | (39,423 | ) | ||||||||
| Change in unrealized gains/(losses) on investment securities available-for-sale | (584,681 | ) | 230,787 | (353,894 | ) | ||||||||||||
Reclassification adjustment for net gains/(losses) included in net income on non-OTTI securities (2) | (73,084 | ) | 28,848 | (44,236 | ) | �� | |||||||||||
Reclassification adjustment for net gains/(losses) included in net income on OTTI securities (3) | 63,630 | (25,116 | ) | 38,514 | |||||||||||||
| Total reclassification adjustment for net gains/(losses) included in net income | (9,454 | ) | 3,732 | (5,722 | ) | ||||||||||||
| Net unrealized gains/(losses) on investment securities available-for-sale | (594,135 | ) | 234,519 | (359,616 | ) | 160,224 | (359,616 | ) | (199,392 | ) | |||||||
Amortization of defined benefit plans(4) | 18,566 | (7,403 | ) | 11,163 | (26,716 | ) | 11,163 | (15,553 | ) | ||||||||
| As of December 31, 2013 | (508,383 | ) | 199,681 | (308,702 | ) | 54,334 | (308,702 | ) | (254,368 | ) | |||||||
(1) Net losses reclassified into Interest on borrowings and other debt obligations in the Consolidated Statement of Operations for the settlements of interest rate swap contracts designated as cash flow hedges.
(2) Net gains reclassified into Net gain on sale of investment securities in the Consolidated Statement of Operations for the sale of available-for-sale securities.
(3) Unrealized losses previously recognized in accumulated other comprehensive income on securities for which OTTI was recognized during the period.
(4) Included in the computation of net periodic pension costs.
NOTE 15. DERIVATIVES
General
The Company uses derivative financial instruments primarily to help manage exposure to interest rate, foreign exchange, equity and credit risk, as well as to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. The Company also enters into derivatives with customers to facilitate their risk management activities. The Company uses derivative financial instruments as risk management tools and not for speculative trading purposes. The fair value of all derivative balances is recorded within Other assets and Other liabilities on the Consolidated Balance Sheet.
See Note 19 for discussion of the valuation methodology for derivative instruments.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. DERIVATIVES (continued)
Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying as specified in the contract. Derivative transactions are often measured in terms of notional amount, but this amount is generally not exchanged and is not recorded on the balance sheet. The notional amount is the basis to which the underlying is applied to determine required payments under the derivative contract. The underlying is a referenced interest rate (commonly Overnight Indexed Swap ("OIS") or LIBOR), security price, credit spread or other index. Derivative balances are presented on a gross basis taking into consideration the effects of legally enforceable master netting agreements.
The Company’s capital markets and mortgage banking activities are subject to price risk. The Company employs various tools to measure and manage price risk in its portfolios. In addition, the Board of Directors has established certain limits relative to positions and activities. The level of price risk exposure at any given time depends on the market environment and expectations of future price and market movements and will vary from period to period.
To qualify for hedge accounting, the Company was required to designate SC’s derivatives as accounting hedges on or after the Change in Control date. The Company designated certain of SC’s derivatives as accounting hedges effective April 1, 2014.
Credit Risk Contingent Features
The Company has entered into certain derivative contracts that require the posting of collateral to counterparties when these contracts are in a net liability position. The amount of collateral to be posted is based on the amount of the net liability and thresholds generally related to the Company's long-term senior unsecured credit ratings. In a limited number of instances, counterparties also have the right to terminate their ISDA master agreements if the Company's ratings fall below investment grade. As of December 31, 2015, derivatives in this category had a fair value of $37.5 million. The credit ratings of the Company and SHUSA are currently considered investment grade. The Company estimates a further 1- or 2- notch downgrade by either S&P or Moody's would require the Company to post up to an additional $0.2 million or $0.2 million of collateral, respectively, to comply with existing derivative agreements.
As of December 31, 2015 and 2014, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e. those containing collateral posting or termination provisions based on the Company's ratings) that were in a net liability position totaled $128.1 million and $133.2 million, respectively. The Company had $128.8 million and $127.6 million in cash and securities collateral posted to cover those positions as of December 31, 2015 and 2014, respectively.
Fair Value Hedges
The Company enters into cross-currency swaps to hedge its foreign currency exchange risk on certain Euro-denominated investments. The Company also entered into interest rate swaps to hedge the interest rate risk on certain fixed rate investments. These derivatives are designated as fair value hedges at inception. The Company includes all components of each derivative's gain or loss in the assessment of hedge effectiveness. The earnings impact of the ineffective portion of these hedges was not material for the years ended December 31, 2015 and 2014. The last of the hedges is scheduled to expire in June 2020.
Cash Flow Hedges
Management uses derivative instruments, which are designated as hedges, to mitigate the impact of interest rate movements on the fair value of certain liabilities, assets and on highly probable forecasted cash flows. These instruments primarily include interest rate swaps that have underlying interest rates based on key benchmark indices and forward sale or purchase commitments. The nature and volume of the derivative instruments used to manage interest rate risk depend on the level and type of assets and liabilities on the balance sheet and the risk management strategies for the current and anticipated interest rate environment.
Interest rate swaps are generally used to convert fixed-rate assets and liabilities to variable rate assets and liabilities and vice versa. The Company utilizes interest rate swaps that have a high degree of correlation to the related financial instrument.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. DERIVATIVES (continued)
The last of the hedges is scheduled to expire in December 2030. The Company includes all components of each derivative's gain or loss in the assessment of hedge effectiveness. The earnings impact of the ineffective portion of these hedges was not material for the years ended December 31, 2015 and 2014. As of December 31, 2015, the Company expects approximately $0.3 million of gross losses recorded in accumulated other comprehensive loss to be reclassified to earnings during the subsequent twelve months as the future cash flows occur.
Derivatives Designated in Hedge Relationships – Notional and Fair Values
Derivatives designated as accounting hedges at December 31, 2015 and December 31, 2014 included:
Notional Amount | Asset | Liability | Weighted Average Receive Rate | Weighted Average Pay Rate | Weighted Average Life (Years) | ||||||||||||||
| (dollars in thousands) | |||||||||||||||||||
| December 31, 2015 | |||||||||||||||||||
| Fair value hedges: | |||||||||||||||||||
| Cross-currency swaps | $ | 16,390 | $ | 3,695 | $ | 92 | 4.76 | % | 4.75 | % | 0.11 | ||||||||
| Interest rate swaps | 318,000 | 47 | 2,006 | 1.07 | % | 2.31 | % | 3.50 | |||||||||||
| Cash flow hedges: | |||||||||||||||||||
| Pay fixed — receive floating interest rate swaps | 11,030,431 | 7,295 | 23,047 | 0.32 | % | 1.13 | % | 3.00 | |||||||||||
| Total | $ | 11,364,821 | $ | 11,037 | $ | 25,145 | 0.35 | % | 1.17 | % | 3.01 | ||||||||
| December 31, 2014 | |||||||||||||||||||
| Fair Value hedges: | |||||||||||||||||||
| Cross-currency swaps | $ | 18,230 | $ | 2,711 | $ | 980 | 4.76 | % | 4.75 | % | 1.11 | ||||||||
| Interest rate swaps | 257,000 | 232 | 779 | 0.90 | % | 2.38 | % | 4.33 | |||||||||||
| Cash flow hedges: | |||||||||||||||||||
| Pay fixed — receive floating interest rate swaps | 10,086,103 | 7,619 | 20,552 | 0.17 | % | 1.11 | % | 3.02 | |||||||||||
| Total | $ | 10,361,333 | $ | 10,562 | $ | 22,311 | 0.19 | % | 1.14 | % | 3.05 | ||||||||
See Note 14 for detail of the amounts included in accumulated other comprehensive income related to derivatives activity.
Other Derivative Activities
The Company also enters into derivatives that are not designated as accounting hedges under GAAP. The majority of these derivatives are customer-related derivatives relating to foreign exchange and lending arrangements, as well as derivatives to hedge interest rate risk on SC secured structured financings and the borrowings under its revolving credit facilities. SC uses both interest rate swaps and interest rate caps to satisfy these requirements and to hedge the variability of cash flows on securities issued by securitization trusts and borrowings under its warehouse facilities. In addition, derivatives are used to manage risks related to residential and commercial mortgage banking and investing activities. Although these derivatives are used to hedge risk and are considered economic hedges, they are not designated as accounting hedges because the contracts they are hedging are typically also carried at fair value on the balance sheet, resulting in generally symmetrical accounting treatment for both the hedging instrument and the hedged item.
Mortgage Banking Derivatives
The Company's derivatives portfolio includes mortgage banking interest rate lock commitments, forward sale commitments and interest rate swaps. As part of its overall business strategy, the Company originates fixed-rate residential mortgages. It sells a portion of this production to the FHLMC, FNMA, and private investors. The Company uses forward sales as a means of hedging against the economic impact of changes in interest rates on the mortgages that are originated for sale and on interest rate lock commitments.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. DERIVATIVES (continued)
The Company typically retains the servicing rights related to residential mortgage loans that are sold. Residential MSRs are accounted for at fair value. As deemed appropriate, the Company economically hedges MSRs using interest rate swaps and forward contracts to purchase MBS.
Customer-related derivatives
The Company offers derivatives to its customers in connection with their risk management needs. These financial derivative transactions primarily consist of interest rate swaps, caps, floors and foreign exchange contracts. Risk exposure from customer positions is managed through transactions with other dealers, including Santander. Refer to Note 22 for related party transactions.
Other derivative activities
The Company uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. Foreign exchange contracts, which include spot and forward contracts as well as cross-currency swaps, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Exposure to gains and losses on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate.
In March 2014, SC entered into a financing arrangement with a third party under which SC pledged certain bonds retained in its own securitizations in exchange for approximately $250.6 million in cash. In conjunction with this financing arrangement, SC entered into a total return swap related to the bonds as an effective avenue to monetize SC’s retained bonds as a source of financing. SC will receive a fixed return on the bonds in exchange for paying a variable rate of three-month LIBOR plus 75 basis points. This facility matured in May 2015.
Other derivative instruments primarily include forward contracts related to certain investment securities sales, an OIS, a total return swap on Visa, Inc. Class B common shares, and equity options, which manage the Company's market risk associated with certain investments and customer deposit products.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. DERIVATIVES (continued)
Derivatives Not Designated in Hedge Relationships – Notional and Fair Values
Other derivative activities at December 31, 2015 and December 31, 2014 included:
| Notional | Asset derivatives Fair value | Liability derivatives Fair value | |||||||||||||||||||||
| December 31, 2015 | December 31, 2014 | December 31, 2015 | December 31, 2014 | December 31, 2015 | December 31, 2014 | ||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||
| Mortgage banking derivatives: | |||||||||||||||||||||||
| Forward commitments to sell loans | $ | 396,518 | $ | 328,757 | $ | 542 | $ | — | $ | — | $ | 2,424 | |||||||||||
| Interest rate lock commitments | 187,930 | 163,013 | 2,540 | 3,063 | — | — | |||||||||||||||||
| Mortgage servicing | 435,000 | 469,000 | 679 | 7,432 | 3,502 | 7,448 | |||||||||||||||||
| Total mortgage banking risk management | 1,019,448 | 960,770 | 3,761 | 10,495 | 3,502 | 9,872 | |||||||||||||||||
| Customer related derivatives: | |||||||||||||||||||||||
| Swaps receive fixed | 9,060,134 | 7,927,522 | 205,397 | 213,415 | 6,023 | 4,343 | |||||||||||||||||
| Swaps pay fixed | 9,273,627 | 7,944,247 | 16,183 | 13,361 | 177,114 | 186,732 | |||||||||||||||||
| Other | 3,035,085 | 1,670,696 | 53,418 | 62,464 | 52,502 | 61,880 | |||||||||||||||||
| Total customer related derivatives | 21,368,846 | 17,542,465 | 274,998 | 289,240 | 235,639 | 252,955 | |||||||||||||||||
| Other derivative activities: | |||||||||||||||||||||||
| Foreign exchange contracts | 2,513,305 | 1,152,125 | 30,262 | 20,033 | 30,144 | 17,390 | |||||||||||||||||
| Interest rate swap agreements | 2,399,000 | 3,231,000 | 1,176 | 535 | 2,481 | 12,743 | |||||||||||||||||
| Interest rate cap agreements | 10,013,912 | 7,541,385 | 32,950 | 49,762 | — | — | |||||||||||||||||
| Options for interest rate cap agreements | 10,013,912 | 7,541,385 | — | — | 32,977 | 49,806 | |||||||||||||||||
| Other | 899,394 | 646,321 | 11,146 | 6,543 | 14,553 | 9,914 | |||||||||||||||||
| Total | $ | 48,227,817 | $ | 38,615,451 | $ | 354,293 | $ | 376,608 | $ | 319,296 | $ | 352,680 | |||||||||||
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. DERIVATIVES (continued)
Gains (Losses) on All Derivatives
The following Consolidated Statement of Operations line items were impacted by the Company’s derivative activities for the years ended December 31, 2015, 2014 and 2013:
| Year Ended December 31, | ||||||||||||||
| Derivative Activity | Accounts | 2015 | 2014 | 2013 | ||||||||||
| (in thousands) | ||||||||||||||
| Fair value hedges: | ||||||||||||||
| Cross-currency swaps | Miscellaneous income | $ | 62 | $ | 777 | $ | 1,700 | |||||||
| Interest rate swaps | Miscellaneous income | (1,412 | ) | (547 | ) | — | ||||||||
| Cash flow hedges: | ||||||||||||||
Pay fixed-receive variable interest rate swaps | Net interest income | (11,595 | ) | (53,112 | ) | (65,900 | ) | |||||||
| Other derivative activities: | ||||||||||||||
| Forward commitments to sell loans | Mortgage banking income | 2,965 | (4,525 | ) | 5,500 | |||||||||
| Interest rate lock commitments | Mortgage banking income | (522 | ) | 2,516 | (14,900 | ) | ||||||||
| Mortgage servicing | Mortgage banking income | (2,806 | ) | (5,683 | ) | 6,500 | ||||||||
| Customer related derivatives | Miscellaneous income | 3,191 | 9,605 | 17,200 | ||||||||||
| Foreign exchange | Miscellaneous income | (2,525 | ) | 805 | (1,000 | ) | ||||||||
| SC non-hedging derivatives | Miscellaneous income | 11,913 | 30,330 | — | ||||||||||
| Net interest income | 78,640 | (5,226 | ) | — | ||||||||||
| Other | Miscellaneous income | (1,129 | ) | (906 | ) | 700 | ||||||||
| Net interest income | — | — | 3,100 | |||||||||||
Disclosures about Offsetting Assets and Liabilities
The Company enters into legally enforceable master netting agreements, which reduce risk by permitting netting of transactions with the same counterparty on the occurrence of certain events. A master netting agreement allows two counterparties the ability to net-settle amounts under all contracts, including any related collateral posted, through a single payment and in a single currency. The right to offset and certain terms regarding the collateral process, such as valuation, credit events and settlement, are contained in the ISDA master agreement. The Company's financial instruments, including resell and repurchase agreements, securities lending arrangements, derivatives and cash collateral, may be eligible for offset on its Consolidated Balance Sheet.
The Company’s has elected to present derivative balances on a gross basis even if the derivative is subject to a legally enforceable master netting (ISDA) agreements for all trades executed after April 1, 2013. Collateral that is received or pledged for these transactions is disclosed within the “Gross amounts not offset in the Condensed Consolidated Balance Sheet” section of the tables below. Prior to April 1, 2013, the Company had elected to net all caps, floors, and interest rate swaps when it had an ISDA agreement with the counterparty. The collateral received or pledged in connection with these transactions is disclosed within the “Gross amounts offset in the Consolidated Balance Sheet" section of the tables below.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. DERIVATIVES (continued)
Information about financial assets and liabilities that are eligible for offset on the Consolidated Balance Sheet as of December 31, 2015 and December 31, 2014, respectively, is presented in the following tables:
| Offsetting of Financial Assets | ||||||||||||||||||||||||
| Gross Amounts Not Offset in the Consolidated Balance Sheet | ||||||||||||||||||||||||
| Gross Amounts of Recognized Assets | Gross Amounts Offset in the Consolidated Balance Sheet | Net Amounts of Assets Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Received | Net Amount | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| December 31, 2015 | ||||||||||||||||||||||||
| Fair value hedges | $ | 3,742 | $ | — | $ | 3,742 | $ | — | $ | — | $ | 3,742 | ||||||||||||
| Cash flow hedges | 7,295 | — | 7,295 | — | — | 7,295 | ||||||||||||||||||
Other derivative activities(1) | 351,761 | 10,161 | 341,600 | 8,008 | 16,424 | 317,168 | ||||||||||||||||||
| Total derivatives subject to a master netting arrangement or similar arrangement | 362,798 | 10,161 | 352,637 | 8,008 | 16,424 | 328,205 | ||||||||||||||||||
Total derivatives not subject to a master netting arrangement or similar arrangement(2) | 2,532 | — | 2,532 | — | — | 2,532 | ||||||||||||||||||
| Total Derivative Assets | $ | 365,330 | $ | 10,161 | $ | 355,169 | $ | 8,008 | $ | 16,424 | $ | 330,737 | ||||||||||||
| Total Financial Assets | $ | 365,330 | $ | 10,161 | $ | 355,169 | $ | 8,008 | $ | 16,424 | $ | 330,737 | ||||||||||||
| December 31, 2014 | ||||||||||||||||||||||||
| Fair value hedges | $ | 2,943 | $ | — | $ | 2,943 | $ | — | $ | — | $ | 2,943 | ||||||||||||
| Cash flow hedges | 7,619 | — | 7,619 | — | — | 7,619 | ||||||||||||||||||
Other derivative activities(1) | 373,545 | 21,109 | 352,436 | 10,020 | 5,940 | 336,476 | ||||||||||||||||||
| Total derivatives subject to a master netting arrangement or similar arrangement | 384,107 | 21,109 | 362,998 | 10,020 | 5,940 | 347,038 | ||||||||||||||||||
Total derivatives not subject to a master netting arrangement or similar arrangement(2) | 3,063 | — | 3,063 | — | — | 3,063 | ||||||||||||||||||
| Total Derivative Assets | $ | 387,170 | $ | 21,109 | $ | 366,061 | $ | 10,020 | $ | 5,940 | $ | 350,101 | ||||||||||||
| Total Financial Assets | $ | 387,170 | $ | 21,109 | $ | 366,061 | $ | 10,020 | $ | 5,940 | $ | 350,101 | ||||||||||||
| (1) | Includes customer-related and other derivatives |
| (2) | Includes mortgage banking derivatives |
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. DERIVATIVES (continued)
| Offsetting of Financial Liabilities | ||||||||||||||||||||||||
| Gross Amounts Not Offset in the Consolidated Balance Sheet | ||||||||||||||||||||||||
| Gross Amounts of Recognized Liabilities | Gross Amounts Offset in the Consolidated Balance Sheet | Net Amounts of Liabilities Presented in the Consolidated Balance Sheet | Financial Instruments | Cash Collateral Pledged | Net Amount | |||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| December 31, 2015 | ||||||||||||||||||||||||
| Fair value hedges | $ | 2,098 | $ | — | $ | 2,098 | $ | 87 | $ | 10,602 | $ | (8,591 | ) | |||||||||||
| Cash flow hedges | 23,047 | 5,589 | 17,458 | — | 33,799 | (16,341 | ) | |||||||||||||||||
Other derivative activities(1) | 319,296 | 111,190 | 208,106 | 4,265 | 174,849 | 28,992 | ||||||||||||||||||
| Total derivatives subject to a master netting arrangement or similar arrangement | 344,441 | 116,779 | 227,662 | 4,352 | 219,250 | 4,060 | ||||||||||||||||||
Total derivatives not subject to a master netting arrangement or similar arrangement(2) | — | — | — | — | — | — | ||||||||||||||||||
| Total Derivative Liabilities | $ | 344,441 | $ | 116,779 | $ | 227,662 | $ | 4,352 | $ | 219,250 | $ | 4,060 | ||||||||||||
| Total Financial Liabilities | $ | 344,441 | $ | 116,779 | $ | 227,662 | $ | 4,352 | $ | 219,250 | $ | 4,060 | ||||||||||||
| December 31, 2014 | ||||||||||||||||||||||||
| Fair value hedges | $ | 1,759 | $ | — | $ | 1,759 | $ | 65 | $ | 5,589 | $ | (3,895 | ) | |||||||||||
| Cash flow hedges | 20,552 | — | 20,552 | 7,341 | 16,797 | (3,586 | ) | |||||||||||||||||
Other derivative activities(1) | 350,863 | 21,109 | 329,754 | 49,318 | 198,103 | 82,333 | ||||||||||||||||||
| Total derivatives subject to a master netting arrangement or similar arrangement | 373,174 | 21,109 | 352,065 | 56,724 | 220,489 | 74,852 | ||||||||||||||||||
Total derivatives not subject to a master netting arrangement or similar arrangement(2) | 1,817 | — | 1,817 | — | 1,736 | 81 | ||||||||||||||||||
| Total Derivative Liabilities | $ | 374,991 | $ | 21,109 | $ | 353,882 | $ | 56,724 | $ | 222,225 | $ | 74,933 | ||||||||||||
| Total Financial Liabilities | $ | 374,991 | $ | 21,109 | $ | 353,882 | $ | 56,724 | $ | 222,225 | $ | 74,933 | ||||||||||||
| (1) | Includes customer-related and other derivatives |
| (2) | Includes mortgage banking derivatives |
NOTE 16. INCOME TAXES
The Company is subject to the income tax laws of the U.S., its states and municipalities and certain foreign countries. These tax laws are complex and are potentially subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing the income tax provision, the Company must make judgments and interpretations about the application of these inherently complex tax laws.
Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. The Company reviews the tax balances quarterly and, as new information becomes available, the balances are adjusted as appropriate. The Company is subject to ongoing tax examinations and assessments in various jurisdictions.
209
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. INCOME TAXES (continued)
Income Taxes from Continuing Operations
The provision for income taxes in the Consolidated Statement of Operations is comprised of the following components:
| YEAR ENDED DECEMBER 31, | ||||||||||||
| 2015 | 2014 (As Restated) | 2013 | ||||||||||
| (in thousands) | ||||||||||||
| Current: | ||||||||||||
| Foreign | $ | 26 | $ | — | $ | 208 | ||||||
| Federal | 118,341 | (234,819 | ) | (79,281 | ) | |||||||
| State | 38,813 | (3,286 | ) | 5,099 | ||||||||
| Total current | 157,180 | (238,105 | ) | (73,974 | ) | |||||||
| Deferred: | ||||||||||||
| Federal | (760,796 | ) | 1,612,613 | 189,274 | ||||||||
| State | (67,847 | ) | 179,849 | 45,000 | ||||||||
| Total deferred | (828,643 | ) | 1,792,462 | 234,274 | ||||||||
| Total income tax (benefit)/provision | $ | (671,463 | ) | $ | 1,554,357 | $ | 160,300 | |||||
Reconciliation of Statutory and Effective Tax Rate
The following is a reconciliation of the U.S. federal statutory rate of 35.0% to the Company's effective tax rate for each of the years indicated:
| YEAR ENDED DECEMBER 31, | |||||||||
| 2015 | 2014 (As Restated) | 2013 | |||||||
| Federal income tax at statutory rate | 35.0 | % | 35.0 | % | 35.0 | % | |||
| Increase/(decrease) in taxes resulting from: | |||||||||
| Valuation allowance | 0.4 | % | 0.1 | % | (0.1 | )% | |||
| Tax-exempt income | 0.5 | % | (0.7 | )% | (4.1 | )% | |||
| Bank owned life insurance | 0.5 | % | (0.5 | )% | (2.5 | )% | |||
| State income taxes, net of federal tax benefit | (1.7 | )% | 1.2 | % | 4.8 | % | |||
Investment tax credits(1) | — | % | — | % | (2.1 | )% | |||
| General business tax credits | 0.3 | % | (0.3 | )% | (2.6 | )% | |||
| Electric vehicle credits | 0.6 | % | (0.7 | )% | — | % | |||
| Debt redemption | — | % | (1.3 | )% | — | % | |||
| Basis in SC | 25.6 | % | 2.3 | % | — | % | |||
| Dividend from SC | — | % | — | % | (7.1 | )% | |||
| Nondeductible goodwill impairment | (44.5 | )% | — | % | — | % | |||
| Uncertain tax position reserve | (2.8 | )% | (0.5 | )% | 0.3 | % | |||
| Other | 4.0 | % | 0.2 | % | (1.3 | )% | |||
| Effective tax rate | 17.9 | % | 34.8 | % | 20.3 | % | |||
(1) Investment tax credits in 2013 were the result of the Company's investment in a VIE.
210
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. INCOME TAXES (continued)
Deferred Tax Assets and Liabilities
The tax effects of temporary differences that give rise to the deferred tax assets and deferred tax liabilities are presented below:
| AT DECEMBER 31, | ||||||||
| 2015 | 2014 (as Restated) | |||||||
| (in thousands) | ||||||||
| Deferred tax assets: | ||||||||
| Allowance for loan and lease losses | $ | 237,574 | $ | 244,764 | ||||
| IRC Section 475 mark to market adjustment | 553,586 | 616,798 | ||||||
| Unrealized loss on available-for-sale securities | 62,113 | 35,232 | ||||||
| Unrealized loss on derivatives | 5,692 | 9,816 | ||||||
| Capital loss carryforwards | 38,276 | 27,150 | ||||||
| Net operating loss carry forwards | 814,473 | 576,007 | ||||||
| Non-solicitation payments | 952 | 5,610 | ||||||
| Employee benefits | 142,016 | 104,234 | ||||||
| General business credit & other tax credit carry forwards | 478,792 | 423,695 | ||||||
| Foreign tax credit carry forwards | — | 7,870 | ||||||
| Broker commissions paid on originated mortgage loans | 19,375 | 22,078 | ||||||
| Minimum tax credit carry forwards | 158,448 | 153,748 | ||||||
| Recourse reserves | 11,990 | 25,725 | ||||||
| Deferred interest expense | 77,517 | 78,264 | ||||||
| Other | 78,419 | 107,742 | ||||||
| Total gross deferred tax assets | 2,679,223 | 2,438,733 | ||||||
| Valuation allowance | (64,928 | ) | (87,929 | ) | ||||
| Total deferred tax assets | 2,614,295 | 2,350,804 | ||||||
| Deferred tax liabilities: | ||||||||
| Purchase accounting adjustments | 109,590 | 277,113 | ||||||
| Deferred income | 17,257 | 20,506 | ||||||
| Originated mortgage servicing rights | 57,679 | 46,155 | ||||||
| Change in Control deferred gain | 381,068 | 1,350,597 | ||||||
Leasing transactions(1) | 1,966,197 | 1,386,022 | ||||||
| Depreciation and amortization | 357,689 | 424,340 | ||||||
| Other | 49,082 | 13,152 | ||||||
| Total gross deferred tax liabilities | 2,938,562 | 3,517,885 | ||||||
| Net deferred tax (liability) | $ | (324,267 | ) | $ | (1,167,081 | ) | ||
(1) Deferred tax liability related to leasing transactions is primarily the result of accelerated tax depreciation on leasing transactions.
The IRC Section 475 mark to market adjustment deferred tax asset is related to SC's business as a dealer, which is required to be recognized under IRC Section 475 for net gains that have been recognized for tax purposes on loans that are required to be marked to market for tax purposes but not book purposes. The leasing transactions deferred tax liability ("DTL") is primarily related to accelerated tax depreciation on leasing transactions. The Change in Control deferred gain is the book over tax basis difference in the Company's investment in SC. The DTL would be realized upon the Company's disposition of its interest in SC or through dividends received from SC.
Periodic reviews of the carrying amount of deferred tax assets are made to determine if the establishment of a valuation allowance is necessary. If, based on the available evidence in future periods, it is more likely than not that all or a portion of the Company’s deferred tax assets will not be realized, a deferred tax valuation allowance would be established. Consideration is given to all positive and negative evidence related to the realization of the deferred tax assets.
211
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. INCOME TAXES (continued)
Items considered in this evaluation include historical financial performance, expectation of future earnings, the ability to carry back losses to recoup taxes previously paid, the length of statutory carry-forward periods, experience with operating loss and tax credit carryforwards not expiring unused, tax planning strategies and timing of reversals of temporary differences. The Company's evaluation is based on current tax laws, as well as its expectations of future performance. As of December 31, 2015, the Company maintains a valuation allowance of $64.9 million related to deferred tax assets subject to carryforward periods for which the Company has determined it is more likely than not that these deferred tax assets will remain unused after the carry-forward periods have expired.
The deferred tax asset realization analysis is updated at each year-end using the most recent forecasts. An assessment is made quarterly as to whether the forecasts and assumptions used in the deferred tax asset realization analysis should be revised in light of any changes that have occurred or are expected to occur that would significantly impact the forecasts or modeling assumptions. At December 31, 2015, the Company has recorded a deferred tax asset of $747.2 million related to federal net operating loss carryforwards, which may be offset against future taxable income. If not utilized in future years, these will expire in varying amounts through 2035. The Company has recorded a deferred tax asset of $67.3 million related to state net operating loss carryforwards, which may be used against future taxable income. If not utilized in future years, these will expire in varying amounts through 2035. The Company has recorded a deferred tax asset of $38.3 million related to capital loss carryforwards, which may be used against future capital gain income. If not utilized in future years, these will expire through 2020. The Company also has recorded a deferred tax asset of $478.8 million related to tax credit carryforwards, which may be offset against future taxable income. If not utilized in future years, these will expire in varying amounts through 2035. The Company has concluded that it is more likely than not that $5.3 million of the deferred tax asset related to the state net operating loss carryforwards, $27.0 million of the deferred tax asset related to capital loss carryforwards and $32.6 million of the deferred tax asset related to tax credit carryforwards and the entire deferred tax assets related to the capital loss and foreign tax credit carryforwards will not be realized. The Company has not recognized a deferred tax liability of $46.4 million related to earnings that are considered permanently reinvested in a consolidated foreign entity.
Retained earnings at December 31, 2015 included $112.1 million in bad debt reserves for which no deferred taxes have been provided, due to the indefinite nature of the recapture provisions.
212
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. INCOME TAXES (continued)
Changes in Liability for Unrecognized Tax Benefits
At December 31, 2015, the Company had net unrecognized tax benefit reserves related to uncertain tax positions of $247.3 million. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| Unrecognized Tax Benefits | Accrued Interest and Penalties | Total | ||||||||||
| (in thousands) | ||||||||||||
| Gross unrecognized tax benefits at January 1, 2013 | $ | 125,465 | $ | 23,023 | $ | 148,488 | ||||||
| Additions based on tax positions related to 2013 | 2,339 | — | 2,339 | |||||||||
| Additions for tax positions of prior years | — | 936 | 936 | |||||||||
| Gross unrecognized tax benefits at December 31, 2013 | 127,804 | 23,959 | 151,763 | |||||||||
| Change in Control | 1,487 | 746 | 2,233 | |||||||||
| Additions based on tax positions related to 2014 | 2,681 | — | 2,681 | |||||||||
| Additions for tax positions of prior years | 34,536 | 3,845 | 38,381 | |||||||||
| Reductions for tax positions of prior years | (24,783 | ) | (6,351 | ) | (31,134 | ) | ||||||
| Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations | (2,473 | ) | (927 | ) | (3,400 | ) | ||||||
| Settlements | (2,514 | ) | (428 | ) | (2,942 | ) | ||||||
| Gross unrecognized tax benefits at December 31, 2014 | 136,738 | 20,844 | 157,582 | |||||||||
| Additions based on tax positions related to the current year | 633 | — | 633 | |||||||||
| Additions for tax positions of prior years | 103,063 | 2,994 | 106,057 | |||||||||
| Reductions for tax positions of prior years | (11 | ) | (9 | ) | (20 | ) | ||||||
| Reductions to unrecognized tax benefits as a result of a lapse of the applicable statute of limitations | (1,055 | ) | (156 | ) | (1,211 | ) | ||||||
| Gross unrecognized tax benefits at December 31, 2015 | 239,368 | $ | 23,673 | 263,041 | ||||||||
| Gross net unrecognized tax benefits that if recognized would impact the effective tax rate at December 31, 2015 | $ | 239,368 | $ | 23,673 | ||||||||
| Less: Federal, state and local income tax benefits | (15,693 | ) | ||||||||||
| Net unrecognized tax benefit reserves | $ | 247,348 | ||||||||||
Tax positions will initially be recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. The Company is subject to the income tax laws of the U.S., its states and municipalities and certain foreign countries. These tax laws are complex and are potentially subject to different interpretations by the taxpayer and relevant governmental taxing authorities. In establishing an income tax provision, the Company must make judgments and interpretations about the application of these inherently complex tax laws. The Company recognizes penalties and interest accrued related to unrecognized tax benefits within Income tax provision on the Consolidated Statement of Operations.
The Company filed a lawsuit against the United States in 2009 in Federal District Court in Massachusetts relating to the proper tax consequences of two financing transactions with an international bank through which the Company borrowed $1.2 billion. As a result of these financing transactions, the Company paid foreign taxes of $264.0 million during the years 2003 through 2007 and claimed a corresponding foreign tax credit for foreign taxes paid during those years, which the 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.
213
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. INCOME TAXES (continued)
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.
While the Company remains confident in the legal merits of its position, the Company increased its reserve position as of December 31, 2015 by $104.2 million, and believes its reserve amount adequately provides for potential exposure to the IRS related to these items. Over the next 12 months, it is reasonably possible that changes in the reserve for uncertain tax positions could range from a decrease of $230.1 million to an increase of $201.9 million.
With few exceptions, the Company is no longer subject to federal, state and non-U.S. income tax examinations by tax authorities for years prior to 2003.
NOTE 17. STOCK-BASED COMPENSATION
SC Compensation Plan
Beginning in 2012, SC granted stock options to certain executives, other employees, and independent directors under the SC stock and option award plan (the "SC Plan"). The SC Plan was administered by SC's Board and enabled SC to make stock awards up to a total of approximately 29.4 million common shares (net of shares canceled or forfeited), or 8.5% of the equity invested in SC as of December 31, 2011. The SC Plan expired on January 31, 2015, and accordingly, no further awards will be made under this plan. In December 2013, the SC Board established an omnibus incentive plan (the "Omnibus Incentive Plan"), which enables SC to grant awards of nonqualified and incentive stock options, stock appreciation rights, restricted stock awards, restricted stock units ("RSUs"), and other awards that may be settled in or based upon the value of SC Common Stock, up to a total of 5,192,640 common shares.
Stock options granted have an exercise price based on the estimated fair market value of SC Common Stock on the grant date. The stock options expire after ten years and include both time vesting options and performance vesting options. The fair value of the stock options is amortized into income over the vesting period as time and performance vesting conditions are met. Under a management shareholder agreement (the "Management Shareholder Agreement") entered into by certain employees, no shares obtained through exercise of stock options could be transferred until the later of December 31, 2016, and SC's execution of an IPO (the later date of which is referred to as the Lapse Date). Until the Lapse Date, if an employee were to leave SC, SC would have the right to repurchase any or all of the stock obtained by the employee through option exercise. If the employee were terminated for cause (as defined in the SC Plan) or voluntarily left SC without good reason (as defined in the SC Plan), in each case, prior to the Lapse Date the repurchase price would be the lower of the strike price or fair market value at the date of repurchase. If the employee were terminated without cause or voluntarily left SC with good reason, in each case, prior to the Lapse Date the repurchase price is the fair market value at the date of repurchase. Management believes SC's repurchase right caused the IPO to constitute an implicit vesting condition and therefore did not record any stock compensation expense until the date of the IPO.
214
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. STOCK-BASED COMPENSATION (continued)
On December 28, 2013, the SC Board approved certain changes to the SC Plan and the Management Shareholder Agreement, including acceleration of vesting for certain employees, removal of transfer restrictions for shares underlying a portion of the options outstanding under the SC Plan, and addition of transfer restrictions for shares underlying another portion of the outstanding options. All of the changes were contingent on, and effective upon, SC's execution of an IPO and, accordingly, became effective upon pricing of the IPO on January 22, 2014. In addition, on December 28, 2013, SC granted 583,890 shares of restricted stock to certain executives under terms of the Omnibus Incentive Plan. Compensation expense related to this restricted stock is recognized over a five-year vesting period, with $8.9 million and $2.5 million recorded for the years ended December 31, 2015 and 2014, respectively. Compensation expense recognized during the year ended December 31, 2015 included $7.2 million related to the acceleration of the vesting of restricted stock awards modified in accordance with the Separation Agreement with Mr. Dundon.
On January 23, 2014, SC executed an IPO, in which selling stockholders offered and sold to the public 85,242,042 shares of SC Common Stock at a price of $24.00 per share. SC received no proceeds from the IPO. SC recognized stock-based compensation expense totaling $117.8 million related to vested options upon the closing of the IPO, including $33.8 million related to accelerated vesting for certain executives. Also in connection with the IPO, SC granted 1,406,835 additional stock options under the SC Plan to certain executives, other employees, and an independent director with a grant date fair value of $10.2 million, which is being recognized over the awards' vesting period of five years for the employees and three years for the director. Additional stock option grants have been made during the year ended December 31, 2015 to employees; the estimated compensation costs associated with these additional grants is $3.3 million which will also be recognized over the vesting periods of the awards. The grant date fair values of these stock option awards were determined using the Black-Scholes option valuation model.
A summary of SC's stock options and related activity as of and for the year ended December 31, 2015 is as follows:
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term (Years) | Aggregate Intrinsic Value | ||||||
| (in whole dollars) | (in 000's) | ||||||||
| Options outstanding at January 1, 2015 | 21,357,911 | $ | 10.82 | 7.2 | $ | 187,637 | |||
| Granted | 433,844 | 24.29 | |||||||
| Exercised | (8,953,812 | ) | 9.85 | (124,132 | ) | ||||
| Expired | (15,197 | ) | 9.73 | ||||||
| Forfeited | (300,040 | ) | 16.62 | ||||||
| Options outstanding at December 31, 2015 | 12,522,706 | $ | 11.84 | 6.4 | $ | 50,163 | |||
| Options exercisable at December 31, 2015 | 9,619,940 | $ | 11.09 | 6.2 | $ | 45,773 | |||
| Options expected to vest at December 31, 2015 | 2,574,904 | $ | 14.49 | 6.9 | |||||
In connection with compensation restrictions imposed on certain executive officers and other employees by the European Central Bank under the Capital Requirements Directive IV prudential rules, which require a portion of such officers' and employees' variable compensation to be paid in the form of equity, SC granted restricted stock units ("RSUs") in February and April 2015. Under the Omnibus Incentive Plan, a portion of the RSUs vested immediately upon grant, and a portion will vest annually over the next 3 years. In June 2015, as part of a separate grant under the Omnibus Incentive Plan, SC granted certain officers RSUs that vest over a three-year period, with vesting dependent on Banco Santander performance over that time. After vesting, stock obtained by employees and officers through RSUs must be held for 1 year. In October 2015, SC granted, under the Omnibus Incentive Plan, certain directors RSUs that vest upon the earlier of the first anniversary of grant date or the first annual meeting following the grant date. In December 2015, SC granted a new officer RSUs that will vest in equal portions on each of the first three anniversaries of the grant date.
Subject to limitations of banking regulators and applicable law, Mr. Dundon’s Separation Agreement provided that his unvested restricted stock awards would vest in full in accordance with their terms and his unvested stock options would vest in full. Further, on July 2, 2015, Mr. Dundon exercised a right under the Separation Agreement to settle his options for a cash payment. In addition, any service-based vesting requirements that were applicable to Mr. Dundon’s outstanding RSUs in respect of his 2014 annual bonus were waived, and such RSUs continue to vest and be settled in accordance with the underlying award agreement. As of the date hereof, these actions have not been approved by banking regulators.
215
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. STOCK-BASED COMPENSATION (continued)
Subject to applicable regulatory approvals and law, Mr. Dundon’s outstanding stock options will remain exercisable until the third anniversary of his resignation, and subject to certain time limitations, Mr. Dundon would be permitted to exercise such options in whole, but not in part, and settle such options for a cash payment equal to the difference between the closing trading price of a share of SC common stock as of the date immediately preceding such exercise and the exercise price of such option. Mr. Dundon exercised this cash settlement option on July 2, 2015.
Following the modification of Mr. Dundon's stock option awards, subject to limitations of banking regulators and applicable law, SC determined that the modified stock option awards should no longer be accounted for within equity, and should be recognized as a liability at fair value. In addition, the modification and vesting of Mr. Dundon's unvested RSUs also resulted in SC recognizing additional stock compensation expense based on the fair value of the restricted stock awards on the date of the modification. The Company transferred $102.8 million from Common stock and paid-in capital to Other liabilities in connection with the stock option modification and cash settlement option exercise, and recognized an additional $9.9 million in stock compensation expense during the year ended December 31, 2015 for all equity-based award modifications. As of December 31, 2015, SC had not made any payments associated with Mr. Dundon's exercise of the cash settlement option.
As discussed in Note 3, the Change in Control required the Company to fair value SC’s outstanding stock options as of the IPO date. SC’s total number of stock options outstanding as of the IPO date was approximately 25.4 million which includes the additional stock options granted described above. The fair values of these stock options at the IPO date were also determined using the Black-Scholes option valuation model using inputs available as of the IPO date. The assumptions used by the Company at that date were as follows:
| As of the date of Change in Control: | ||
| January 28, 2014 | ||
| Assumption: | ||
| Risk-free interest rate | 1.19%-1.85% | |
| Expected life (in years) | 4.00-5.75 | |
| Expected volatility | 49.0 | % |
| Dividend yield | 1.42 | % |
| Weighted average grant date fair value | $7.54 - $8.38 | |
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 will be recognized as stock compensation expense over the remaining vesting period of the awards. Between the IPO date and December 31, 2014, the Company recognized stock-based compensation expense totaling $99.6 million, including $82.6 million that 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 as also discussed above. The total amount also included the IPO date fair value of the additional stock option grant of approximately $15.0 million.
A summary of the status and changes of SC's non-vested stock option shares as of and for the year ended December 31, 2015, is presented below:
| Shares | Weighted Average Grant Date Fair Value | ||||
| Non-vested at January 1, 2015 | 4,487,731 | $ | 6.72 | ||
| Granted | 433,844 | 8.10 | |||
| Vested | (1,703,572 | ) | 7.08 | ||
| Forfeited or expired | (315,237 | ) | 7.02 | ||
| Non-vested at December 31, 2015 | 2,902,766 | $ | 6.68 | ||
At December 31, 2015, total unrecognized compensation expense for non-vested stock options granted was $15.9 million, which is expected to be recognized over a weighted average period of 2.3 years.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. STOCK-BASED COMPENSATION (continued)
The following summarizes the assumptions used in estimating the fair value of stock options granted under the Management Equity Plan to employees for the years ended December 31, 2015 and 2014.
| For the year ended December 31, 2015 | For the period beginning January 28, 2014 through December 31, 2014 | ||
| Assumption: | |||
| Risk-free interest rate | 1.64% - 1.97% | 1.94% - 2.12% | |
| Expected life (in years) | 6.0 - 6.5 | 6.0 - 6.5 | |
| Expected volatility | 32% - 48% | 49% - 51% | |
| Dividend yield | 1.6% - 2.7% | 2.3% - 4.2% | |
| Weighted average grant date fair value | $6.92 - $9.67 | $7.54 - $8.38 | |
The Company will have the same fair value basis with that of SC for any stock option awards after the IPO date.
Santander Stock-Based Compensation Plan - SC
Santander previously established a stock-based compensation plan for certain employees of SC. This compensation plan is linked to Santander’s earnings per share growth in comparison to similar financial institutions. The shares are awarded based on performance during specific cycles at various per share prices.
| • | Cycle one, from July 2007 through June 2009, had maximum authorized shares of 96,030 at a price of $19.38 per share. This cycle closed with total shares distributed of 77,469. |
| • | Cycle two, from July 2007 through June 2010, had maximum authorized shares of 144,120 at a price of $19.38 per share. This cycle closed with total shares distributed of 114,040. |
| • | Cycle three, from July 2008 through June 2011, had maximum authorized shares of 147,908 at a price of $7.29 per share. This cycle closed with total shares distributed of 120,732. |
| • | Cycle four, from July 2009 through June 2012, had maximum authorized shares of 157,611 at a price of $6.50 per share. This cycle closed with total shares distributed of 43,475. |
| • | Cycle five, from July 2010 through June 2013, had maximum authorized shares of 163,302 at a price of $6.87 per share. This cycle closed with no shares distributed. |
The shares were awarded at the end of each cycle; however, the awarding of these shares was contingent upon Santander’s meeting specified performance requirements during each cycle and each employee’s continued employment with SC.
NOTE 18. EMPLOYEE BENEFIT PLANS
Defined Contribution Plans
All employees of the Bank are eligible to participate in the Company's 401(k) Plan following their completion of one month of service. There is no age requirement to join the 401(k) Plan. The Bank matches 100% of employee contributions up to 3% of their compensation and then 50% of employee contributions between 3% and 5% of their compensation. The Company match is immediately vested and is allocated to the employee’s various 401(k) Plan investment options in the same percentages as the employee’s own contributions. The Bank recognized expense for contributions to the 401(k) Plan of $20.4 million, $17.4 million and $15.0 million during 2015, 2014, and 2013, respectively, within the Compensation and benefits line on the Consolidated Statements of Operations.
SC sponsors a defined contribution plan offered to qualifying employees. Employees participating in the plan may contribute up to 75% of their base salary, subject to federal limitations on absolute amounts contributed. SC matches 100% of employee contributions up to 6% of their base salary. The total amount contributed by SC in 2015 and 2014 was $9.5 million and $7.9 million, respectively.
217
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. EMPLOYEE BENEFIT PLANS (continued)
Defined Benefit Plans
The Company sponsors various post-employment and post-retirement plans. All of the plans are frozen and therefore closed to new entrants; all benefits are fully vested, and therefore the plans ceased accruing benefits. The total net unfunded status related to these plans was $67.4 million and $70.9 million at December 31, 2015 and December 31, 2014, respectively, and is recorded within Other liabilities on the Consolidated Balance Sheet. The liabilities are made up of the following:
| • | The Company’s benefit obligation related to its supplemental executive retirement plan SERP was $24.4 million and $25.6 million at December 31, 2015 and 2014, respectively. |
| • | The Company’s benefit obligation related to other post-employment plans was $8.5 million and $9.2 million at December 31, 2015 and 2014, respectively. |
| • | The Company acquired a pension plan from its acquisition of Independence Community Bank Corp. ("the Plan"). The unfunded status of the Plan was $34.5 million and $36.1 million at December 31, 2015 and 2014, respectively. The accumulated benefit obligation was $99.7 million and $109.4 million at December 31, 2015 and 2014, respectively. |
Included in accumulated other comprehensive income at December 31, 2015 and 2014 were unrecognized actuarial losses, net of tax, of $27.0 million and $29.6 million, respectively, that had not yet been recognized related to all the Company's plans, including the Plan.
The required post-retirement disclosures below are provided for the Plan which is the Company's most significant post-retirement plan.
The following table summarizes the benefit obligation, change in Plan assets and components of net periodic pension expense for the Plan as of December 31, 2015 and 2014:
| Year ended December 31, | ||||||||
| 2015 | 2014 | |||||||
| (in thousands) | ||||||||
| Change in benefit obligation: | ||||||||
| Benefit obligation at beginning of year | $ | 109,422 | $ | 89,062 | ||||
| Service cost | 443 | 310 | ||||||
| Interest cost | 4,291 | 4,340 | ||||||
| Actuarial (loss)/gain | (7,880 | ) | 20,549 | |||||
| Annuity payments | (6,576 | ) | (4,839 | ) | ||||
| Projected benefit obligation at year end | $ | 99,700 | $ | 109,422 | ||||
| Change in plan assets: | ||||||||
| Fair value at beginning of year | $ | 73,356 | $ | 73,183 | ||||
| Employer contributions | 1,820 | 2,271 | ||||||
| Actual return on plan assets | (3,404 | ) | 2,741 | |||||
| Annuity payments | (6,576 | ) | (4,839 | ) | ||||
| Fair value at year end | $ | 65,196 | $ | 73,356 | ||||
| Components of net periodic pension expense: | ||||||||
| Service cost | $ | 443 | $ | 310 | ||||
| Interest cost | 4,291 | 4,340 | ||||||
| Expected return on plan assets | (5,005 | ) | (5,020 | ) | ||||
| Amortization of unrecognized actuarial loss | 4,214 | 2,111 | ||||||
| Net periodic pension expense | $ | 3,943 | $ | 1,741 | ||||
Service cost includes administrative expenses of the Plan, which are paid from Plan assets. The Company expects to make contributions of $2.7 million to the Plan in 2016.
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. EMPLOYEE BENEFIT PLANS (continued)
Pension plan assets are required to be reported and disclosed at fair value in the financial statements. See Note 1 for discussion about the Company’s fair value policy. In accordance with the Plan’s investment policy, the Plan’s assets were invested in the following allocation as of the end of the Plan year:
| December 31, 2015 | ||
| Equity mutual funds | 36.1 | % |
| Fixed income mutual funds | 51.9 | % |
Alternative investments (1) | 12.0 | % |
(1) Includes asset allocation funds and collective trusts
The shares of the underlying mutual funds are fair valued using quoted market prices in an active market, and therefore all of the assets were considered Level 1 within the fair value hierarchy as of December 31, 2015 and 2014. There have been no changes in the valuation methodologies used at December 31, 2015 and 2014.
Specific investments are made in accordance with the Plan’s investment policy. The investment policy of the Plan is to maintain full funding without creating an undue risk of increasing any unfunded liability. A secondary investment objective is, where possible, to reduce the contribution rate in future years. The Plan’s allocation of assets is subject to periodic adjustment and re-balancing depending upon market conditions.
The assumptions utilized to calculate the projected benefit obligation and net periodic pension expense at December 31, 2015 and 2014 were:
| December 31, 2015 | December 31, 2014 | |||||
| Discount rate | 4.50 | % | 4.00 | % | ||
| Expected long-term return on plan assets | 7.00 | % | 7.00 | % | ||
| Salary increase rate | — | % | — | % | ||
The expected long-term rate of return on Plan assets reflects the average rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation. The selected rate considers the historical and expected future investment trends of the present and expected assets in the Plan.
The following table sets forth the expected benefit payments to be paid in future years for the Plan (in thousands):
| 2016 | $ | 5,406 | |
| 2017 | 5,440 | ||
| 2018 | 5,599 | ||
| 2019 | 5,644 | ||
| 2020 | 5,783 | ||
| 2021-2025 | 29,367 | ||
| Total | $ | 57,239 | |
Included in accumulated other comprehensive income at December 31, 2015 and 2014 were unrecognized actuarial losses of $44.8 million and $48.5 million that had not yet been recognized related to the Plan. The actuarial loss included in accumulated other comprehensive income and expected to be recognized in net periodic pension cost during the fiscal year ended December 31, 2016 is $3.9 million.
219
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUE
General
As of December 31, 2015, $21.9 billion of the Company’s total assets consisted of financial instruments measured at fair value on a recurring basis, including financial instruments for which the Company elected the FVO. Approximately $10.5 million of these financial instruments were measured using quoted market prices for identical instruments or Level 1 inputs. Approximately $20.1 billion of these financial instruments were measured using valuation methodologies involving market-based and market-derived information, or Level 2 inputs. Approximately $1.8 billion of these financial instruments were measured using model-based techniques, or Level 3 inputs, and represented approximately 8.4% of total assets measured at fair value and approximately 1.4% of total consolidated assets.
Fair value is defined in GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP establishes a fair value reporting hierarchy to maximize the use of observable inputs when measuring fair value and defines the three levels of inputs as noted below:
•Level 1 - Assets or liabilities for which the identical item is traded on an active exchange, such as publicly-traded instruments or futures contracts.
•Level 2 - Assets and liabilities valued based on observable market data for similar instruments. Fair value is estimated using inputs other than quoted prices included within Level 1 that are observable for assets or liabilities, either directly or indirectly.
•Level 3 - Assets or liabilities for which significant valuation assumptions are not readily observable in the market, and instruments valued based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require. Fair value is estimated using unobservable inputs that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities may include financial instruments whose value is determined using pricing services, pricing models with internally developed assumptions, DCF methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Assets and liabilities measured at fair value, by their nature, result in a higher degree of financial statement volatility. When available, the Company attempts to use quoted market prices or matrix pricing in active markets to determine fair value and classifies such items as Level 1 or Level 2 assets or liabilities. If quoted market prices in active markets are not available, fair value is determined using third-party broker quotes and/or DCF models incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using broker quotes and/or DCF models are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation.
The Company values assets and liabilities based on the principal market on which each would be sold (in the case of assets) or transferred (in the case of liabilities). The principal market is the forum with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market. In the absence of observable market transactions, the Company considers liquidity valuation adjustments to reflect the uncertainty in pricing the instruments. The fair value of a financial asset is measured on a stand-alone basis and cannot be measured as a group, with the exception of certain financial instruments held and managed on a net portfolio basis. In measuring the fair value of a nonfinancial asset, the Company assumes the highest and best use of the asset by a market participant, not just the intended use, to maximize the value of the asset. The Company also considers whether any credit valuation adjustments are necessary based on the counterparty's credit quality.
Any models used to determine fair values or validate dealer quotes based on the descriptions below are subject to review and testing as part of the Company's model validation and internal control testing processes.
220
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUE (continued)
The Bank's Market Risk Department is responsible for determining and approving the fair values of all assets and liabilities valued at fair value, including the Company's Level 3 assets and liabilities. Price validation procedures are performed and the results are reviewed for Level 3 assets and liabilities by the Market Risk Department. Price validation procedures performed for these assets and liabilities can include comparing current prices to historical pricing trends by collateral type and vintage, comparing prices by product type to indicative pricing grids published by market makers, and obtaining corroborating dealer prices for significant securities.
The Company reviews the assumptions utilized to determine fair value on a quarterly basis. Any changes in methodologies or significant inputs used in determining fair values are further reviewed to determine if a change in fair value level hierarchy has occurred. Transfers in and out of Levels 1, 2 and 3 are considered to be effective as of the end of the quarter in which they occur.
There were no transfers between Levels 1, 2 and 3 during the year ended December 31, 2015 for any assets or liabilities valued at fair value on a recurring basis. During the year ended December 31, 2014, the Company transferred certain of its ABS from Level 2 to Level 3 due to limited price transparency in connection with their limited trading activity. There were no other transfers between Levels 1, 2 and 3 during the year ended December 31, 2014.
221
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUE (continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the assets and liabilities that are measured at fair value on a recurring basis by major product category and fair value hierarchy as of December 31, 2015 and December 31, 2014.
(1) LHFS disclosed on the Consolidated Balance Sheet also includes loans held for sale that are held at the lower of cost or fair value.
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance at December 31, 2015 | ||||||||||||
| (in thousands) | |||||||||||||||
| Financial assets: | |||||||||||||||
| U.S. Treasury securities | $ | — | $ | 3,188,388 | $ | — | $ | 3,188,388 | |||||||
| Corporate debt | — | 1,475,574 | — | 1,475,574 | |||||||||||
| Asset-backed securities | — | 409,270 | 1,360,240 | 1,769,510 | |||||||||||
| Equity securities | 10,487 | — | — | 10,487 | |||||||||||
| State and municipal securities | — | 767,880 | — | 767,880 | |||||||||||
| Mortgage backed securities | — | 13,639,656 | — | 13,639,656 | |||||||||||
| Total investment securities available-for-sale | 10,487 | 19,480,768 | 1,360,240 | 20,851,495 | |||||||||||
| Retail installment contracts held for investment | — | — | 328,655 | 328,655 | |||||||||||
Loans held-for-sale(1) | — | 236,760 | — | 236,760 | |||||||||||
| Mortgage servicing rights | — | — | 147,233 | 147,233 | |||||||||||
| Derivatives: | |||||||||||||||
| Fair value | — | 3,742 | — | 3,742 | |||||||||||
| Cash flow | — | 7,295 | — | 7,295 | |||||||||||
| Mortgage banking interest rate lock commitments | — | — | 2,540 | 2,540 | |||||||||||
| Mortgage banking forward sell commitments | — | 542 | — | 542 | |||||||||||
| Customer related | — | 274,998 | — | 274,998 | |||||||||||
| Foreign exchange | — | 30,262 | — | 30,262 | |||||||||||
| Mortgage servicing | — | 679 | — | 679 | |||||||||||
| Interest rate swap agreements | — | 1,176 | — | 1,176 | |||||||||||
| Interest rate cap agreements | — | 32,950 | — | 32,950 | |||||||||||
| Other | — | 11,136 | 10 | 11,146 | |||||||||||
| Total financial assets | $ | 10,487 | $ | 20,080,308 | $ | 1,838,678 | $ | 21,929,473 | |||||||
| Financial liabilities: | |||||||||||||||
| Derivatives: | |||||||||||||||
| Fair value | $ | — | $ | 2,098 | $ | — | $ | 2,098 | |||||||
| Cash flow | — | 23,047 | — | 23,047 | |||||||||||
| Customer related | — | 235,639 | — | 235,639 | |||||||||||
| Total return swap | — | — | 282 | 282 | |||||||||||
| Foreign exchange | — | 30,144 | — | 30,144 | |||||||||||
| Mortgage servicing | — | 3,502 | — | 3,502 | |||||||||||
| Interest rate swaps | — | 2,481 | — | 2,481 | |||||||||||
| Option for interest rate cap | — | 32,977 | — | 32,977 | |||||||||||
| Other | — | 14,149 | 122 | 14,271 | |||||||||||
| Total financial liabilities | $ | — | $ | 344,037 | $ | 404 | $ | 344,441 | |||||||
222
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUE (continued)
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Balance at December 31, 2014 | ||||||||||||
| (in thousands) | |||||||||||||||
| Financial assets: | |||||||||||||||
| U.S. Treasury securities | $ | — | $ | 1,695,767 | $ | — | $ | 1,695,767 | |||||||
| Corporate debt | — | 2,182,401 | — | 2,182,401 | |||||||||||
| Asset-backed securities | — | 1,452,760 | 1,267,643 | 2,720,403 | |||||||||||
| Equity securities | 10,343 | — | — | 10,343 | |||||||||||
| State and municipal securities | — | 1,823,462 | — | 1,823,462 | |||||||||||
| Mortgage backed securities | — | 7,475,702 | — | 7,475,702 | |||||||||||
| Total investment securities available-for-sale | 10,343 | 14,630,092 | 1,267,643 | 15,908,078 | |||||||||||
| Trading securities | — | 833,936 | — | 833,936 | |||||||||||
| Retail installment contracts held for investment | — | — | 845,911 | 845,911 | |||||||||||
| Loans held-for-sale | — | 213,666 | — | 213,666 | |||||||||||
| Mortgage servicing rights | — | — | 145,047 | 145,047 | |||||||||||
| Derivatives: | |||||||||||||||
| Fair value | — | 2,943 | — | 2,943 | |||||||||||
| Cash flow | — | 7,619 | — | 7,619 | |||||||||||
| Mortgage banking interest rate lock commitments | — | — | 3,063 | 3,063 | |||||||||||
| Customer related | — | 289,240 | — | 289,240 | |||||||||||
| Foreign exchange | — | 20,033 | — | 20,033 | |||||||||||
| Mortgage servicing | — | 7,432 | — | 7,432 | |||||||||||
| Interest rate swap agreements | — | 535 | — | 535 | |||||||||||
| Interest rate cap agreements | — | 49,762 | — | 49,762 | |||||||||||
| Other | — | 6,536 | 7 | 6,543 | |||||||||||
| Total financial assets | $ | 10,343 | $ | 16,061,794 | $ | 2,261,671 | $ | 18,333,808 | |||||||
| Financial liabilities: | |||||||||||||||
| Derivatives: | |||||||||||||||
| Fair value | $ | — | $ | 1,759 | $ | — | $ | 1,759 | |||||||
| Cash flow | — | 20,552 | — | 20,552 | |||||||||||
| Mortgage banking forward sell commitments | — | 2,424 | — | 2,424 | |||||||||||
| Customer related | — | 252,955 | — | 252,955 | |||||||||||
| Total return swap | — | 1,736 | 282 | 2,018 | |||||||||||
| Foreign exchange | — | 17,390 | — | 17,390 | |||||||||||
| Mortgage servicing | — | 7,448 | — | 7,448 | |||||||||||
| Interest rate swaps | — | 12,743 | — | 12,743 | |||||||||||
| Option for interest rate cap | — | 49,806 | — | 49,806 | |||||||||||
| Other | — | 7,823 | 73 | 7,896 | |||||||||||
| Total financial liabilities | $ | — | $ | 374,636 | $ | 355 | $ | 374,991 | |||||||
223
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUE (continued)
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company may be required to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with GAAP from time to time. These adjustments to fair value usually result from application of lower-of-cost-or-fair value accounting or certain impairment measures. Assets measured at fair value on a nonrecurring basis that were still held on the balance sheet were as follows:
| Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Other Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Fair Value | ||||||||||||
| (in thousands) | |||||||||||||||
| December 31, 2015 | |||||||||||||||
| Impaired loans held for investment | $ | — | $ | 122,792 | $ | 326 | $ | 123,118 | |||||||
| Foreclosed assets | — | 27,574 | — | 27,574 | |||||||||||
| Vehicle inventory | — | 204,120 | — | 204,120 | |||||||||||
| Loans held for sale | — | — | 2,049,293 | 2,049,293 | |||||||||||
| Goodwill | — | — | 1,019,960 | 1,019,960 | |||||||||||
| Indefinite lived intangibles | — | — | 38,300 | 38,300 | |||||||||||
| December 31, 2014 | |||||||||||||||
| Impaired loans held for investment | $ | — | $ | 101,218 | $ | 67,699 | $ | 168,917 | |||||||
| Foreclosed assets | — | 45,599 | — | 45,599 | |||||||||||
| Vehicle inventory | — | 136,136 | — | 136,136 | |||||||||||
Valuation Processes and Techniques
Impaired loans held for investment represents the recorded investment of impaired commercial loans for which the Company periodically records nonrecurring adjustments of collateral-dependent loans measured for impairment when establishing the allowance for loan and lease losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Written offers to purchase a specific impaired loan are considered observable market inputs, which are considered Level 1 inputs. Appraisals are obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and are considered Level 2 inputs. Loans where the value of the underlying collateral is determined using a combination of real estate appraisals, field examinations and internal calculations are considered Level 3 inputs. The inputs in the internal calculations may include the loan balance, estimation of the collectability of the underlying receivables held by the customer used as collateral, sale and liquidation value of the inventory held by the customer used as collateral and historical loss-given-default parameters. In cases in which the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized. The total carrying value of these loans was $91.3 million and $100.2 million at December 31, 2015 and December 31, 2014, respectively.
Foreclosed assets represent the recorded investment in assets taken in foreclosure of defaulted loans, and are primarily comprised of commercial and residential real properties and generally measured at fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of market value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace.
The Company estimates the fair value of its vehicles, which are obtained either through repossession or lease termination, using historical auction rates and current market values of used cars.
The estimated fair value for personal and commercial LHFS is calculated based on a combination of estimated market rates for similar loans with similar credit risks and a DCF analysis in which the Company uses significant unobservable inputs on key assumptions, including historical default rates and adjustments to reflect voluntary prepayments, prepayment rates, discount rates reflective of the cost of funding, and credit loss expectations.
224
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUE (continued)
The estimated fair value of goodwill and intangible assets are valued using unobservable inputs and is classified as Level 3. Fair value is calculated using a DCF model. On a quarterly basis, the Company assesses whether or not impairment indicators are present. For information on the Company's goodwill impairment test and the results of the most recent goodwill impairment test, see Note 1 and Note 9 for a description of the Company's goodwill valuation methodology.
Fair Value Adjustments
The following table presents the increases and decreases in value of certain assets that are measured at fair value on a nonrecurring basis for which a fair value adjustment has been included in the Consolidated Statements of Operations relating to assets held at period-end:
| Statement of Operations Location | Year Ended December 31, | ||||||||||||
| 2015 | 2014 | 2013 | |||||||||||
| (in thousands) | |||||||||||||
| Impaired loans held for investment | Provision for credit losses | $ | (3,618 | ) | $ | (34,802 | ) | $ | (29,103 | ) | |||
| Foreclosed assets | Miscellaneous income(1) | (3,163 | ) | (4,091 | ) | (5,441 | ) | ||||||
| Loans held for sale | Provision for credit losses | (323,514 | ) | — | — | ||||||||
Miscellaneous income(1)(2) | (238,271 | ) | — | — | |||||||||
| Goodwill impairment | Impairment of goodwill(3) | (4,447,622 | ) | — | — | ||||||||
| Indefinite lived intangible assets | Amortization of intangibles | (11,700 | ) | — | — | ||||||||
| $ | (5,027,888 | ) | $ | (38,893 | ) | $ | (34,544 | ) | |||||
(1) These amounts reduce Miscellaneous income.
(2) The $238.3 million decrease in miscellaneous income relates to lower of cost or fair value adjustments recorded on loans subsequent to the loans being reclassified to LHFS.
(3) In the year ended December 31, 2015, Goodwill totaling $5.5 billion was written down to its implied fair value of $1.0 billion, resulting in a goodwill impairment charge of $4.4 billion.
Level 3 Rollforward for Recurring Assets and Liabilities
The tables below present the changes in all Level 3 balances for the years ended December 31, 2015 and 2014, respectively.
| Year Ended December 31, 2015 | |||||||||||||||||||
| Investments Available-for-Sale | Retail Installment Contracts Held for Investment | MSRs | Derivatives | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Balance, December 31, 2014 | $ | 1,267,643 | $ | 845,911 | $ | 145,047 | $ | 2,715 | $ | 2,261,316 | |||||||||
| Losses in other comprehensive income | (8,392 | ) | — | — | — | (8,392 | ) | ||||||||||||
| Gains/(losses) in earnings | — | 254,744 | 3,948 | (965 | ) | 257,727 | |||||||||||||
| Additions/Issuances | 1,207,466 | — | 22,964 | — | 1,230,430 | ||||||||||||||
Settlements(1) | (1,106,477 | ) | (772,000 | ) | (24,726 | ) | 396 | (1,902,807 | ) | ||||||||||
| Balance, December 31, 2015 | $ | 1,360,240 | $ | 328,655 | $ | 147,233 | $ | 2,146 | $ | 1,838,274 | |||||||||
| Changes in unrealized gains (losses) included in earnings related to balances still held at December 31, 2015 | $ | — | $ | 254,744 | $ | 3,948 | $ | (442 | ) | $ | 258,250 | ||||||||
| (1) | Settlements include charge-offs, prepayments, pay downs and maturities. |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUE (continued)
| Year Ended December 31, 2014 | |||||||||||||||||||
| Investments Available-for-Sale | Retail Installment Contracts Held for Investment | MSRs | Derivatives | Total | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Balance, December 31, 2013 | $ | 52,940 | $ | — | $ | 141,787 | $ | 164 | $ | 194,891 | |||||||||
| Losses in other comprehensive income | (2,752 | ) | — | — | — | (2,752 | ) | ||||||||||||
| Gains/(losses) in earnings | — | 559,153 | (2,817 | ) | 1,158 | 557,494 | |||||||||||||
| Additions/Issuances | 316,000 | 1,870,383 | 28,058 | — | 2,214,441 | ||||||||||||||
Settlements(1) | (270,005 | ) | (1,583,625 | ) | (21,981 | ) | 1,393 | (1,874,218 | ) | ||||||||||
| Transfers into level 3 | 1,171,460 | — | — | — | 1,171,460 | ||||||||||||||
| Balance, December 31, 2014 | $ | 1,267,643 | $ | 845,911 | $ | 145,047 | $ | 2,715 | $ | 2,261,316 | |||||||||
| Changes in unrealized gains (losses) included in earnings related to balances still held at December 31, 2014 | $ | — | $ | 559,153 | $ | (2,817 | ) | $ | (1,358 | ) | $ | 554,978 | |||||||
(1) Settlements include charge-offs, prepayments, pay downs and maturities.
The Company recognized $254.7 million and $559.2 million of gains in earnings related to the Retail Installment Contracts Held for Investment where the Company elected the fair value option. The gains are driven by three primary factors: 1) the recognition of interest income 2) recoveries of previously charged-off RICs and 3) actual performance of the portfolio since the Change in Control. Recoveries from RICs that were charged-off at the Change in Control dates are a direct increase to the gain recognized within the portfolio. In accordance with ASC 805, Business Combinations, the Company did not ascribe a fair value to the portfolio of sub-prime charged-off RICs at the Change in Control date. Recoveries of previously charged off loans are usually recorded as a reduction to charge-offs in the period the recovery is made, however, in instances where the FVO is elected, it will flow through the fair value mark. At the Change in Control date, the unpaid principal balance of the previously charged-off RIC portfolio was approximately $3 billion.
Valuation Processes and Techniques - Recurring Fair Value Assets and Liabilities
The following is a description of the valuation techniques used for instruments measured at fair value on a recurring basis:
Securities Available-for-Sale and Trading Securities
Securities accounted for at fair value include both available-for-sale and trading securities portfolios. The Company utilizes a third-party pricing service to value its investment securities portfolios. Its primary pricing service has consistently proved to be a high quality third-party pricing provider. For those investments not valued by pricing vendors, other trusted market sources are utilized. The vendors the Company uses provide pricing services on a global basis. The Company monitors and validates the reliability of vendor pricing on an ongoing basis, which can include pricing methodology reviews, performing detailed reviews of the assumptions and inputs used by the vendor to price individual securities, and price validation testing. Price validation testing is performed independently of the risk-taking function and can include corroborating the prices received from third-party vendors with prices from another third-party source, reviewing valuations of comparable instruments, comparison to internal valuations, or by reference to recent sales of similar securities.
The classification of securities within the fair value hierarchy is based upon the activity level in the market for the security type and the observability of the inputs used to determine their fair value. Actively traded quoted market prices for investment securities available-for-sale, such as U.S. Treasury and government agency securities, corporate debt, state and municipal securities, and MBS, are not readily available. The Company's principal markets for its investment securities are the secondary institutional markets with an exit price that is predominantly reflective of bid-level pricing in these markets. These investment securities are priced by third-party pricing vendors. The third-party vendors use a variety of methods when pricing these securities that incorporate relevant observable market data to arrive at an estimate of what a buyer in the marketplace would pay for a security under current market conditions. These investment securities are, therefore, considered Level 2.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUE (continued)
ABS is comprised primarily of collateralized loan obligations ("CLOs") and other ABS. Certain ABS are valued using DCF models. The DCF models are obtained from a third-party pricing vendor who uses observable market data and therefore are classified as Level 2. CLOs are initially valued by the provider using DCF models which consider inputs such as default correlation, credit spread, prepayment speed, conditional default rate and loss severity. The price produced by the model is then compared to recent trades for similar transactions. If there are differences between the model price and the market price, adjustments are made to the model so the final price approximates the market price. These CLO investments are, therefore, considered Level 2. Other ABS that could not be valued using a third-party pricing service are valued using an internally-developed DCF model. When estimating the fair value using this model, the Company uses its best estimate of the key assumptions which include the discount rates and forward yield curves. The Company uses comparable bond indices based on industry, term, and rating to discount the expected future cash flows. Determining the comparability of assets involves significant subjectivity related to asset type differences, cash flows, performance and other inputs. The inability of the Company to corroborate the fair value of the ABS due to the limited available observable data on these ABS resulted in a fair value classification of Level 3.
The Company's equity securities, which are comprised primarily of shares of registered mutual funds, are priced using net asset value per share, which is validated with a sufficient level of observable activity. Since the price is observable and unadjusted, these investments are considered Level 1.
Gains and losses on investments are recognized in the Consolidated Statements of Operations through Net gain on sale of investment securities.
RICs Held for Investment
For certain RIC held for investment, the Company has elected the FVO. The fair values of RICs are estimated using the DCF model. In estimating the fair value using this model, the Company uses significant unobservable inputs on key assumptions, which includes historical default rate and adjustments to reflect voluntary prepayments, prepayment rates based on available data from a comparable market securitization of similar assets, discount rates reflective of the cost of funding debt issuance and recent historical equity yields, recovery rates based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. Accordingly, retail installment contracts held for investment are classified as Level 3.
LHFS
The fair values of LHFS are estimated using published forward agency prices to agency buyers such as FNMA and FHLMC. The majority of the residential mortgage LHFS portfolio is sold to these two agencies. The fair value is determined using current secondary market prices for portfolios with similar characteristics, adjusted for servicing values and market conditions.
These loans are regularly traded in active markets, and observable pricing information is available from market participants. The prices are adjusted as necessary to include the embedded servicing value in the loans as well as the specific characteristics of certain loans that are priced based on the pricing of similar loans. These adjustments represent unobservable inputs to the valuation and, are not significant given the relative insensitivity of the value to changes in these inputs to the fair value of the loans. Accordingly, residential mortgage LHFS are classified as Level 2. See further discussion below in the FVO for Financial Assets and Financial Liabilities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUE (continued)
MSRs
The model to value MSRs estimates the present value of the future net cash flows from mortgage servicing activities based on various assumptions. These cash flows include servicing and ancillary revenue, offset by the estimated costs of performing servicing activities. Significant assumptions used in the valuation of residential MSRs include changes in anticipated loan prepayment rates ("CPRs") and the discount rate, reflective of a market participant's required return on an investment for similar assets. Other important valuation assumptions include market-based servicing costs and the anticipated earnings on escrow and similar balances held by the Company in the normal course of mortgage servicing activities. All of these assumptions are considered to be unobservable inputs. Historically, servicing costs and discount rates have been less volatile than CPR and earnings rates, both of which are directly correlated with changes in market interest rates. Increases in prepayment speeds, discount rates and servicing costs result in lower valuations of MSRs. Decreases in the anticipated earnings rate on escrow and similar balances result in lower valuations of MSRs. For each of these items, the Company makes assumptions based on current market information and future expectations. All of the assumptions are based on standards that the Company believes would be utilized by market participants in valuing MSRs and are derived and/or benchmarked against independent public sources. Accordingly, MSRs are classified as Level 3. Gains and losses on MSRs are recognized on the Consolidated Statements of Operations through Mortgage banking income, net. See further discussion on MSRs in Note 10.
Listed below are the most significant inputs that are utilized by the Company in the evaluation of residential MSRs:
| • | A 10% and 20% increase in the CPR speed would decrease the fair value of the residential servicing asset by $5.0 million and $9.5 million, respectively, at December 31, 2015. |
| • | A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $5.0 million and $9.6 million, respectively, at December 31, 2015. |
Significant increases (decreases) in any of those inputs in isolation would result in significantly higher (lower) fair value measurements. These sensitivity calculations are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change. Prepayment estimates generally increase when market interest rates decline and decrease when market interest rates rise. Discount rates typically increase when market interest rates increase and/or credit and liquidity risks increase and decrease when market interest rates decline and/or credit and liquidity conditions improve.
Derivatives
The valuation of these instruments is determined using widely accepted valuation techniques, including DCF analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable and unobservable market-based inputs. The fair value represents the estimated amount the Company would receive or pay to terminate the contract or agreement, taking into account current interest rates, foreign exchange rates, equity prices and, when appropriate, the current creditworthiness of the counterparties.
The Company incorporates credit valuation adjustments in the fair value measurement of its derivatives to reflect the respective counterparty's nonperformance risk in the fair value measurement of its derivatives, except for those derivative contracts with associated credit support annexes which provide credit enhancements, such as collateral postings and guarantees.
The Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy. Certain of the Company's derivatives utilize Level 3 inputs, which are primarily related to mortgage banking derivatives-interest rate lock commitments.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUE (continued)
The DCF model is utilized to determine the fair value of the mortgage banking derivatives-interest rate lock commitments. The significant unobservable inputs for mortgage banking derivatives used in the fair value measurement of the Company's loan commitments are "pull through" percentage and the MSR value that is inherent in the underlying loan value. The pull through percentage is an estimate of loan commitments that will result in closed loans. Significant increases (decreases) in any of these inputs in isolation would result in significantly higher (lower) fair value measurements. Significant increases (decreases) in the fair value of a mortgage banking derivative asset (liability) results when the probability of funding increases (decreases). Significant increases (decreases) in the fair value of a mortgage loan commitment result when the embedded servicing value increases (decreases).
Gains and losses related to derivatives affect various line items in the Consolidated Statements of Operations. See Note 15 for a discussion of derivatives activity.
Level 3 Inputs - Significant Recurring Assets and Liabilities
The following table presents quantitative information about the significant unobservable inputs within significant Level 3 recurring assets and liabilities.
| Fair Value at December 31, 2015 | Valuation Technique | Unobservable Inputs | Range (Weighted Average) | |||||||
| (in thousands) | ||||||||||
| Financial Assets: | ||||||||||
| Asset-backed securities | ||||||||||
| Financing bonds | $ | 1,310,203 | Discounted Cash Flow | Discount Rate (1) | 1.10% - 2.14% (1.39%) | |||||
| Sale-leaseback securities | $ | 50,037 | Consensus Pricing (2) | Offered quotes (3) | 127.42 | % | ||||
| Retail installment contracts held for investment | $ | 328,655 | Discounted Cash Flow | Prepayment rate (CPR) (4) | 9.25 | % | ||||
Discount Rate (5) | 10.00% - 13.50% (10.92%) | |||||||||
Recovery Rate (6) | 25.00% - 43.00% (30.36%) | |||||||||
| Mortgage servicing rights | $ | 147,233 | Discounted Cash Flow | Prepayment rate (CPR) (7) | 0.52% - 54.35% (10.12%) | |||||
Discount Rate (8) | 9.90 | % | ||||||||
| Mortgage banking interest rate lock commitments | $ | 2,540 | Discounted Cash Flow | Pull through percentage (9) | 76.95 | % | ||||
MSR value (10) | 0.73% - 1.07% (1.01%) | |||||||||
(1) Based on the applicable term and discount index.
(2) Consensus pricing refers to fair value estimates that are generally developed using information such as dealer quotes or other third-party valuations or comparable asset prices.
(3) Based on the nature of the input, a range or weighted average does not exist. For sale-leaseback securities, the Company owns one security.
(4) Based on the analysis of available data from a comparable market securitization of similar assets.
(5) Based on the cost of funding of debt issuance and recent historical equity yields.
(6) Based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool.
(7) Average CPR projected from collateral stratified by loan type, note rate and maturity.
(8) Based on the nature of the input, a range or weighted average does not exist.
(9) Historical weighted average based on principal balance calculated as the percentage of loans originated for sale divided by total commitments less outstanding commitments.
(10) MSR value is the estimated value of the servicing right embedded in the underlying loan, expressed in basis points of outstanding unpaid principal balance.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUE (continued)
Fair Value of Financial Instruments
The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company's financial instruments are as follows:
| December 31, 2015 | |||||||||||||||||||
| Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Financial assets: | |||||||||||||||||||
| Cash and amounts due from depository institutions | $ | 5,025,148 | $ | 5,025,148 | $ | 5,025,148 | $ | — | $ | — | |||||||||
| Available-for-sale investment securities | 20,851,495 | 20,851,495 | 10,487 | 19,480,768 | 1,360,240 | ||||||||||||||
| Loans held for investment, net | 76,279,051 | 76,307,394 | — | 122,792 | 76,184,602 | ||||||||||||||
| Loans held-for-sale | 3,191,762 | 3,212,202 | — | 236,760 | 2,975,442 | ||||||||||||||
| Restricted cash | 2,429,729 | 2,429,729 | 2,429,729 | — | — | ||||||||||||||
| Mortgage servicing rights | 147,233 | 147,233 | — | — | 147,233 | ||||||||||||||
| Derivatives | 365,330 | 365,330 | — | 362,780 | 2,550 | ||||||||||||||
| Financial liabilities: | |||||||||||||||||||
| Deposits | 56,114,232 | 56,121,954 | 47,601,229 | 8,520,725 | — | ||||||||||||||
| Borrowings and other debt obligations | 49,086,103 | 49,320,778 | — | 40,117,999 | 9,202,779 | ||||||||||||||
| Derivatives | 344,441 | 344,441 | — | 344,037 | 404 | ||||||||||||||
| December 31, 2014 | |||||||||||||||||||
| (As Restated) | |||||||||||||||||||
| Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | |||||||||||||||
| (in thousands) | |||||||||||||||||||
| Financial assets: | |||||||||||||||||||
| Cash and amounts due from depository institutions | $ | 2,234,725 | $ | 2,234,725 | $ | 2,234,725 | $ | — | $ | — | |||||||||
| Available-for-sale investment securities | 15,908,078 | 15,908,078 | 10,343 | 14,630,092 | 1,267,643 | ||||||||||||||
| Trading securities | 833,936 | 833,936 | — | 833,936 | — | ||||||||||||||
| Loans held for investment, net | 74,273,471 | 74,265,569 | — | 101,218 | 74,164,351 | ||||||||||||||
| Loans held-for-sale | 260,252 | 260,251 | — | 260,251 | — | ||||||||||||||
| Restricted cash | 2,024,838 | 2,024,838 | 2,024,838 | — | — | ||||||||||||||
| Mortgage servicing rights | 145,047 | 145,047 | — | — | 145,047 | ||||||||||||||
| Derivatives | 387,170 | 387,170 | — | 384,100 | 3,070 | ||||||||||||||
| Financial liabilities: | |||||||||||||||||||
| Deposits | 52,474,007 | 52,507,347 | 45,162,698 | 7,344,649 | — | ||||||||||||||
| Borrowings and other debt obligations | 39,679,382 | 40,147,937 | — | 30,355,610 | 9,792,327 | ||||||||||||||
| Derivatives | 374,991 | 374,991 | — | 374,636 | 355 | ||||||||||||||
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUE (continued)
Valuation Processes and Techniques - Financial Instruments
The preceding tables present disclosures about the fair value of the Company's financial instruments. Those fair values for certain instruments are presented based upon subjective estimates of relevant market conditions at a specific point in time and information about each financial instrument. In cases in which quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties resulting in variability in estimates affected by changes in assumptions and risks of the financial instruments at a certain point in time. Therefore, the derived fair value estimates presented above for certain instruments cannot be substantiated by comparison to independent markets. In addition, the fair values do not reflect any premium or discount that could result from offering for sale at one time an entity’s entire holding of a particular financial instrument, nor does it reflect potential taxes and the expenses that would be incurred in an actual sale or settlement. Accordingly, the aggregate fair value amounts presented above do not represent the underlying value of the Company.
The following methods and assumptions were used to estimate the fair value of each class of financial instruments not measured at fair value on the Consolidated Balance Sheet:
Cash and amounts due from depository institutions
Cash and cash equivalents include cash and due from depository institutions, interest-bearing deposits in other banks, federal funds sold, and securities purchased under agreements to resell. The related fair value measurements have been classified as Level 1, since their carrying value approximates fair value due to the short-term nature of the asset.
As of December 31, 2015 and December 31, 2014, the Company had $2.4 billion and $2.0 billion, respectively, of restricted cash. Restricted cash is related to cash restricted for investment purposes, cash posted for collateral purposes, cash advanced for loan purchases, and lockbox collections. Cash and cash equivalents, including restricted cash, have maturities of three months or less and, accordingly, the carrying amount of these instruments is deemed to be a reasonable estimate of fair value.
Loans held for investment, net
The fair values of loans are estimated based on groupings of similar loans, including but not limited to stratifications by type, interest rate, maturity, and borrower creditworthiness. Discounted future cash flow analyses are performed for these loans incorporating assumptions of current and projected voluntary prepayment speeds. Discount rates are determined using the Company's current origination rates on similar loans, adjusted for changes in current liquidity and credit spreads (if necessary). Because the current liquidity spreads are generally not observable in the market and the expected loss assumptions are based on the Company's experience, these are Level 3 valuations. Impaired loans are valued at fair value on a nonrecurring basis. See further discussion under "Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis" above.
Deposits
The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, interest-bearing demand deposit accounts, savings accounts and certain money market accounts is equal to the amount payable on demand and does not take into account the significant value of the cost advantage and stability of the Company’s long-term relationships with depositors. The fair value of fixed-maturity certificates of deposit ("CDs") is estimated by discounting cash flows using currently offered rates for deposits of similar remaining maturities. The related fair value measurements have generally been classified as Level 1 for core deposits, since the carrying value approximates fair value due to the short-term nature of the liabilities. All other deposits are considered to be Level 2.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUE (continued)
Borrowings and other debt obligations
Fair value is estimated by discounting cash flows using rates currently available to the Company for other borrowings with similar terms and remaining maturities. Certain other debt obligation instruments are valued using available market quotes for similar instruments, which contemplates issuer default risk. The related fair value measurements have generally been classified as Level 2. A certain portion of debt, relating to revolving credit facilities, is classified as Level 3. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements and, therefore, are considered to be Level 3.
Commitments to extend credit and standby letters of credit
Commitments to extend credit and standby letters of credit include the value of unfunded lending commitments and standby letters of credit, as well as the recorded liability for probable losses. The Company’s pricing of such financial instruments is based largely on credit quality and relationship, probability of funding and other requirements. Loan commitments often have fixed expiration dates and contain termination and other clauses which provide relief from funding in the event of significant deterioration in the credit quality of the customer. The rates and terms of the Company’s loan commitments and letters of credit are competitive with other financial institutions operating in markets served by the Company.
The liability for probable losses is estimated by analyzing unfunded lending commitments and standby letters of credit for commercial customers and segregating by risk according to the Company's internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information, result in the estimation of the reserve for probable losses.
These instruments and the related reserve are classified as Level 3. The Company believes that the carrying amounts, which are included in Other liabilities, are reasonable estimates of fair value for these financial instruments.
FVO for Financial Assets and Financial Liabilities
LHFS
The Company's LHFS portfolio primarily consists of residential mortgages and RICs. RICs and commercial loans that are held-for-sale are accounted for at the lower of cost or market. The Company adopted the FVO on residential mortgage loans classified as held-for-sale, which allows the Company to record the mortgage LHFS portfolio at fair market value compared to the lower of cost, net of deferred fees, deferred origination costs, or market. The Company economically hedges its residential LHFS portfolio, which is reported at fair value. A lower of cost or market accounting treatment would not allow the Company to record the excess of the fair market value over book value, but would require the Company to record the corresponding reduction in value on the hedges. Both the loans and related hedges are carried at fair value, which reduces earnings volatility, as the amounts more closely offset.
RIC held for investment
To reduce accounting and operational complexity, the Company elected the FVO for certain of its RICs held for investment in connection with the Change in Control. These loans consisted of all of SC’s RIC accounted by SC under ASC 310-30, as well as all of SC’s RICs that were more than 60 days past due at the date of the Change in Control, which collectively had an aggregate outstanding unpaid principal balance of $2.6 billion with a fair value of $1.9 billion at that date.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 19. FAIR VALUE (continued)
The following table summarizes the differences between the fair value and the principal balance of LHFS and RIC measured at fair value as of December 31, 2015 and 2014.
| Fair Value | Aggregate Unpaid Principal Balance | Difference | ||||||||||
| (in thousands) | ||||||||||||
| December 31, 2015 | ||||||||||||
Loans held-for-sale(1) | $ | 236,760 | $ | 234,313 | $ | 2,447 | ||||||
| Nonaccrual loans | — | — | — | |||||||||
| Retail installment contracts held for investment | $ | 328,655 | $ | 423,757 | $ | (95,102 | ) | |||||
| Nonaccrual loans | 38,226 | 60,793 | (22,567 | ) | ||||||||
| December 31, 2014 | ||||||||||||
| Loans held-for-sale | $ | 213,666 | $ | 208,889 | $ | 4,777 | ||||||
| Nonaccrual loans | — | — | — | |||||||||
| Retail installment contracts held for investment | $ | 845,911 | $ | 1,074,071 | $ | (228,160 | ) | |||||
| Nonaccrual loans | 90,341 | 149,098 | (58,757 | ) | ||||||||
(1) LHFS disclosed on the Consolidated Balance Sheet also includes loans held for sale that are held at the lower of cost or fair value.
Interest income on the Company’s LHFS and RIC held for investment is recognized when earned based on their respective contractual rates in Interest income on loans in the Consolidated Statements of Operations. The accrual of interest is discontinued and reversed once the loans become more than 90 days past due for LHFS and more than 60 days past due for RIC held for investment.
Residential MSRs
The Company elected to account for its existing portfolio of residential MSRs at fair value. This election created greater flexibility with regard to any ongoing decisions relating to risk management of the asset by mitigating the effects of changes to the residential MSRs' fair value through the use of risk management instruments.
The Company's residential MSRs had an aggregate fair value of $147.2 million and $145.0 million at December 31, 2015 and 2014, respectively. Changes in fair value totaling a gain of $3.9 million and a loss of $2.8 million were recorded in Mortgage banking income, net in the Consolidated Statements of Operations during the years ended December 31, 2015 and 2014, respectively.
NOTE 20. COMMITMENTS, CONTINGENCIES AND GUARANTEES
Off-Balance Sheet Risk - Financial Instruments
In the normal course of business, the Company utilizes a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers and manage its exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, letters of credit, loans sold with recourse, forward contracts, and interest rate and cross currency swaps, caps and floors. These financial instruments may involve, to varying degrees, elements of credit, liquidity, and interest rate risk in excess of the amount recognized on the Consolidated Balance Sheet. The contractual or notional amounts of these financial instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, letters of credit and loans sold with recourse is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For forward contracts and interest rate swaps, caps and floors, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of its forward contracts and interest rate swaps, caps and floors through credit approvals, limits and monitoring procedures. See Note 15 to these Consolidated Financial Statements for discussion of all derivative contract commitments.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
The following table details the amount of commitments at the dates indicated:
| Other Commitments | December 31, 2015 | December 31, 2014 | ||||||
| (in thousands) | ||||||||
Commitments to extend credit (1) | $ | 31,379,039 | $ | 28,792,062 | ||||
| Unsecured revolving lines of credit | — | 5 | ||||||
| Letters of credit | 1,832,884 | 1,789,666 | ||||||
| Recourse exposure on sold loans | 70,394 | 174,902 | ||||||
| Commitments to sell loans | 56,982 | 82,791 | ||||||
| Total commitments | $ | 33,339,299 | $ | 30,839,426 | ||||
(1) Commitments to extend credit excludes commitments that can be canceled by the Company without notice.
Commitments to Extend Credit
Commitments to extend credit generally have fixed expiration dates, are variable rate, and contain provisions that permit the Company to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer’s credit quality. These arrangements normally require payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements.
Subsequent to December 31, 2015 but prior to the issuance of the financial statements, SBNA transferred and settled $3.1 billion of unfunded commitments to extend credit to an unconsolidated related party.
The following table details the amount of commitments to extend credit expiring per period as of the dates indicated:
| December 31, 2015 | December 31, 2014 | |||||||
| (in thousands) | ||||||||
| 1 year or less | $ | 6,451,239 | $ | 5,968,468 | ||||
| Over 1 year to 3 years | 5,250,512 | 5,322,291 | ||||||
| Over 3 years to 5 years | 12,136,625 | 10,810,213 | ||||||
Over 5 years (1) | 7,540,663 | 6,691,090 | ||||||
| Total | $ | 31,379,039 | $ | 28,792,062 | ||||
(1) Includes certain commitments to extend credit that do not have a contractual maturity date, but are expected to be outstanding greater than 5 years.
Unsecured Revolving Lines of Credit
Such commitments, included in the Commitments to extend credit line above, arise primarily from agreements with customers for unused lines of credit on unsecured revolving accounts and credit cards, provided there is no violation of conditions in the underlying agreement. These commitments, substantially all of which the Company can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualifications.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
Letters of Credit
The Company’s letters of credit meet the definition of a guarantee. Letters of credit commit the Company to make payments on behalf of its customers if specified future events occur. The guarantees are primarily issued to support public and private borrowing arrangements. The weighted average term of these commitments is 14.7 months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the event of a draw by the beneficiary that complies with the terms of the letters of credit, the Company would be required to honor the commitment. The Company has various forms of collateral for these letters of credit, including real estate assets and other customer business assets. The maximum undiscounted exposure related to these commitments at December 31, 2015 was $1.8 billion. The fees related to letters of credit are deferred and amortized over the lives of the commitments and were immaterial to the Company’s financial statements at December 31, 2015. Management believes that the utilization rate of these letters of credit will continue to be substantially less than the amount of the commitments, as has been the Company’s experience to date. As of December 31, 2015 and 2014, the liability related to these letters of credit was $29.9 million and $73.9 million, respectively, which is recorded within the reserve for unfunded lending commitments in Other liabilities on the Consolidated Balance Sheet. The credit risk associated with letters of credit is monitored using the same risk rating system utilized within the loan and financing lease portfolio. Also included within the reserve for unfunded lending commitments at December 31, 2015 and 2014 were lines of credit outstanding of $117.5 million and $58.8 million, respectively.
The following table details the amount of letters of credit expiring per period as of the dates indicated:
| December 31, 2015 | December 31, 2014 | |||||||
| (in thousands) | ||||||||
| 1 year or less | $ | 1,230,424 | $ | 1,250,124 | ||||
| Over 1 year to 3 years | 308,634 | 285,108 | ||||||
| Over 3 years to 5 years | 268,946 | 248,209 | ||||||
| Over 5 years | 24,880 | 6,225 | ||||||
| Total | $ | 1,832,884 | $ | 1,789,666 | ||||
Loans Sold with Recourse
The Company has loans sold with recourse that meet the definition of a guarantee. For loans sold with recourse under the terms of its multifamily sales program with FNMA, the Company retained a portion of the associated credit risk. The unpaid principal balance outstanding of loans sold in these programs was $552.1 million as of December 31, 2015 and $2.6 billion as of December 31, 2014. As a result of its agreement with FNMA, the Company retained a 100% first loss position on each multifamily loan sold to FNMA until the earlier to occur of (i) the aggregate approved losses on multifamily loans sold to FNMA reaching the maximum loss exposure for the portfolio as a whole of $34.4 million as of December 31, 2015 and $152.8 million as of December 31, 2014, or (ii) the time when such loans sold to FNMA under this program are fully paid off. Any losses sustained as a result of impediments in standard representations and warranties would be in addition to the maximum loss exposure.
The Company has established a liability which represents the fair value of the retained credit exposure and the amount the Company estimates it would have to pay a third party to assume the retained recourse obligation. The estimated liability is calculated as the present value of losses that the portfolio is projected to incur based upon internal specific information and an industry-based default curve with a range of estimated losses. At December 31, 2015 and 2014, the Company had $6.8 million and $40.7 million, respectively, of reserves classified in Accrued expenses and payables on the Consolidated Balance Sheets related to the fair value of the retained credit exposure for loans sold to FNMA under this program. The Company's commitment will expire in March 2039 based on the maturity of the loans sold with recourse. Losses sustained by the Company may be offset, or partially offset, by proceeds resulting from the disposition of the underlying mortgaged properties. Approval from FNMA is required for all transactions related to the liquidation of properties underlying the mortgages. In 2015 and 2014 the Company repurchased $1.4 billion and $898.5 million, respectively, of performing loans previously sold to FNMA. Refer to Note 5 Loans to the Consolidated Financial Statements for further discussion of this purchase.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
Commitments to Sell Loans
The Company enters into forward contracts relating to its mortgage banking business to hedge the exposures from commitments to make new residential mortgage loans with existing customers and from mortgage loans classified as LHFS. These contracts mature in less than one year.
Representation and Warranty Liability
In the ordinary course of business, the Company sells residential mortgage loans on a non-recourse basis to certain government-sponsored entities ("GSEs") and private investors. In connection with these sales, the Company has entered into agreements containing various representations and warranties about, among other things, the ownership of the loans, the validity of the liens securing the loans, the loans' compliance with any applicable loan criteria established by the GSEs and the private investors, including underwriting standards and the ongoing existence of mortgage insurance, the absence of delinquent taxes or liens against the property securing the loans, and the loans' compliance with applicable federal, state, and local laws. Breaches of these representations and warranties may require the Company to repurchase the mortgage loan, or if the loan has been foreclosed, the underlying collateral, or otherwise make whole or provide other remedies to the GSEs and the private investors. The repurchase liability is recorded within Accrued expenses and payables on the Consolidated Balance Sheets, and the related income statement activity is recorded in Mortgage banking income, net on the Consolidated Statements of Operations. In May 2014, the Company reached a settlement with FNMA for loans previously sold, resulting in an $8.0 million reduction in the representation and warranty liability. In December 2014, the Company reached a settlement with FHLMC for loans previously sold, resulting in a $24.8 million reduction in the representation and warranty liability. Management believes the Company's repurchase reserve appropriately reflects the estimated probable losses on repurchase claims for all loans sold and outstanding as of December 31, 2015. In making these estimates, the Company considers the losses it expects to incur over the lives of the loans sold. As of December 31, 2015 and December 31, 2014, the reserve balance was $23.8 million and $24.3 million, respectively.
SC Commitments
SC is obligated to make purchase price hold-back payments to a third party originator of loans that it purchases on a periodic basis, when losses are lower than originally expected. SC is also obligated to make total return settlement payments to this third party originator in 2016 and 2017 if returns on the purchased pools are greater than originally expected. The balance of these pools totaled $12.0 million and $57.9 million as of December 31, 2015 and 2014 , respectively.
SC has extended revolving lines of credit to certain auto dealers. Under this arrangement, SC is committed to lend up to each dealer's established credit limit. At December 31, 2015, there was an outstanding balance of $26.9 million and a committed amount of $27.4 million.
Under terms of agreements with a peer-to-peer personal lending platform company, LendingClub, SC was committed as of December 31, 2015 to purchase at least the lesser of $30.0 million per month or 50% of the lending platform company’s aggregate near-prime originations thereafter through July 2017. This commitment could be reduced or canceled with 90 days' notice. On October 9, 2015, SC sent a notice of termination to the lending platform company, and, accordingly, ceased originations on this platform on January 7, 2016. On February 1, 2016, SC completed the sale of substantially all of their 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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
SC committed to purchase certain new advances on personal revolving financings originated by a third party retailer, along with existing balances on accounts with new advances, for an initial term ending in April 2020 and renewing through April 2022 at the retailer's option. Each customer account generated under the agreements generally is approved with a credit limit higher than the amount of the initial purchase, with each subsequent purchase automatically approved as long as it does not cause the account to exceed its limit and the customer is in good standing. As these credit lines do not have a specified maturity, but rather can be terminated at any time in the event of adverse credit changes or lack of use, SC has not recorded an allowance for unfunded commitments. As of December 31, 2015 and December 31, 2014, SC was obligated to purchase $12.5 million and $7.7 million, respectively, in receivables that had been originated by the retailer but not yet purchased by SC. SC is also required to make a profit-sharing payment to the retailer each month if performance exceeds a specified return threshold. During the year ended December 31, 2015, SC and the third party retailer executed an amendment that, among other provisions, increases the profit-sharing percentage retained by SC, gives the retailer the right to repurchase up to 9.99% of the existing portfolio at any time during the term of the agreement, and provided that repurchase right is exercised, gives the retailer the right to retain up to 20% of new accounts subsequently originated. SC is seeking a third party who is willing and able to take on this obligation and continues to classify this portfolio as held-for-sale. SC has recorded lower-of-cost-or-market adjustments on this portfolio and may continue to do so as long as it is held, particularly due to the new volume they are committed to purchase.
Under terms of an application transfer agreement with another original equipment manufacturer (OEM), SC has the first opportunity to review for its own portfolio any credit applications turned down by the OEM's captive finance company. The agreement does not require SC to originate any loans, but for each loan originated SC will pay the OEM a referral fee, comprised of a volume bonus fee and a loss betterment bonus fee. The loss betterment bonus fee will be calculated annually and is based on the amount by which losses on loans originated under the agreement are lower than an established percentage threshold.
In connection with the sale of retail installment contracts through securitizations and other sales, SC has made standard representations and warranties customary to the consumer finance industry. Violations of these representations and warranties may require SC to repurchase loans previously sold to on- or off-balance sheet trusts or other third parties. As of December 31, 2015, SC had no repurchase requests outstanding. In the opinion of management, the potential exposure of other recourse obligations related to SC’s retail installment contract sales agreements will not have a material adverse effect on SC’s consolidated financial position, results of operations, or cash flows.
Santander has provided guarantees on the covenants, agreements, and obligations of SC under the governing documents of its warehouse facilities and privately issued amortizing notes. These guarantees are limited to the obligations of SC as servicer.
Under terms of the Chrysler Agreement, SC must make revenue sharing payments to FCA and also must make gain-sharing payments when residual gains on leased vehicles exceed a specified threshold.
SC has a flow agreement with Bank of America whereby SC is committed to sell up to a specified amount of eligible loans to the Bank of America each month through May 2018. Prior to October 1, 2015, the amount of this monthly commitment was $300 million. On October 1, 2015, SC and Bank of America amended the flow agreement to increase the maximum commitment to sell to $350 million of eligible loans each month, and to change the required written notice period from either party, in the event of termination of the agreement, from 120 days to 90 days. SC retains servicing on all sold loans and may receive or pay a servicer performance payment based on an agreed-upon formula if performance on the sold loans is better or worse, respectively, than expected performance at time of sale.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
SC has sold loans to Citizens Bank of Pennsylvania ("CBP") under terms of a flow agreement and predecessor sale agreements. SC retains servicing on the sold loans and will owe CBP a loss-sharing payment capped at 0.5% of the original pool balance if losses exceed a specified threshold, established on a pool-by-pool basis. On June 25, 2015, SC executed an amendment to the servicing agreement with CBP, which increased the servicing fee SC receives. SC and CBP also amended the flow agreement which reduced, effective from and after August 1, 2015, CBP's committed purchases of Chrysler Capital prime loans from a maximum of $600 million and a minimum of $250 million per quarter to a maximum of $200 million and a minimum of $50 million per quarter, as may be adjusted according to the agreement. In January 2016, the Company executed an amendment to the servicing agreement with CBP which decreased the servicing fee the Company receives on loans sold to CBP by the Company under the flow agreement.
In connection with the bulk sales of Chrysler Capital leases to a third party, SC is obligated to make quarterly payments to the purchaser sharing residual losses for lease terminations with losses over a specific percentage threshold. The estimated guarantee liability was $2.9 million, net, as of December 31, 2015.
On March 31, 2015, SC executed a forward flow asset sale agreement with a third party under terms of which SC is committed to sell charged-off loan receivables in bankruptcy status on a quarterly basis until sales total at least $200 million in proceeds. SC and the third party executed an amendment to the forward flow asset sale agreement on June 29, 2015, which increased the committed sales of charged-off loan receivables in bankruptcy status to $275.0 million, and a second amendment on September 29, 2015 requiring sales to occur quarterly. On November 13, 2015, the SC and the third party executed a third amendment to the forward flow asset sale agreement, which increased the committed sales of charged off loan receivables in bankruptcy status to $350.0 million. However, any sale over $275.0 million is subject to a market price check. As of December 31, 2015, the remaining aggregate commitment was $200.7 million.
Other Off-Balance Sheet Risk
Other off-balance sheet risk stems from financial instruments that do not meet the definition of guarantees under applicable accounting guidance, and from other relationships which include items such as indemnifications provided in the ordinary course of business and intercompany guarantees.
Litigation
In the ordinary course of business, the Company and its subsidiaries are routinely parties to pending and threatened legal actions and proceedings, including class action claims. These actions and proceedings are generally based on alleged violations of consumer protection, securities, environmental, banking, employment and other laws. In some of these actions and proceedings, claims for substantial monetary damages are asserted against the Company and its subsidiaries. In the ordinary course of business, the Company and its subsidiaries are also subject to regulatory examinations, inspections, information-gathering requests, inquiries and investigations, including by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency (the “OCC”), the Consumer Financial Protection Bureau (the “CFPB”), the Federal Deposit Insurance Corporation (the “FDIC”), the Department of Justice (the “DOJ”), the SEC, states' attorney general, and other governmental and regulatory authorities.
In view of the inherent difficulty of predicting the outcome of such litigation and regulatory matters, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of the matters, or the eventual loss, fines or penalties related to the matter. The Company does not presently anticipate that the ultimate aggregate liability, if any, arising out of such other legal proceedings will have a material effect on its financial position.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation and regulatory matters when those matters present loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation, enforcement, or regulatory matter develops, the Company in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether the matter presents a loss contingency that is probable and estimable, during which quarter an accrued liability is established with respect to such loss contingency. The Company continues to monitor the matter for further developments that could affect the amount of the accrued liability previously established. For certain of the Company's legal matters, the Company is able to estimate a range of reasonably possible losses. For other matters for which some loss is probable or reasonably possible, such an estimate is not possible. Management currently estimates that it is reasonably possible that the Company could incur losses in an aggregate amount of up to approximately $25.0 million in excess of the accrued liability, if any, with it also being reasonably possible that the Company could incur no such losses in these matters. This estimated range of reasonably possible losses represents the estimate of possible losses over the life of such legal matters, which may span an indeterminable number of years, and is based on information available as of December 31, 2015.
The regulatory matters for which it is reasonably possible that the Company will incur a significant loss are described below. The Company may include in some of the descriptions of individual disclosed matters certain quantitative information related to the plaintiff's claim against the Company as alleged in the plaintiff's pleadings or other public filings or otherwise based on publicly available information. While information of this type may provide insight into the potential magnitude of a matter, it does not necessarily represent the Company's estimate of reasonably possible loss or its judgment as to any currently appropriate accrual. Refer to Note 16 to these Consolidated Financial Statements for disclosure regarding the lawsuit filed by the Company against the IRS/United States.
Other Regulatory and Governmental Matters
Foreclosure Matters
On May 22, 2013, the Bank received a subpoena from the U.S. Attorney's Office for the Southern District of New York seeking information regarding claims for foreclosure expenses incurred in connection with the foreclosure of loans insured or guaranteed by the Federal Housing Financing Agency, FNMA or FHLMC. The Bank is cooperating with the investigation; however, there can be no assurance that claims or litigation will not arise from this matter.
On April 13, 2011, the Bank and other parties signed a consent order with the Office of Thrift Supervision ("OTS") resolving certain of the Bank's and other parties' foreclosure activities (the "OTS Order") by the Bank's previous primary federal banking regulator, the OTS, as part of an interagency horizontal review of foreclosure practices at 14 mortgage servicers. Upon its conversion to a national bank on January 26, 2012, the Bank entered into a stipulation consenting to the issuance of a consent order by the OCC, which contains the same terms as the OTS Order (the "Order").
Under the agreement, the Bank has paid $6.2 million into a remediation fund, the majority of which has been distributed to borrowers, and will engage in foreclosure avoidance activities, such as loan modifications and short sales over the next two years in an aggregate principal amount of $9.9 million. In return, the OCC waived any civil money penalties that could have been assessed against the Bank. During 2013, the Company submitted for credit from the OCC mortgage loans in the amount of $74.1 million, which represents the principal balance of mortgage loans for which the Bank completed foreclosure avoidance activities with its borrowers.
On June 16, 2015, the Bank entered into a consent order amending the Order and the 2013 amendment to the Order (the “2015 Amendment”). The 2015 Amendment provides that the Bank has not fully complied with the terms of the OTS Order and that nine actionable items under the OTS Order as amended remain. The 2015 Amendment imposes certain supervisory restrictions on the Bank’s mortgage origination and servicing business. These restrictions require the Bank to obtain prior supervisory non-objection from the OCC before engaging in certain new or broader mortgage origination and servicing activities or appointing new senior mortgage servicing officers, although the Bank may generally operate its current mortgage origination and servicing business in the ordinary course. The Bank continues its efforts to close the nine actionable items identified in the 2015 Amendment.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
The 2015 Amendment confirmed that the Bank has fulfilled its obligations under the OTS Order to pay $6.2 million into the remediation fund referenced above and to engage in foreclosure avoidance activities in an aggregate principal amount of at least $9.9 million.
On February 8, 2016, the OCC terminated the OTS Order and assessed a civil monetary penalty of $3.4 million.
Identity Theft Protection Product Matter
The Bank had been in discussions to address concerns that some customers may have paid for but did not receive certain benefits of an identity theft protection product from the Bank's third-party vendor. In response to those concerns, as of December 31, 2014, the Bank had made $37.6 million in total remediation payments to customers. Notwithstanding those payments, on March 26, 2015, the Bank received a Consent Cease and Desist Order ("Consent Order") from the OCC regarding identified deficiencies in SBNA's billing practices with regard to an identity protection product. Pursuant to the Consent Order, the Bank paid a civil monetary penalty of $6.0 million and agreed to remediate customers who paid for but may not have received certain benefits of the identity theft protection product. As indicated above, as of the end of 2014, all customers had been mailed a refund representing the amount paid for product enrollment. Subsequently, the Bank commenced a further review in order to remediate checking account customers who may have been charged an overdraft fee and credit card customers who may have been charged an over limit fee and/or finance charge related to the identity theft protection product fees. The approximate amount of the expected additional remediation is $5.2 million. On June 26, 2015, the Bank sent its formal response to the Consent Order and on October 15, 2015, the OCC sent a Supervisory Letter (SBNA-2015-31) objecting to the Bank's Response and Proposed Reimbursement and Action Plans. On December 14, 2015, the Bank re-submitted a revised response and enhanced Reimbursement and Action Plans and on December 21, 2015 received a notice of non-objection from the OCC. Since that time, the actions and remediation set forth in the plans are underway as is ongoing reporting to the OCC.
Marketing of Overdraft Coverage
On April 1, 2014, the Bank received a civil investigative demand (“CID”) from the CFPB requesting information and documents in connection with the Bank’s marketing to consumers of overdraft coverage for ATM and/or onetime debit card transactions. The bank received a second CFPB CID related to the same overdraft coverage program on February 10, 2015. Pursuant to the terms of the CIDs, the information obtained by the CFPB will be used to determine whether the Bank is in compliance with laws administered by the CFPB. The Bank is cooperating with the investigation; however, there can be no assurance that claims or litigation will not arise from this matter.
The Company's practice is to cooperate fully with regulatory and governmental investigations, audits and other inquiries, including those described above.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
SC matters
Periodically, SC is party to or otherwise involved in various lawsuits and other legal proceedings that arise in the ordinary course of business. On August 26, 2014, a purported securities class action lawsuit was filed in the United States District Court, Southern District of New York (the "Steck Lawsuit"). On October 6, 2014, another purported securities class action lawsuit was filed in the District Court of Dallas County, Texas and was subsequently removed to the United States District Court, Northern District of Texas. Both lawsuits were filed against SC, certain of its current and former directors and executive officers of SC and certain institutions that served as underwriters in SC's IPO. Each lawsuit was brought by a purported stockholder of SC seeking to represent a class consisting of all those who purchased or otherwise acquired securities pursuant and/or traceable to SC's Registration Statement and Prospectus issued in connection with the IPO. Each complaint alleged that the Registration Statement and Prospectus contained misleading statements concerning SC’s auto lending business and underwriting practices. Each lawsuit asserted claims under Section 11 and Section 15 of the Securities Act of 1933 and seeks damages and other relief. In February 2015, the purported class action lawsuit pending in the United States District Court, Northern District of Texas, was voluntarily dismissed with prejudice. In June 2015, the venue of the Steck Lawsuit was transferred from the Southern District of New York to the Northern District of Texas. On October 15, 2015, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Feldman v. Jason A. Kulas, et al., C.A. No. 11614. The lawsuit names as defendants current and former members of SC’s board of directors, and names SC as a nominal defendant. The complaint alleges, among other things, that the current and former director defendants breached their fiduciary duties in connection with overseeing SC’s subprime auto lending practices, resulting in harm to SC. The complaint seeks unspecified damages and equitable relief.
Further, SC is party to or are otherwise involved periodically in reviews, investigations, and proceedings (both formal and informal), and information-gathering requests, by government and self-regulatory agencies, including the Federal Reserve, the CFPB, the DOJ, the SEC, the FTC and various state regulatory agencies. Currently, such proceedings include a civil subpoena from the DOJ under the Financial Institutions Reform, Recovery, and Enforcement Act ("FIRREA") requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime auto loans since 2007. Additionally, on October 28, 2014, SC received a preservation letter and request for documents from the SEC requesting the preservation and production of documents and communications that, among other things, relate to the underwriting and securitization of auto loans since January 1, 2011. SC also has received civil subpoenas from various state Attorneys General requesting similar documents and communications. SC is complying with the requests for information and document preservation.
On November 4, 2015, SC entered into an Assurance of Discontinuance (the "AOD") with the Office of Attorney General of the Commonwealth of Massachusetts (the "Massachusetts AG"). The Massachusetts AG had alleged that SC violated the maximum permissible interest rates allowed by Massachusetts law due to the inclusion of Guaranteed Auto Protection (GAP) in the calculation of finance charges. Among other things, the AOD requires SC, with respect to any loan that exceeded the maximum rates, to issue refunds of all finance charges paid to date and to waive all future finance charges. The AOD also requires SC to undertake certain remedial measures, including ensuring that interest rates on its loans do not exceed maximum rates (when GAP charges are included) in the future, and provides that SC pay one hundred fifty thousand dollars to the Massachusetts AG to reimburse its costs in implementing the AOD.
On February 25, 2015, SC entered into a consent order with the DOJ, approved by the United States District Court for the Northern District of Texas, that resolves the DOJ's claims against SC that certain of its repossession and collection activities during the period of time between violated the Servicemembers Civil Relief Act (the "SCRA"). The consent order requires SC to pay a civil fine in the amount of fifty-five thousand dollars, as well as at least $9.4 million to affected servicemembers consisting of ten thousand dollars plus compensation for any lost equity (with interest) for each repossession by SC and five thousand dollars for each instance where SC sought to collect repossession-related fees on accounts where a repossession was conducted by a prior account holder, as well as requires SC to undertake additional remedial measures.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
On July 31, 2015, the CFPB notified SC that it had referred to the DOJ certain alleged violations by SC of the Equal Credit Opportunity Act ("ECOA") regarding (i) statistical disparities in markups 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 has initiated, based on the referral from the CFPB, an investigation under the ECOA of SC's pricing of automobile loans.
SHUSA does not believe that there are any proceedings, threatened or pending, that, if determined adversely, would have a material adverse effect on the consolidated financial position, results of operations, or liquidity of SC.
Leases
The Company is committed under various non-cancelable operating leases relating to branch facilities having initial or remaining terms in excess of one year. Renewal options exist for the majority of these lease agreements.
Future minimum annual rentals under non-cancelable operating leases and sale-leaseback leases, net of expected sublease income, at December 31, 2015, are summarized as follows:
| AT DECEMBER 31, 2015 | ||||||||||||
Lease Payments | Future Minimum Expected Sublease Income | Net Payments | ||||||||||
| (in thousands) | ||||||||||||
| 2016 | $ | 125,672 | $ | (7,403 | ) | $ | 118,269 | |||||
| 2017 | 115,247 | (6,925 | ) | 108,322 | ||||||||
| 2018 | 99,016 | (4,840 | ) | 94,176 | ||||||||
| 2019 | 87,106 | (3,932 | ) | 83,174 | ||||||||
| 2020 | 64,564 | (2,414 | ) | 62,150 | ||||||||
| Thereafter | 262,901 | (5,793 | ) | 257,108 | ||||||||
| Total | $ | 754,506 | $ | (31,307 | ) | $ | 723,199 | |||||
The Company recorded rental expense of $161.8 million, $145.2 million and $126.4 million, net of $8.9 million, $9.9 million and $11.9 million of sublease income, in 2015, 2014 and 2013, respectively, in Occupancy and equipment expenses in the Consolidated Statement of Operations.
NOTE 21. REGULATORY MATTERS
The Company is subject to the regulations of certain federal, state, and foreign agencies, and undergoes periodic examinations by such regulatory authorities.
The minimum U.S. regulatory capital ratios for banks under Basel III are 4.5% for the common equity tier 1 (CET1) capital ratio, 6.0% for the Tier 1 capital ratio, 8.0% for the Total capital ratio, and 4.0% for the leverage ratio. To qualify as “well-capitalized,” regulators require banks to maintain capital ratios of at least 6.5% for the CET1 capital ratio, 8.0% for the Tier 1 capital ratio, 10.0% for the Total capital ratio, and 5.0% for the Leverage ratio. At December 31, 2015 and 2014, the Company met the well-capitalized capital ratio requirements.
As a BHC, SHUSA is required to maintain a (CET1) capital ratio of at least 4.5%, Tier 1 capital ratio of at least 6%, total capital ratio of at least 8%, and Leverage ratio of at least 4%. The Company’s capital levels exceeded the ratios required for BHCs. The Company's ability to make capital distributions will depend on the Federal Reserve's accepting the Company's capital plan, the results of the stress tests described in this Form 10-K, and the Company's capital status, as well as other supervisory factors.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21. REGULATORY MATTERS (continued)
The DFA mandates an enhanced supervisory framework, which means that the Company is 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, on its own or at the Financial Stability Oversight Council's recommendation, regarding contingent capital, enhanced public disclosures, short-term debt limits, and otherwise as it deems appropriate.
The Company is also required to receive a notice of non-objection to its capital plans from the Federal Reserve and the OCC before taking capital actions, such as paying dividends, implementing common equity repurchase programs, or redeeming or repurchasing capital instruments.
For a discussion of Basel III and the standardized approach and related future changes to the minimum U.S. regulatory capital ratios, see the section of the MD&A captioned Regulatory Matters.
The Federal Deposit Insurance Corporation Improvement Act established five capital tiers: well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. A depository institution’s capital tier depends on its capital levels in relation to various capital measures, which include leverage and risk-based capital measures and certain other factors. Depository institutions that are not classified as well-capitalized or adequately-capitalized are subject to various restrictions regarding capital distributions, payment of management fees, acceptance of brokered deposits and other operating activities.
Federal banking laws, regulations and policies also limit the Bank’s ability to pay dividends and make other distributions to the Company. The Bank must obtain prior OCC approval to declare a dividend or make any other capital distribution if, after such dividend or distribution: (1) the Bank’s total distributions to 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 required if the Bank’s examination or CRA ratings fall below certain levels or the Bank is notified by the OCC that it is a problem association 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 dividends declared or paid in 2015 or 2014. The Bank returned capital of $0.0 million and $128.0 million to SHUSA in 2015 and 2014, respectively.
243
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21. REGULATORY MATTERS (continued)
The following schedule summarizes the actual capital balances of the Bank and SHUSA at December 31, 2015 and 2014:
| REGULATORY CAPITAL | ||||||||||||||||
| Common Equity Tier 1 Capital Ratio | Tier 1 Capital Ratio | Total Capital Ratio | Leverage Ratio | |||||||||||||
| ($ in thousands) | ||||||||||||||||
Santander Bank at December 31, 2015(1): | ||||||||||||||||
| Regulatory capital | $ | 9,857,655 | $ | 9,857,655 | $ | 10,775,851 | $ | 9,857,655 | ||||||||
| Capital ratio | 13.81 | % | 13.81 | % | 15.09 | % | 11.46 | % | ||||||||
SHUSA at December 31, 2015(1): | ||||||||||||||||
| Regulatory capital | $ | 12,963,174 | $ | 14,647,474 | $ | 16,628,013 | $ | 14,647,474 | ||||||||
| Capital ratio | 11.95 | % | 13.51 | % | 15.33 | % | 11.57 | % | ||||||||
| Tier 1 Common Capital | Tier 1 Capital Ratio | Total Capital Ratio | Leverage Ratio | |||||||||||||
Santander Bank at December 31, 2014(2): | ||||||||||||||||
| Regulatory capital | $ | 8,831,156 | $ | 8,831,156 | $ | 9,872,603 | $ | 8,831,156 | ||||||||
| Capital ratio | 13.23 | % | 13.23 | % | 14.79 | % | 12.01 | % | ||||||||
SHUSA at December 31, 2014(2): | ||||||||||||||||
| (As Restated) | ||||||||||||||||
| Regulatory capital | $ | 10,962,147 | $ | 13,072,941 | $ | 15,066,932 | $ | 13,072,941 | ||||||||
| Capital ratio | 10.89 | % | 12.99 | % | 14.97 | % | 12.31 | % | ||||||||
(1) Represents phase-in ratios under Basel III
(2) Represents ratios under Basel I
NOTE 22. RELATED PARTY TRANSACTIONS
The parties related to the Company are deemed to include, in addition to its subsidiaries, jointly controlled entities, the Bank’s key management personnel (the members of its Board of Directors and certain officers at the level of senior executive vice president or above, together with their close family members) and the entities over which the key management personnel may exercise significant influence or control.
See Note 12 to the Consolidated Financial Statements for a description of the various debt agreements SHUSA has with Santander.
In March 2010, the Company issued a $750.0 million subordinated note to Santander, which was scheduled to mature in March 2020. This subordinated note bore interest at 5.75% until March 2015. SHUSA paid Santander $0.0 million (zero) in interest in 2015, and approximately $6.1 million and $43.1 million in interest in 2014, and 2013, respectively. This note was converted to common stock in February 2014. See Note 13 to the Consolidated Financial Statements.
The Company has $5.0 billion of public securities consisting of various senior note obligations, trust preferred security obligations and preferred stock issuances. Santander owned approximately 3.0% of the outstanding principal of these securities as of December 31, 2015.
The Company has entered into derivative agreements with Santander and Abbey National Treasury Services plc, a subsidiary of Santander, which consist primarily of swap agreements to hedge interest rate risk and foreign currency exposure. These contracts had notional values of $3.8 billion and $2.3 billion, respectively, as of December 31, 2015, compared to $3.0 billion and $2.6 billion, respectively, as of December 31, 2014.
244
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22. RELATED PARTY TRANSACTIONS (continued)
In 2006, Santander provided confirmation of standby letters of credit issued by the Company, which were not renewed after the fourth quarter of 2013. During the year ended December 31, 2013, the average unfunded balance outstanding under these commitments was $34.8 million. The Company incurred $0.3 million in fees in the year ended December 31, 2013.
During the year ended December 31, 2015, the Company paid $6.4 million in rental payments to Santander, compared to $6.7 million in 2014 and $2.5 million in 2013.
In the ordinary course of business, we may provide loans to our executive officers and, directors also known as Regulations O insiders. Pursuant to our policy, such loans are generally issued on the same terms as those prevailing at the time for comparable loans to unrelated persons and do not involve more than the normal risk of collectability. As permitted by Regulation O, certain mortgage loans to directors and executive officers of the Company and the Bank, including the Company's executive officers, are priced at up to a 1.0% discount to market and require no application fee, but contain no other terms than terms available in comparable transactions with non-employees. The 1.0% discount is discontinued when an employee terminates his or her employment with the Company or the Bank. The outstanding balance of these loans was $4.7 million and $6.6 million at December 31, 2015 and December 31, 2014, respectively.
The Company and its affiliates entered into or were subject to various service agreements with Santander and its affiliates. Each of the agreements was made in the ordinary course of business and on market terms. Those agreements include the following:
| • | NW Services Co., a Santander affiliate doing business as Aquanima, is under contract with the Bank to provide procurement services, with fees paid in 2015 in the amount of $3.3 million, $3.5 million in 2014 and $3.3 million in 2013. There were no payables in connection with this agreement in the years ended December 31, 2015 and 2014. The fees related to this agreement are recorded in Outside services in the Consolidated Statement of Operations. |
| • | Geoban, S.A., a Santander affiliate, is under contract with the Bank to provide administrative services, consulting and professional services, application support and back-office services, including debit card disputes and claims support, and consumer and mortgage loan set-up and review, with total fees paid in 2015 in the amount of $9.8 million, $13.4 million in 2014 and $15.7 million in 2013. In addition, as of December 31, 2015 and 2014, the Company had payables with Geoban, S.A. in the amounts of $10.5 million and $1.6 million, respectively. The fees related to this agreement are recorded in Outside services in the Consolidated Statement of Operations. |
| • | Ingenieria De Software Bancario S.L., a Santander affiliate, is under contract with the Bank to provide information technology development, support and administration, with fees paid in 2015 in the amount of $95.0 million, $108.5 million in 2014 and $125.8 million in 2013. In addition, as of December 31, 2015 and December 31, 2014, the Company had payables with Ingenieria De Software Bancario S.L. in the amounts of $12.3 million and $16.2 million, respectively. The fees related to this agreement are capitalized in Premises and equipment on the Consolidated Balance Sheets. |
| • | Produban Servicios Informaticos Generales S.L., a Santander affiliate, is under contract with the Bank to provide professional services, and administration and support of information technology production systems, telecommunications and internal/external applications, with fees paid in the amount of $106.8 million in 2015, $83.2 million in 2014 and $93.9 million in 2013. In addition, as of December 31, 2015 and December 31, 2014, the Company had payables with Produban Servicios Informaticos Generales S.L. in the amounts of $10.6 million and $9.9 million, respectively. The fees related to this agreement are recorded in Occupancy and equipment expenses and Technology expense in the Consolidated Statement of Operations. |
| • | Santander Back-Offices Globales Mayoristas S.A., a Santander affiliate, is under contract with the Bank to provide administrative services and back-office support for the Bank’s derivative, foreign exchange and hedging transactions and programs. Fees in the amounts of $1.3 million were paid to Santander Back-Offices Globales Mayoristas S.A. with respect to this agreement in 2015, and $0.7 million and $0.4 million in 2014 and 2013, respectively. There were no payables in connection with this agreement in 2015 or 2014. The fees related to this agreement are recorded in Outside services in the Consolidated Statement of Operations. |
245
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22. RELATED PARTY TRANSACTIONS (continued)
| • | SGF, a Santander affiliate, is under contracts with the Bank to provide (i) administration and management of employee benefits and payroll functions for the Bank and other affiliates, including employee benefits and payroll processing services provided by third party vendors through sponsorship by SGF, and (ii) property management and related services. In 2015, fees in the amount of $8.0 million were paid to SGF with respect to this agreement, compared to $12.3 million in 2014 and $11.6 million in 2013. There were no payables in connection with this agreement in 2015 or 2014. The fees related to this agreement are recorded in Outside services in the Consolidated Statement of Operations. |
| • | Santander Securities LLC, a Santander affiliate, entered into a contract with the Bank as of April 2012 to provide integrated services and conduct broker-dealer activities and insurance services. Santander Securities LLC collects amounts due from customers on behalf of the Bank and remits the amounts net of fees. As of December 31, 2015, the Company had receivables with Santander Securities LLC in the amount of $3.6 million, compared to $3.8 million in 2014, which are recorded within Other assets on the Consolidated Balance Sheet. Fees recognized related to this agreement were $46.5 million for the year-ended December 31, 2015, compared to $51.7 million in 2014, which are recorded within Consumer fees in the Consolidated Statement of Operations. Fees incurred in 2015 were $0.0 million, compared to $0.1 million in 2014 and $0.2 million in 2013. There were no payables in connection with this agreement in 2015 or 2014. |
SC has entered into or was subject to various agreements with Santander, its affiliates or the Company. Each of the agreements was done in the ordinary course of business and on market terms. Those agreements include the following:
| • | SC has a line of credit agreement with Santander. During the years ended December 31, 2015 and December 31, 2014, SC incurred interest expense, including unused fees of $96.8 million and $92.2 million which includes $6.0 million and $7.8 million of accrued interest payable, respectively. SC also has a letter of credit facility with Santander for which it incurred $0.0 million and $0.5 million of interest expense, including unused fees of $0.0 million and $0.1 million payable in 2015 and 2014, respectively. In August 2015, under a new agreement with Santander, SC agreed to begin paying Santander a fee of 12.5 basis points (per annum) on certain warehouse facilities, as they renew, for which Santander provides a guarantee of SC's servicing obligations. For revolving commitments, the guarantee fee will be paid on the total committed amount and for amortizing commitments, the guarantee fee will be paid against each months ending balance. The guarantee fee will only be applicable for additional facilities upon the execution of the counter-guaranty agreement related to a new facility or if reaffirmation is required on existing revolving or amortizing commitments as evidenced by a duly executed counter-guaranty agreement. SC recognized guarantee fee expense of $2.3 million for the year ended December 31, 2015. |
| • | SC has entered into derivative agreements with Santander and its affiliates, which consist primarily of swap agreements to hedge interest rate risk. These contracts had notional values of $13.7 billion and $16.3 billion at December 31, 2015 and 2014, respectively, which are included in Note 15 of these Consolidated Financial Statements. |
| • | In December 2015, SC formed a new wholly-owned subsidiary, Santander Consumer International PR, LLC (SCI), and SCI opened deposit accounts with Banco Santander Puerto Rico, an affiliated entity. |
| • | During 2014, and until May 9, 2015, SC entered into a flow agreement with SBNA under which SBNA has the first right to review and approve Chrysler Capital consumer vehicle lease applications. SC may review any applications declined by SBNA for SC’s own portfolio. SC provides servicing and receives an origination fee on all leases originated under this agreement. Pursuant to the Chrysler Agreement, SC pays FCA on behalf of SBNA for residual gains and losses on the flowed leases. |
| • | During the years ended December 31, 2015 and December 31, 2014, SC originated $23.5 million and $17.4 million, respectively, in personal unsecured revolving loans under terms of a master service agreement with a company in which it has a cost method investment and holds a warrant to increase its ownership if certain vesting conditions are satisfied. The master service agreement enables SC to review point-of-sale credit applications of retail store customers. During the year ended December 31, 2015, SC fully impaired its cost method investment in this entity and recorded a loss of $6.0 million. On March 24, 2016, SC notified most of the retailers for which it reviews credit applications that it will no longer fund new originations effective April 11, 2016. |
246
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 22. RELATED PARTY TRANSACTIONS (continued)
| • | On July 2, 2015, SC announced the departure of Thomas G. Dundon from his roles as Chairman of the Board and Chief Executive Officer of SC, effective as of the close of business on July 2, 2015. In connection with Mr. Dundon's departure, and subject to the terms and conditions of his Employment Agreement, including Mr. Dundon's execution of a release of claims against SC, Mr. Dundon became entitled to receive certain payments and benefits under his Employment Agreement. The Separation Agreement also provided for the modification of terms of certain equity-based awards. Certain of the payments, agreements to make payments and benefits may be effective only upon receipt of certain required regulatory approvals. |
| • | During 2015, SC recognized $12.3 million in severance-related expenses, and $9.9 million in stock compensation expense in connection with Mr. Dundon’s departure and the terms of the Separation Agreement. As of December 31, 2015, SC had recorded a liability for $115.1 million in contemplation of the payments and benefits due under the terms of the Separation Agreement. Mr. Dundon will continue to serve as a Director of SC's Board, and will serve as a consultant to SC for twelve months from the date of the Separation Agreement at a mutually agreed rate, subject to required bank regulatory approvals. As of December 31, 2015, SC has not made any payments to Mr. Dundon arising from or pursuant to the terms of the Separation Agreement. |
| • | On July 2, 2015, the Company announced that it had entered into an agreement with former SC Chief Executive Officer Thomas G. Dundon, DDFS, and Santander related to Mr. Dundon's departure from SC (the “Separation Agreement”). Pursuant to the Separation Agreement the Company was deemed to have delivered an irrevocable notice to exercise its option to acquire all of the shares of SC Common Stock owned by DDFS and consummate the transactions contemplated by the call option notice, subject to the receipt of all required regulatory approvals (the "Call Transaction"). At that date, the SC Common Stock held by DDFS ("the DDFS Shares") represented approximately 9.7% of SC Common Stock. Also, in connection with and pursuant to the Separation Agreement, on July 2, 2015, Mr. Dundon, the Company, DDFS LLC, SC and Santander entered into an amendment to the Shareholders Agreement (the Second Amendment). The Second Amendment amended, for purposes of calculating the price per share to be paid in the event that a put or call option was exercised with respect to the shares of SC Common Stock owned by DDFS LLC in accordance with the terms and conditions of the Shareholders Agreement, the definition of the term “Average Stock Price” to mean $26.83. The Separation Agreement did not affect Santander’s option to assume the Company’s obligation under the Call Transaction as provided in the Shareholders Agreement that was entered into by the same parties on January 28, 2014. Under the Separation Agreement, because the Call Transaction was not consummated prior to October 15, 2015 (the “Call End Date”), DDFS is free to transfer any or all of the DDFS shares, subject to the terms and conditions of the Amended and Restated Loan Agreement, dated as of July 16, 2014, between DDFS and Santander. In the event the Call Transaction were to be completed after the Call End Date, interest would accrue on the price paid per share in the Call Transaction at the overnight LIBOR rate on the third business day preceding the consummation of the Call Transaction plus 100 basis points with respect to the shares of SC Common Stock that were ultimately sold in the Call Transaction. The Amended and Restated Loan Agreement provides for a $300.0 million revolving loan which as of December 31, 2015 had an unpaid principal balance of approximately $290.0 million. Pursuant to the Loan Agreement, 29,598,506 shares of the SC’s Common Stock owned by DDFS LLC are pledged as collateral under a related pledge agreement. |
| • | SC paid certain expenses incurred by Mr. Dundon in the operation of a private plane in which he owns a partial interest when used for SC business within the contiguous 48 states. Under this practice, payment is based on a set flight time hourly rate. For the years ended December 31, 2015 and December 31, 2014, the Company paid $0.4 million and $0.6 million, respectively, to Meregrass Company, Inc., the company managing the plane's operations, with an average rate of $5,800 per hour in both years. |
| • | As of December 31, 2015, Jason Kulas, SC's current CEO, Mr. Dundon, and a Santander employee who was a member of the SC Board until the second quarter of 2015, each had a minority equity investment in a property in which SC leases 373,000 square feet as its corporate headquarters. Per the rental agreement, SC was not required to pay base rent until February 2015. During the year ended December 31, 2015, SC paid $5.0 million in lease payments on this property. Future minimum lease payments over the 12-year term of the lease, which extends through 2026, total $75.4 million. |
247
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23. PARENT COMPANY FINANCIAL INFORMATION
Condensed financial information of the parent company is as follows:
BALANCE SHEETS
| AT DECEMBER 31, | ||||||||
| 2015 | 2014 (1) | |||||||
| (As Restated) | ||||||||
| (in thousands) | ||||||||
| Assets | ||||||||
| Cash and cash equivalents | $ | 3,169,366 | $ | 2,099,992 | ||||
| Loans to non-bank subsidiaries | 300,000 | 300,000 | ||||||
| Investment in subsidiaries: | ||||||||
| Bank subsidiary | 9,082,729 | 8,974,690 | ||||||
| Non-bank subsidiaries | 7,819,588 | 10,098,766 | ||||||
Premises and equipment, net(3) | 57,622 | 122 | ||||||
| Equity method investments | 22,981 | 29,181 | ||||||
| Restricted cash | 73,060 | 82,019 | ||||||
Other assets(2) | 253,338 | 270,802 | ||||||
| Total assets | $ | 20,778,684 | $ | 21,855,572 | ||||
| Liabilities and stockholder's equity | ||||||||
Borrowings and other debt obligations(2) | $ | 3,294,976 | $ | 1,804,297 | ||||
| Borrowings from non-bank subsidiaries | 140,144 | 139,184 | ||||||
| Deferred tax liabilities, net | 69,539 | 1,153,184 | ||||||
| Other liabilities | 132,671 | 93,141 | ||||||
| Total liabilities | 3,637,330 | 3,189,806 | ||||||
| Stockholder's equity | 17,141,354 | 18,665,766 | ||||||
| Total liabilities and stockholder's equity | $ | 20,778,684 | $ | 21,855,572 | ||||
(1) Reflects the impact of the Change in Control and 11 months of activity of SC as a consolidated subsidiary.
(2) Balances as of December 31, 2014 include re-classification of debt issuance costs from Other assets to Borrowings and other debt obligations in accordance with the adoption of ASU 2015-03. Refer to Note 1 to the Consolidated Financial Statements for additional details related to this ASU implementation.
(3) During 2015, the Company added a significant amount of premises and equipment, primarily computer hardware and software, which was assigned to the Parent Company. In prior years, premises and equipment was included within the Other assets line of the Parent Company Balance Sheet.
248
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23. PARENT COMPANY FINANCIAL INFORMATION (continued)
STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
| YEAR ENDED DECEMBER 31, | ||||||||||||
| 2015 | 2014 (1) | 2013 (2) | ||||||||||
| (As Restated) | ||||||||||||
| (in thousands) | ||||||||||||
| Dividends from non-bank subsidiaries | $ | — | $ | 31,649 | $ | — | ||||||
| Interest income | 7,439 | 6,042 | 3,365 | |||||||||
| Income from equity method investments | 262 | 24,107 | 449,357 | |||||||||
| Gain on Change in Control | — | 2,428,539 | — | |||||||||
| Other income | 2,688 | 2,049 | 2,009 | |||||||||
| Total income | 10,389 | 2,492,386 | 454,731 | |||||||||
| Interest expense | 108,811 | 70,816 | 161,812 | |||||||||
| Other expense | 287,650 | 149,774 | 44,678 | |||||||||
| Total expense | 396,461 | 220,590 | 206,490 | |||||||||
| (Loss)/income before income taxes and equity in earnings of subsidiaries | (386,072 | ) | 2,271,796 | 248,241 | ||||||||
| Income tax (benefit)/provision | (1,048,267 | ) | 827,508 | 54,235 | ||||||||
| Income before equity in earnings of subsidiaries | 662,195 | 1,444,288 | 194,006 | |||||||||
| Equity in undistributed earnings / (deficits) of: | ||||||||||||
| Bank subsidiary | 141,311 | 303,704 | 344,994 | |||||||||
| Non-bank subsidiaries | (2,258,103 | ) | 709,640 | 89,103 | ||||||||
| Net (loss)/income | (1,454,597 | ) | 2,457,632 | 628,103 | ||||||||
| Other comprehensive income, net of tax: | ||||||||||||
| Net unrealized (losses)/gains on cash flow hedge derivative financial instruments | (2,322 | ) | 25,163 | 39,751 | ||||||||
| Net unrealized (losses)/gains recognized on investment securities | (43,511 | ) | 146,877 | (359,616 | ) | |||||||
| Amortization of defined benefit plans | 2,602 | (14,082 | ) | 11,163 | ||||||||
| Total other comprehensive (loss)/income | (43,231 | ) | 157,958 | (308,702 | ) | |||||||
| Comprehensive (loss)/income | $ | (1,497,828 | ) | $ | 2,615,590 | $ | 319,401 | |||||
(1) Reflects the impact of the Change in Control and 11 months of activity of SC as a consolidated subsidiary.
(2) Balances as of December 31, 2013 presented with SC being accounted for as an equity method investment at that date.
249
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 23. PARENT COMPANY FINANCIAL INFORMATION (continued)
STATEMENT OF CASH FLOWS
| FOR THE YEAR ENDED DECEMBER 31 | ||||||||||||
| 2015 | 2014 (1) | 2013 (2) | ||||||||||
| (As Restated) | ||||||||||||
| (in thousands) | ||||||||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||||||
| Net (loss)/income | $ | (1,454,597 | ) | $ | 2,457,632 | $ | 628,103 | |||||
| Adjustments to reconcile net income to net cash (paid in)/provided by operating activities: | ||||||||||||
| Gain on SC Change in Control | — | (2,291,003 | ) | — | ||||||||
| Net gain on sale of SC shares | — | (137,536 | ) | — | ||||||||
| Deferred tax (expense) / benefit | (1,071,571 | ) | 969,496 | 141,292 | ||||||||
| Undistributed (earnings) / deficit of: | ||||||||||||
| Bank subsidiary | (141,311 | ) | (303,704 | ) | (344,994 | ) | ||||||
| Non-bank subsidiaries | 2,258,103 | (709,640 | ) | (89,103 | ) | |||||||
| Stock based compensation expense | 25 | 449 | 2,057 | |||||||||
| Remittance to Santander for stock based compensation | — | (1,656 | ) | (3,877 | ) | |||||||
| Equity earnings from equity method investments | (262 | ) | (24,107 | ) | (449,357 | ) | ||||||
| Dividends from equity method investments | — | — | 188,661 | |||||||||
| Net change in other assets and other liabilities | 42,933 | 3,842 | (293,867 | ) | ||||||||
| Net cash (paid in) / provided by operating activities | (366,680 | ) | (36,227 | ) | (221,085 | ) | ||||||
| CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||||||
| Net capital returned from/(contributed to) subsidiaries | 11,116 | 146,585 | 178,266 | |||||||||
| Net change in restricted cash | 8,959 | (82,019 | ) | — | ||||||||
| Net (increase)/decrease in loans to subsidiaries | — | (300,000 | ) | — | ||||||||
| Proceeds from sale of SC shares | — | 320,145 | — | |||||||||
| Proceeds from the sales of equity method investments | 14,947 | — | — | |||||||||
| Purchases of premises and equipment | (58,524 | ) | — | — | ||||||||
| Net cash (used in) / provided by investing activities | (23,502 | ) | 84,711 | 178,266 | ||||||||
| CASH FLOWS FROM FINANCIAL ACTIVITIES: | ||||||||||||
| Repayment of other debt obligations | (600,000 | ) | — | (481,267 | ) | |||||||
| Net proceeds received from senior notes and senior credit facility | 2,085,205 | — | 500,000 | |||||||||
| Net change in borrowings | 960 | 77 | 896 | |||||||||
| Dividends to preferred stockholders | (14,600 | ) | (14,600 | ) | (14,600 | ) | ||||||
| Net proceeds from the issuance of common stock | — | 1,771,000 | — | |||||||||
| Impact of SC stock option activity | (12,009 | ) | — | — | ||||||||
| Net cash provided by/(used in) financing activities | 1,459,556 | 1,756,477 | 5,029 | |||||||||
| Increase/(Decrease) in cash and cash equivalents | 1,069,374 | 1,804,961 | (37,790 | ) | ||||||||
| Cash and cash equivalents at beginning of period | 2,099,992 | 295,031 | 332,821 | |||||||||
| Cash and cash equivalents at end of period | $ | 3,169,366 | $ | 2,099,992 | $ | 295,031 | ||||||
(1) Reflects the impact of the Change in Control and 11 months of activity of SC as a consolidated subsidiary.
(2) Balances as of December 31, 2013 presented with SC being accounted for as an equity method investment at that date.
250
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24. BUSINESS SEGMENT INFORMATION
Business Segment Products and Services
The Company’s reportable segments are focused principally around the customers the Bank and SC serve. The Company has identified the following reportable segments:
| • | The Retail Banking segment primarily comprises the Bank's branch locations and residential mortgage business. The branch locations offer a wide range of products and services to consumers, and attract deposits by offering a variety of deposit instruments including demand and interest-bearing demand deposit accounts, money market and savings accounts, CDs and retirement savings products. The branch locations also offer consumer loans such as credit cards, and home equity loans and lines of credit. The Retail Banking segment also includes investment services, provides annuities, mutual funds, managed monies, and insurance products and acts as an investment brokerage agent to the customers of the Retail Banking segment. |
| • | The Auto Finance & Business Banking segment currently provides commercial lines, loans, and deposits to business banking customers as well as indirect consumer leasing, commercial loans to dealers and financing for commercial vehicles and municipal equipment. The Auto Finance & Business Banking segment includes certain activity related to the Bank's intercompany agreements with SC. |
In conjunction with the Chrysler Agreement, the Bank has an agreement with SC under which SC provides the Bank with the first right to review and assess FCA dealer lending opportunities and, if the Bank elects, to provide the proposed financing. Historically and through September 30, 2014, SC provided servicing under this arrangement. Effective October 1, 2014, the servicing of all Chrysler Capital receivables from dealers, including receivables held by the Bank and by SC, were transferred to the Bank. The agreements executed in connection with this transfer require SC to permit the Bank the first right to review and assess Chrysler Capital dealer lending opportunities and require the Bank to pay SC a relationship management fee based upon the performance and yields of Chrysler Capital dealer loans held by the Bank. All intercompany revenue and fees between the Bank and SC are eliminated in the consolidated results of the Company.
On January 17, 2014, the Bank entered into a direct origination agreement with SC under which the Bank had the first right to review and approve all prime Chrysler Capital consumer vehicle lease applications. SC could review any applications declined by the Bank for SC’s own portfolio. SC provides servicing and receives an origination fee on all leases originated under this agreement. During April 2015, the Bank and SC determined not to renew this direct origination agreement which expired by its terms on May 9, 2015.
| • | The Real Estate and Commercial Banking segment offers commercial real estate loans, multifamily loans, commercial loans, and the Bank's related commercial deposits. This segment also provides financing and deposits for government entities and niche product financing for specific industries, including oil and gas and mortgage warehousing, among others. |
| • | The Global Corporate Banking ("GCB") segment was formerly designated as the Global Corporate Banking & Market & Large Corporate Banking segment and was renamed during the third quarter of 2015. This segment serves the needs of global commercial and institutional customers by leveraging the international footprint of the Santander group to provide financing and banking services to corporations with over $500 million in annual revenues. GCB's offerings and strategy are based on Santander's local and global capabilities in wholesale banking. |
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24. BUSINESS SEGMENT INFORMATION (continued)
| • | SC is a specialized consumer finance company focused on vehicle finance. SC’s primary business is the indirect origination of RIC, principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers. In conjunction with a ten-year private label financing agreement with FCA that became effective May 1, 2013, SC offers a full spectrum of auto financing products and services to FCA customers and dealers under the Chrysler Capital brand. These products and services include consumer RIC and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. SC also originates vehicle loans through a web-based direct lending program, purchases vehicle RIC from other lenders, and services automobile, recreational and marine vehicle portfolios for other lenders. Additionally, SC has several relationships through which it provides personal loans, private label credit cards and other consumer finance products. During 2015, SC announced its intention to exit the personal lending business. |
SC has entered into a number of intercompany agreements with the Bank as described above as part of the Auto Finance & Business Banking segment. All intercompany revenue and fees between the Bank and SC are eliminated in the consolidated results of the Company.
The Other category includes earnings from the investment portfolio, interest from the non-strategic assets portfolio, interest expense on the Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses.
For segment reporting purposes, SC continues to be managed as a separate business unit. The Company’s segment results, excluding SC, are derived from the Company’s business unit profitability reporting system by specifically attributing managed balance sheet assets, deposits and other liabilities and their related interest income or expense to each of the segments. Funds transfer pricing methodologies are utilized to allocate a cost for funds used or a credit for funds provided to business line deposits, loans and selected other assets using a matched funding concept. The methodology includes a liquidity premium adjustment, which considers an appropriate market participant spread for commercial loans and deposits by analyzing the mix of borrowings available to the Company with comparable maturity periods.
Other income and expenses are managed directly by each business line, including fees, service charges, salaries and benefits, and other direct expenses, as well as certain allocated corporate expenses, and are accounted for within each segment’s financial results. Accounting policies for the lines of business are the same as those used in preparation of the Consolidated Financial Statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business. Where practical, the results are adjusted to present consistent methodologies for the segments.
The application and development of management reporting methodologies is a dynamic process and is subject to periodic enhancements. The implementation of these enhancements to the internal management reporting methodology may materially affect the results disclosed for each segment with no impact on consolidated results. Whenever significant changes to management reporting methodologies take place, prior period information is reclassified wherever practicable.
During the third quarter of 2015, 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 business unit, formerly included in the Retail Banking reportable segment, was combined with the Auto Finance and Alliances business unit. |
| • | The commercial business banking business unit, formerly included in the Real Estate and Commercial Banking reportable segment, was combined with the Auto Finance and Alliances business unit. |
| • | A new reportable segment named Auto Finance & Business Banking was created from the small business banking unit, the commercial business banking unit, and the Auto Finance and Alliances unit. |
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24. BUSINESS SEGMENT INFORMATION (continued)
| • | The internal funds transfer pricing ("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. |
Prior period FTP results have been recast based on the Company's best estimate to conform to current methodologies for the segments, however due to system constraints, FTP results for 2013 have not been recast. All other prior period results have been recast to conform to the new composition of the reportable segments.
Certain segments previously deemed quantitatively significant no longer met the threshold and have been combined with the Other category as of December 31, 2015. Prior period results have been recast to conform to the new composition of the reportable segment.
Results of Segments
The following tables present certain information regarding the Company’s segments.
| For the Year Ended | SHUSA excluding SC | Non-GAAP measure(4) | |||||||||||||||||||||||||||
| December 31, 2015 | Retail Banking | Auto Finance & Business Banking | Real Estate and Commercial Banking | Global Corporate Banking | Other(2) | SC(3) | SC Purchase Price Adjustments | Eliminations | Total | ||||||||||||||||||||
| (in thousands) | |||||||||||||||||||||||||||||
| Net interest income/(loss) | $ | 691,457 | $ | 252,519 | $ | 460,404 | $ | 219,279 | $ | (57,268 | ) | $ | 4,862,921 | $ | 343,049 | $ | 347 | $ | 6,772,708 | ||||||||||
| Total non-interest income | 283,789 | 407,536 | 93,402 | 89,997 | 94,763 | 1,266,286 | 307,023 | (46,091 | ) | 2,496,705 | |||||||||||||||||||
| Provision for credit losses | 51,630 | 5,078 | 24,770 | 27,941 | 25,714 | 2,965,198 | 1,015,568 | — | 4,115,899 | ||||||||||||||||||||
| Total expenses | 1,316,915 | 525,853 | 205,093 | 104,204 | 324,523 | 1,878,685 | 4,596,803 | (51,957 | ) | 8,900,119 | |||||||||||||||||||
| Income/(loss) before income taxes | (393,299 | ) | 129,124 | 323,943 | 177,131 | (312,742 | ) | 1,285,324 | (4,962,299 | ) | 6,213 | (3,746,605 | ) | ||||||||||||||||
Intersegment revenue/(expense)(1) | (4,742 | ) | 5,956 | 6,953 | (9,601 | ) | 1,434 | — | — | — | — | ||||||||||||||||||
| Total average assets | 16,971,220 | 8,415,871 | 21,424,413 | 11,823,350 | 32,586,273 | 34,584,296 | — | — | 125,805,423 | ||||||||||||||||||||
| (1) | Intersegment revenue/(expense) represents charges or credits for funds used or provided by each of the segments and is included in net interest income. |
| (2) | Other is not considered a segment and includes earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and Holding Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses. |
| (3) | Management of SHUSA manages SC by analyzing the pre-Change in Control results of SC as disclosed in this column. |
| (4) | Purchase Price Adjustments represents the impact that SC purchase marks had on the results of SC included within the consolidated operations of SHUSA, while eliminations eliminate intercompany transactions. |
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 24. BUSINESS SEGMENT INFORMATION (continued)
| For the Year Ended | SHUSA excluding SC | Non-GAAP measure(4) | |||||||||||||||||||||||||||
| December 31, 2014 | Retail Banking | Auto Finance & Business Banking | Real Estate and Commercial Banking | Global Corporate Banking | Other(2) | SC(3) | SC Purchase Price Adjustments | Eliminations | Total | ||||||||||||||||||||
| (As Restated) | (in thousands) | ||||||||||||||||||||||||||||
| Net interest income | $ | 666,768 | $ | 242,307 | $ | 416,671 | $ | 180,392 | $ | 72,364 | $ | 4,329,683 | $ | 421,102 | $ | (344,514 | ) | $ | 5,984,773 | ||||||||||
| Total non-interest income | 392,635 | 225,175 | 82,427 | 84,580 | 188,905 | 1,042,661 | 343,513 | (107,502 | ) | 2,252,394 | |||||||||||||||||||
| Gain on Change in Control | — | — | — | — | — | — | 2,428,539 | — | 2,428,539 | ||||||||||||||||||||
| Provision for/(release of) credit losses | 59,006 | 12,733 | (72,923 | ) | 691 | (1,506 | ) | 2,680,527 | 41,739 | (225,454 | ) | 2,494,813 | |||||||||||||||||
| Total expenses | 1,238,790 | 337,571 | 188,119 | 94,302 | 419,412 | 1,547,694 | 144,086 | (270,245 | ) | 3,699,729 | |||||||||||||||||||
| Income/(loss) before income taxes | (238,393 | ) | 117,178 | 383,902 | 169,979 | (156,637 | ) | 1,144,123 | 3,007,329 | 43,683 | 4,471,164 | ||||||||||||||||||
Intersegment revenue/(expense)(1) | (4,317 | ) | 5,240 | 6,380 | (8,486 | ) | 1,183 | — | — | — | — | ||||||||||||||||||
| Total average assets | 17,735,588 | 6,569,789 | 20,404,240 | 9,362,307 | 26,810,061 | 27,694,566 | — | — | 108,576,551 | ||||||||||||||||||||
| (1) | Intersegment revenue/(expense) represents charges or credits for funds used or provided by each of the segments and is included in net interest income. |
| (2) | Other is not considered a segment and includes earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and Holding Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses. |
| (3) | Management of SHUSA manages SC by analyzing the pre-Change in Control results of SC as disclosed in this column. |
| (4) | Purchase Price Adjustments represent the impact that SC purchase marks had on the results of SC included within the consolidated operations of SHUSA, while eliminations adjust for the one month that SHUSA accounted for SC as an equity method investment and eliminate intercompany transactions. |
| For the Year Ended | |||||||||||||||||||||
| December 31, 2013 | Retail Banking | Auto Finance & Alliances | Real Estate and Commercial Banking | Global Corporate Banking | Other(2) | Equity Method Investment in SC | Total | ||||||||||||||
| (in thousands) | |||||||||||||||||||||
| Net interest income | $ | 667,757 | $ | 230,822 | $ | 377,395 | $ | 167,666 | $ | 70,131 | $ | — | $ | 1,513,771 | |||||||
| Total non-interest income | 357,764 | 52,911 | 105,710 | 81,670 | 36,871 | 453,157 | 1,088,083 | ||||||||||||||
| Provision for/(release of) credit losses | 117,882 | 36,656 | (52,364 | ) | (893 | ) | (54,431 | ) | — | 46,850 | |||||||||||
| Total expenses | 1,310,330 | 99,422 | 226,012 | 71,310 | 59,527 | — | 1,766,601 | ||||||||||||||
| Income/(loss) before income taxes | (402,691 | ) | 147,655 | 309,457 | 178,919 | 101,906 | 453,157 | 788,403 | |||||||||||||
Intersegment revenue/(expense)(1) | 4,147 | 1,338 | 6,679 | (12,267 | ) | 103 | — | — | |||||||||||||
| Total average assets | 18,632,940 | 5,496,126 | 19,031,882 | 8,150,589 | 28,503,311 | — | 79,814,848 | ||||||||||||||
| (1) | Intersegment revenue/(expense) represents charges or credits for funds used or provided by each of the segments and is included in net interest income. |
| (2) | Other is not considered a segment and includes earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and Holding Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses. |
NON-GAAP FINANCIAL MEASURES
The Chief Operating Decision Maker ("CODM"), as described by ASC 280, Segment Reporting, manages SC on a historical basis by reviewing the results of SC on a pre-Change in Control basis. The Results of Segments table discloses SC's operating information on the same basis that it is reviewed by SHUSA's CODM to reconcile to SC's GAAP results, purchase price adjustments and accounting for SC as an equity method investment. The Company's non-GAAP information has limitations as an analytical tool, and the reader should not consider it in isolation, or as a substitute for analysis of its results or any performance measures under GAAP as set forth in its financial statements. The reader should compensate for these limitations by relying primarily on the GAAP results and using this non-GAAP information only as a supplement to evaluate the Company's performance.
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ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has had no disagreements with its auditors on accounting principles, practices or financial statement disclosure during and through the date of the financial statements included in this report.
Based upon the recommendation of our Audit Committee, PricewaterhouseCoopers LLP will replace Deloitte & Touche LLP as the Company's independent auditors for the fiscal year ending on December 31, 2016. That change was reported by the Company in a Current Report on Form 8-K dated December 10, 2015, filed with the SEC on December 15, 2015.
ITEM 9A - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
The Company carried out an evaluation, under the supervision of its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based on such evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that as of the end of the period covered by this Annual Report on Form 10-K, the Company did not maintain effective disclosure controls and procedures because of the material weaknesses described below.
Notwithstanding these material weaknesses, the Company has concluded that the financial statements included in this report fairly present in all material respects its financial position, results of operations, capital position, and cash flows for the periods presented, in conformity with generally accepted accounting principles (GAAP).
Management's Report on Internal Control over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. The Company’s internal control over financial reporting is a process designed under the supervision of the Company’s CEO and CFO to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external purposes in accordance with GAAP.
Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on the financial statements.
As of December 31, 2015, management assessed the effectiveness of the Company’s internal control over financial reporting based on the criteria for effective internal control over financial reporting established in “Internal Control - Integrated Framework,” issued by the Committee of Sponsoring Organizations (COSO) of the Treadway Commission (“2013 framework”). Based on the assessment, management determined that the Company did not maintain effective internal control over financial reporting as of December 31, 2015.
Allowance for Loan Losses
We have identified the following material weaknesses related to the allowance for loan losses and related disclosures emanating from our majority owned subsidiary, Santander Consumer USA Holdings, Inc. (“SC”):
As of December 31, 2015, we assessed the effectiveness of internal control over its financial reporting and determined they did not maintain effective internal control over financial reporting as of December 31, 2015. These material weaknesses relate to the following financial statement line items in the Company’s consolidated financial statements: the allowance for loan losses, provision for credit losses, and the related disclosures within Note 5 - Loans and Allowance for Credit Losses.
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| (i) | Management’s review control of the methodology for estimating the credit loss allowance in accordance with GAAP did not operate effectively. |
| (ii) |
| (iii) | Review controls of the troubled debt restructurings (“TDRs”) footnote disclosures and supporting information did not effectively identify that parameters used to query the loan data were incorrect. A review of inputs used to estimate expected cash flows of loans modified in TDRs did not identify errors in types of cash flows included and in the assumed timing and amount of defaults. |
| (iv) | Review controls over inputs and assumptions in models used for estimating credit loss allowance and related model changes were not effective and management did not adequately challenge significant assumptions. Review and approval controls over the development of new models to estimate credit loss allowance and related model changes were ineffective. Adequate and comprehensive performance monitoring over related model output results was not performed and we did not maintain adequate model documentation. |
| (v) | SC’s Control Environment, related to hiring and retention of personnel with appropriate knowledge, experience, and training in certain areas important to financial reporting; inadequate mechanisms and oversight to ensure accountability for the performance of internal control over financial reporting responsibilities or to ensure corrective actions were appropriately prioritized and implemented in a timely manner; inadequate assessment of changes in risks that could significantly impact internal control over financial reporting or an adequate determination and prioritization of how those risks should be managed; and inadequate oversight of accounting and financial reporting activities in implementing certain accounting practices. |
In addition to the above items emanating from SC, in the process of estimating the Allowance for Loan Losses related to SC loans in the Company’s consolidated financial statements, SC’s discount rates were used in the TDR methodology rather than the discount rate required for the Company related to the original purchase accounting discount. Management’s review control of the methodology did not operate effectively.
Goodwill
In connection with the annual goodwill impairment test conducted as of October 1st, the Company determined there was a material weakness in the operating effectiveness of management’s review control over the calculation of the carrying value of the Company’s SC reporting unit used in the Company’s step one goodwill impairment tests performed in accordance with ASC 350-20. A review of the calculation did not identify an error which resulted in an understatement of the carrying value used in the goodwill impairment tests. While the impact of the error did not result in a different conclusion regarding the step one impairment test that was conducted, it was reasonably possible that the understated carrying value could have resulted in a different conclusion that would not have been prevented or detected.
Additionally, in performing step two of the impairment test on the SC reporting unit as of December 31, 2015, in accordance with ASC 350-20, the review control over data utilized in the valuation was not operating effectively.
Control Environment
The Company is involved with complex accounting matters (such as purchase accounting, goodwill, allowance and TDR matters) emanating from the SC reporting unit, which require significant resources, time and technical expertise. We determined there was a material weakness in the design and operating effectiveness of the controls pertaining to the Company’s oversight of its SC subsidiary activities and the Company’s accounting for such transactions that are significant to the Company’s internal control over financial reporting. These activities were (a) ineffective oversight to ensure accountability for the performance of internal control over financial reporting responsibilities or to ensure corrective actions were appropriately prioritized and implemented in a timely manner; and (b) inadequate resources, time and technical expertise to perform effective oversight of the application of accounting and financial reporting activities that are significant to the Company’s consolidated financial statements.
A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis. These control failures result in a reasonable possibility that a material misstatement would not be prevented or detected on a timely basis, in each of the weaknesses noted above including the allowance for loan losses, TDR and goodwill. Accordingly, management has concluded that these deficiencies each constitute a material weakness and that related controls did not operate effectively.
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Deloitte & Touche LLP, our independent registered public accounting firm, has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. This audit report is contained within.
Remediation Plan for Material Weaknesses in Internal Control over Financial Reporting
We are currently working to develop plans to remediate the material weaknesses described above, which will include implementing additional measures to remediate the underlying causes that gave rise to the material weaknesses.
Status of Remediation of Previously Reported Material Weakness in Internal Control over Financial Reporting
During the fourth quarter of 2014, management identified a material weakness in internal control over the Company's process to prepare and review the Statement of Cash Flows (SCF) and Notes to the Consolidated Financial Statements. Specifically, the Company concluded that it did not have adequate controls designed and in place over the preparation and review of the Condensed Consolidated SCF and financial statement disclosures in Note 5, whereby errors were made during 2014 that were not identified in a timely manner.
During 2015, with the oversight of senior management and the Audit Committee, the Company implemented a number of new controls to remediate the material weakness described above. The Company has revised the design of the former process to prepare and review the Company’s SCF and Notes to the Consolidated Financial Statements, designed and implemented additional controls over the preparation and data providers, to remediate the underlying control weakness that gave rise to the material weakness. The newly implemented controls include additional reviews at a detailed level at the statement preparation and data provider levels.
The Company believes these enhancements have remediated the SCF controls design aspect of this material weakness. However, we continue to monitor the operating effectiveness of the new controls and believe these changes will strengthen its internal control over financial reporting for the preparation and review of the SCF and Notes to the Consolidated Financial Statements in order to address the remaining material weakness related to the operating effectiveness of the controls.
Limitations on Effectiveness of Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control over Financial Reporting
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.
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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. 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 Allowance for Loan Losses, Goodwill, Control Environment, and previously reported Material Weakness related to the Company's process to prepare and review the Statement of Cash Flows (SCF) 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.
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 expressed an unqualified opinion on those financial statements.
/s/ Deloitte & Touche LLP
Boston, Massachusetts
April 14, 2016
ITEM 9B - OTHER INFORMATION
We have determined that our previous methodology for determining credit loss allowance for individually acquired RICs was in error as we did not calculate impairment on TDRs separately from a general credit loss allowance on loans not classified as TDRs.
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In addition, we incorrectly identified the population of loans that should be classified as TDRs and, separately, incorrectly estimated the impairment on these loans. We have also determined that subvention payments related to our leased vehicles were incorrectly classified as additional Lease vehicle income rather than reductions to Leased vehicle expense. The impacts of the corrections of these errors on the unaudited quarterly financial information filed in our Quarterly Reports on Form 10-Q for each quarter of 2014 and 2015, are shown in the following tables (all dollar amounts are in thousands).
The following table summarizes the impact of the corrections on the Company's Consolidated Balance Sheet for the quarterly periods ended March 31, 2015, June 30, 2015, and September 30, 2015. The line items noted below were limited to the Balance Sheet line items impacted by the correction of the allowance for loan and lease losses and subvention payment errors described above.
| As reported | As restated | As reported | As restated | As reported | As restated | |||||||||||||||||||||||||
| March 31, 2015 | Corrections | March 31, 2015 | June 30, 2015 | Corrections | June 30, 2015 | September 30, 2015 | Corrections | September 30, 2015 | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||||
| Loans held for investment | $ | 78,520,165 | $ | (14,305 | ) | $ | 78,505,860 | $ | 79,484,496 | $ | (19,867 | ) | $ | 79,464,629 | $ | 78,709,721 | $ | (46,329 | ) | $ | 78,663,392 | |||||||||
| Allowance for loan and lease losses | (2,493,240 | ) | 192,002 | (2,301,238 | ) | (3,070,458 | ) | 208,905 | (2,861,553 | ) | (2,912,346 | ) | 110,943 | (2,801,403 | ) | |||||||||||||||
| Net loans held for investment | 76,026,925 | 177,697 | 76,204,622 | 76,414,038 | 189,038 | 76,603,076 | 75,797,375 | 64,614 | 75,861,989 | |||||||||||||||||||||
| TOTAL ASSETS | $ | 123,248,006 | $ | 177,697 | $ | 123,425,703 | $ | 126,127,126 | $ | 189,038 | $ | 126,316,164 | $ | 130,865,753 | $ | 64,614 | $ | 130,930,367 | ||||||||||||
| LIABILITIES | ||||||||||||||||||||||||||||||
| Deferred tax liabilities, net | $ | 1,030,676 | $ | 68,303 | $ | 1,098,979 | $ | 1,017,839 | $ | 70,279 | $ | 1,088,118 | $ | 1,217,066 | $ | 19,106 | $ | 1,236,172 | ||||||||||||
| TOTAL LIABILITIES | 100,428,674 | 68,303 | 100,496,977 | 103,039,449 | 70,279 | 103,109,728 | 107,629,018 | 19,106 | 107,648,124 | |||||||||||||||||||||
| STOCKHOLDER'S EQUITY | ||||||||||||||||||||||||||||||
| Retained earnings | 3,869,581 | 64,407 | 3,933,988 | 4,033,374 | 69,783 | 4,103,157 | 4,111,611 | 27,878 | 4,139,489 | |||||||||||||||||||||
| TOTAL SHUSA STOCKHOLDER’S EQUITY | 18,750,262 | 64,407 | 18,814,669 | 18,834,160 | 69,783 | 18,903,943 | 18,955,747 | 27,878 | 18,983,625 | |||||||||||||||||||||
| Noncontrolling interest | 4,069,070 | 44,987 | 4,114,057 | 4,253,517 | 48,976 | 4,302,493 | 4,280,988 | 17,630 | 4,298,618 | |||||||||||||||||||||
| TOTAL STOCKHOLDER’S EQUITY | 22,819,332 | 109,394 | 22,928,726 | 23,087,677 | 118,759 | 23,206,436 | 23,236,735 | 45,508 | 23,282,243 | |||||||||||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 123,248,006 | $ | 177,697 | $ | 123,425,703 | $ | 126,127,126 | $ | 189,038 | $ | 126,316,164 | $ | 130,865,753 | $ | 64,614 | $ | 130,930,367 | ||||||||||||
259
The following table summarizes the impact of the corrections on the Company's Consolidated Balance Sheet for the quarterly periods ended March 31, 2014, June 30, 2014, and September 30, 2014. The line items noted below were limited to the Balance Sheet line items impacted by the correction of the allowance for credit losses and subvention payment errors described above.
| As reported | As restated | As reported | As restated | As reported | As restated | |||||||||||||||||||||||||
| March 31, 2014 | Corrections | March 31, 2014 | June 30, 2014 | Corrections | June 30, 2014 | September 30, 2014 | Corrections | September 30, 2014 | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||
| ASSETS | ||||||||||||||||||||||||||||||
| Loans held for investment | $ | 74,062,616 | $ | 4,502 | $ | 74,067,118 | $ | 75,637,888 | $ | 3.667 | $ | 75,641,555 | $ | 74,526,819 | $ | (1,686 | ) | $ | 74,525,133 | |||||||||||
| Allowance for loan and lease losses | (1,110,592 | ) | 5,556 | (1,105,036 | ) | (1,425,856 | ) | 131,834 | (1,294,022 | ) | (1,805,389 | ) | 345,305 | (1,460,084 | ) | |||||||||||||||
| Net loans held for investment | 72,952,024 | 10,058 | 72,962,082 | 74,212,032 | 135,501 | 74,347,533 | 72,721,430 | 343,619 | 73,065,049 | |||||||||||||||||||||
| TOTAL ASSETS | $ | 109,168,077 | $ | 10,058 | $ | 109,178,135 | $ | 112,512,985 | $ | 135,501 | $ | 112,648,486 | $ | 113,538,172 | $ | 343,619 | $ | 113,881,791 | ||||||||||||
| LIABILITIES | ||||||||||||||||||||||||||||||
| Deferred tax liabilities, net | $ | 257,190 | $ | 3,984 | $ | 261,174 | $ | 376,796 | $ | 54,641 | $ | 431,437 | $ | 388,816 | $ | 138,833 | $ | 527,649 | ||||||||||||
| TOTAL LIABILITIES | 87,571,981 | 3,984 | 87,575,965 | 90,533,025 | 54,641 | 90,587,666 | 91,298,139 | 138,833 | 91,436,972 | |||||||||||||||||||||
| STOCKHOLDER'S EQUITY | ||||||||||||||||||||||||||||||
| Retained earnings | 3,160,343 | 3,568 | 3,163,911 | 3,359,535 | 47,485 | 3,407,020 | 3,560,557 | 120,245 | 3,680,802 | |||||||||||||||||||||
| TOTAL SHUSA STOCKHOLDER’S EQUITY | 17,902,661 | 3,568 | 17,906,229 | 18,166,685 | 47,485 | 18,214,170 | 18,367,663 | 120,245 | 18,487,908 | |||||||||||||||||||||
| Noncontrolling interest | 3,693,435 | 2,506 | 3,695,941 | 3,813,275 | 33,375 | 3,846,650 | 3,872,370 | 84,541 | 3,956,911 | |||||||||||||||||||||
| TOTAL STOCKHOLDER’S EQUITY | 21,596,096 | 6,074 | 21,602,170 | 21,979,960 | 80,860 | 22,060,820 | 22,240,033 | 204,786 | 22,444,819 | |||||||||||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 109,168,077 | $ | 10,058 | $ | 109,178,135 | $ | 112,512,985 | $ | 135,501 | $ | 112,648,486 | $ | 113,538,172 | $ | 343,619 | $ | 113,881,791 | ||||||||||||
260
The following table summarizes the impact of the corrections on the Company's Consolidated Statement of Operations for the three months ended March 31, 2015, June 30, 2015, and September 30, 2015. The line items noted below were limited to the Income Statement line items impacted by the correction of the allowance for credit losses and subvention payment errors described above.
| For the three months ended: | For the three months ended: | For the three months ended: | ||||||||||||||||||||||||||||
| As reported | As restated | As reported | As restated | As reported | As restated | |||||||||||||||||||||||||
| March 31, 2015 | Corrections | March 31, 2015 | June 30, 2015 | Corrections | June 30, 2015 | September 30, 2015 | Corrections | September 30, 2015 | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||
| Provision for credit losses | $ | 872,184 | $ | 172,029 | $ | 1,044,213 | $ | 1,001,754 | $ | (11,341 | ) | $ | 990,413 | $ | 854,180 | $ | 124,424 | $ | 978,604 | |||||||||||
| NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 781,975 | (172,029 | ) | 609,946 | 760,561 | 11,341 | 771,902 | 829,082 | (124,424 | ) | 704,658 | |||||||||||||||||||
| Lease income | 398,385 | (86,075 | ) | 312,310 | 443,506 | (105,643 | ) | 337,863 | 486,510 | (124,918 | ) | 361,592 | ||||||||||||||||||
| TOTAL FEES AND OTHER INCOME | 655,840 | (86,074 | ) | 569,766 | 793,273 | (105,643 | ) | 687,630 | 837,954 | (124,918 | ) | 713,036 | ||||||||||||||||||
| TOTAL NON-INTEREST INCOME | 665,397 | (86,074 | ) | 579,323 | 802,980 | (105,643 | ) | 697,337 | 835,961 | (124,918 | ) | 711,043 | ||||||||||||||||||
| Lease expense | 321,958 | (86,075 | ) | 235,883 | 361,903 | (105,643 | ) | 256,260 | 384,276 | (124,918 | ) | 259,358 | ||||||||||||||||||
| TOTAL GENERAL AND ADMINISTRATIVE EXPENSES | 1,049,696 | (86,075 | ) | 963,621 | 1,144,848 | (105,643 | ) | 1,039,205 | 1,211,424 | (124,918 | ) | 1,086,506 | ||||||||||||||||||
| INCOME/(LOSS) BEFORE INCOME TAXES | 365,012 | (172,028 | ) | 192,984 | 388,951 | 11,341 | 400,292 | 423,888 | (124,424 | ) | 299,464 | |||||||||||||||||||
| Income tax provision/(benefit) | 112,973 | (72,829 | ) | 40,144 | 119,971 | 1,976 | 121,947 | 241,764 | (51,174 | ) | 190,590 | |||||||||||||||||||
| NET INCOME/(LOSS) INCLUDING NONCONTROLLING INTEREST | 252,039 | (99,199 | ) | 152,840 | 268,980 | 9,365 | 278,345 | 182,124 | (73,250 | ) | 108,874 | |||||||||||||||||||
| LESS: NET INCOME/(LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST | 93,450 | (41,126 | ) | 52,324 | 101,535 | 3,989 | 105,524 | 100,237 | (31,346 | ) | 68,891 | |||||||||||||||||||
| NET INCOME/(LOSS) ATTRIBUTABLE TO SHUSA | $ | 158,589 | $ | (58,073 | ) | $ | 100,516 | $ | 167,445 | $ | 5,376 | $ | 172,821 | $ | 81,887 | $ | (41,904 | ) | $ | 39,983 | ||||||||||
261
The following table summarizes the impact of the corrections on the Company's Consolidated Statement of Operations for the six and nine months ended June 30, 2015, and September 30, 2015. The line items noted below were limited to the Income Statement line items impacted by the correction of the allowance for credit losses and subvention payment errors described above.
| For the six months ended: | For the nine months ended: | |||||||||||||||||||
| As reported | As restated | As reported | As restated | |||||||||||||||||
| June 30, 2015 | Corrections | June 30, 2015 | September 30, 2015 | Corrections | September 30, 2015 | |||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Provision for credit losses | $ | 1,873,938 | $ | 160,688 | $ | 2,034,626 | $ | 2,728,118 | $ | 285,112 | $ | 3,013,230 | ||||||||
| NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 1,542,315 | (160,688 | ) | 1,381,627 | 2,371,397 | (285,112 | ) | 2,086,285 | ||||||||||||
| Lease income | 841,891 | (191,718 | ) | 650,173 | 1,328,401 | (316,636 | ) | 1,011,765 | ||||||||||||
| TOTAL FEES AND OTHER INCOME | 1,449,333 | (191,717 | ) | 1,257,616 | 2,287,287 | (316,636 | ) | 1,970,651 | ||||||||||||
| TOTAL NON-INTEREST INCOME | 1,468,597 | (191,717 | ) | 1,276,880 | 2,304,558 | (316,636 | ) | 1,987,922 | ||||||||||||
| Lease expense | 683,861 | (191,718 | ) | 492,143 | 1,068,137 | (316,636 | ) | 751,501 | ||||||||||||
| TOTAL GENERAL AND ADMINISTRATIVE EXPENSES | 2,194,545 | (191,718 | ) | 2,002,827 | 3,405,969 | (316,636 | ) | 3,089,333 | ||||||||||||
| INCOME/(LOSS) BEFORE INCOME TAXES | 753,961 | (160,687 | ) | 593,274 | 1,177,849 | (285,112 | ) | 892,737 | ||||||||||||
| Income tax provision/(benefit) | 232,944 | (70,853 | ) | 162,091 | 474,708 | (122,027 | ) | 352,681 | ||||||||||||
| NET INCOME/(LOSS) INCLUDING NONCONTROLLING INTEREST | 521,017 | (89,834 | ) | 431,183 | 703,141 | (163,085 | ) | 540,056 | ||||||||||||
| LESS: NET INCOME/(LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST | 194,985 | (37,137 | ) | 157,848 | 295,222 | (68,483 | ) | 226,739 | ||||||||||||
| NET INCOME/(LOSS) ATTRIBUTABLE TO SHUSA | $ | 326,032 | $ | (52,697 | ) | $ | 273,335 | $ | 407,919 | $ | (94,602 | ) | $ | 313,317 | ||||||
262
The following table summarizes the impact of the corrections on the Company's Consolidated Statement of Operations for the three months ended March 31, 2014, June 30, 2014, and September 30, 2014. The line items noted below were limited to the Income Statement line items impacted by the correction of the allowance for credit losses and subvention payment errors described above.
| For the three months ended: | For the three months ended: | For the three months ended: | ||||||||||||||||||||||||||||
| As reported | As restated | As reported | As restated | As reported | As restated | |||||||||||||||||||||||||
| March 31, 2014 | Corrections | March 31, 2014 | June 30, 2014 | Corrections | June 30, 2014 | September 30, 2014 | Corrections | September 30, 2014 | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||
| Provision for credit losses | $ | 335,330 | $ | (10,059 | ) | $ | 325,271 | $ | 686,034 | $ | (125,442 | ) | $ | 560,592 | $ | 1,013,357 | $ | (208,119 | ) | $ | 805,238 | |||||||||
| NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 836,775 | 10,059 | 846,834 | 904,000 | 125,442 | 1,029,442 | 612,119 | 208,119 | 820,238 | |||||||||||||||||||||
| Lease income | 115,402 | (29,636 | ) | 85,766 | 266,090 | (58,625 | ) | 207,465 | 269,966 | (38,183 | ) | 231,783 | ||||||||||||||||||
| TOTAL FEES AND OTHER INCOME | 430,773 | (29,637 | ) | 401,136 | 628,885 | (58,623 | ) | 570,262 | 643,695 | (38,184 | ) | 605,511 | ||||||||||||||||||
| TOTAL NON-INTEREST INCOME | 2,861,256 | (29,637 | ) | 2,831,619 | 638,290 | (58,623 | ) | 579,667 | 643,826 | (38,184 | ) | 605,642 | ||||||||||||||||||
| Lease expense | 88,611 | (29,636 | ) | 58,975 | 210,199 | (58,625 | ) | 151,574 | 208,879 | (38,183 | ) | 170,696 | ||||||||||||||||||
| TOTAL GENERAL AND ADMINISTRATIVE EXPENSES | 738,514 | (29,636 | ) | 708,878 | 870,238 | (58,625 | ) | 811,613 | 919,743 | (38,183 | ) | 881,560 | ||||||||||||||||||
| INCOME/(LOSS) BEFORE INCOME TAXES | 2,927,750 | 10,058 | 2,937,808 | 539,061 | 125,444 | 664,505 | 295,194 | 208,118 | 503,312 | |||||||||||||||||||||
| Income tax provision/(benefit) | 1,050,107 | 3,984 | 1,054,091 | 199,746 | 50,657 | 250,403 | 36,102 | 84,192 | 120,294 | |||||||||||||||||||||
| NET INCOME/(LOSS) INCLUDING NONCONTROLLING INTEREST | 1,877,643 | 6,074 | 1,883,717 | 339,315 | 74,787 | 414,102 | 259,092 | 123,926 | 383,018 | |||||||||||||||||||||
| LESS: NET INCOME/(LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST | 107,740 | 2,506 | 110,246 | 136,473 | 30,870 | 167,343 | 54,420 | 51,166 | 105,586 | |||||||||||||||||||||
| NET INCOME/(LOSS) ATTRIBUTABLE TO SHUSA | $ | 1,769,903 | $ | 3,568 | $ | 1,773,471 | $ | 202,842 | $ | 43,917 | $ | 246,759 | $ | 204,672 | $ | 72,760 | $ | 277,432 | ||||||||||||
263
The following table summarizes the impact of the corrections on the Company's Consolidated Statement of Operations for the six and nine months ended June 30, 2014, and September 30, 2014. The line items noted below were limited to the Income Statement line items impacted by the correction of the allowance for credit losses and subvention payment errors described above.
| For the six months ended: | For the nine months ended: | |||||||||||||||||||
| As reported | As restated | As reported | As restated | |||||||||||||||||
| June 30, 2014 | Corrections | June 30, 2014 | September 30, 2014 | Corrections | September 30, 2014 | |||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Provision for credit losses | $ | 1,021,364 | $ | (135,501 | ) | $ | 885,863 | $ | 2,034,721 | $ | (343,620 | ) | $ | 1,691,101 | ||||||
| NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 1,740,775 | 135,501 | 1,876,276 | 2,352,894 | 343,620 | 2,696,514 | ||||||||||||||
| Lease income | 381,493 | (88,261 | ) | 293,232 | 651,458 | (126,444 | ) | 525,014 | ||||||||||||
| TOTAL FEES AND OTHER INCOME | 1,059,658 | (88,260 | ) | 971,398 | 1,703,353 | (126,444 | ) | 1,576,909 | ||||||||||||
| TOTAL NON-INTEREST INCOME | 3,499,546 | (88,260 | ) | 3,411,286 | 4,143,372 | (126,444 | ) | 4,016,928 | ||||||||||||
| Lease expense | 299,159 | (88,261 | ) | 210,898 | 508,038 | (126,444 | ) | 381,594 | ||||||||||||
| TOTAL GENERAL AND ADMINISTRATIVE EXPENSES | 1,610,519 | (88,261 | ) | 1,522,258 | 2,530,262 | (126,444 | ) | 2,403,818 | ||||||||||||
| INCOME/(LOSS) BEFORE INCOME TAXES | 3,466,711 | 135,502 | 3,602,213 | 3,761,905 | 343,620 | 4,105,525 | ||||||||||||||
| Income tax provision/(benefit) | 1,249,753 | 54,641 | 1,304,394 | 1,285,855 | 138,833 | 1,424,688 | ||||||||||||||
| NET INCOME/(LOSS) INCLUDING NONCONTROLLING INTEREST | 2,216,958 | 80,861 | 2,297,819 | 2,476,050 | 204,787 | 2,680,837 | ||||||||||||||
| LESS: NET INCOME/(LOSS) ATTRIBUTABLE TO NONCONTROLLING INTEREST | 244,213 | 33,376 | 277,589 | 298,633 | 84,542 | 383,175 | ||||||||||||||
| NET INCOME/(LOSS) ATTRIBUTABLE TO SHUSA | $ | 1,972,745 | $ | 47,485 | $ | 2,020,230 | $ | 2,177,417 | $ | 120,245 | $ | 2,297,662 | ||||||||
264
The following tables summarize the impact of the corrections on the Company's Consolidated Statements of Stockholder's Equity for the three, six, and nine months ended March 31, 2015, June 30, 2015, and September 30, 2015. The line items noted below were limited to the Stockholder's Equity line items impacted by the correction of the allowance for credit losses error described above.
| Nine Month Period Ended September 30, 2015 | ||||||||||||||||||||||||||||||||||||
| Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | ||||||||||||||||||||||||||||
| As Reported | Corrections | As Restated | ||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||
| Balance, Beginning of period | $ | 3,714,642 | $ | 3,960,809 | $ | 22,504,095 | $ | 122,480 | $ | 86,113 | $ | 208,593 | $ | 3,837,122 | $ | 4,046,922 | $ | 22,712,688 | ||||||||||||||||||
| Comprehensive income attributable to SHUSA | 407,919 | — | 435,456 | (94,602 | ) | — | (94,602 | ) | 313,317 | — | 340,854 | |||||||||||||||||||||||||
| Comprehensive income attributable to NCI | — | 295,222 | 295,222 | — | (68,483 | ) | (68,483 | ) | — | 226,739 | 226,739 | |||||||||||||||||||||||||
| Balance, End of period | $ | 4,111,611 | $ | 4,280,988 | $ | 23,236,735 | $ | 27,878 | $ | 17,630 | $ | 45,508 | $ | 4,139,489 | $ | 4,298,618 | $ | 23,282,243 | ||||||||||||||||||
| Six Month Period Ended June 30, 2015 | ||||||||||||||||||||||||||||||||||||
| Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | ||||||||||||||||||||||||||||
| As Reported | Corrections | As Restated | ||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||
| Balance, Beginning of period | $ | 3,714,642 | $ | 3,960,809 | $ | 22,504,095 | $ | 122,480 | $ | 86,113 | $ | 208,593 | $ | 3,837,122 | $ | 4,046,922 | $ | 22,712,688 | ||||||||||||||||||
| Comprehensive income attributable to SHUSA | 326,032 | — | 296,940 | (52,697 | ) | — | (52,697 | ) | 273,335 | — | 244,243 | |||||||||||||||||||||||||
| Comprehensive income attributable to NCI | — | 194,985 | 194,985 | — | (37,137 | ) | (37,137 | ) | — | 157,848 | 157,848 | |||||||||||||||||||||||||
| Balance, End of period | $ | 4,033,374 | $ | 4,253,517 | $ | 23,087,677 | $ | 69,783 | $ | 48,976 | $ | 118,759 | $ | 4,103,157 | $ | 4,302,493 | $ | 23,206,436 | ||||||||||||||||||
| Three Month Period Ended March 31, 2015 | ||||||||||||||||||||||||||||||||||||
| Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | ||||||||||||||||||||||||||||
| As Reported | Corrections | As Restated | ||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||
| Balance, Beginning of period | $ | 3,714,642 | $ | 3,960,809 | $ | 22,504,095 | $ | 122,480 | $ | 86,113 | $ | 208,593 | $ | 3,837,122 | $ | 4,046,922 | $ | 22,712,688 | ||||||||||||||||||
| Comprehensive income attributable to SHUSA | 158,589 | — | 210,079 | (58,073 | ) | — | (58,073 | ) | 100,516 | — | 152,006 | |||||||||||||||||||||||||
| Comprehensive income attributable to NCI | — | 93,450 | 93,450 | — | (41,126 | ) | (41,126 | ) | — | 52,324 | 52,324 | |||||||||||||||||||||||||
| Balance, End of period | $ | 3,869,581 | $ | 4,069,070 | $ | 22,819,332 | $ | 64,407 | $ | 44,987 | $ | 109,394 | $ | 3,933,988 | $ | 4,114,057 | $ | 22,928,726 | ||||||||||||||||||
265
| Nine Month Period Ended September 30, 2014 | ||||||||||||||||||||||||||||||||||||
| Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | ||||||||||||||||||||||||||||
| As Reported | Corrections | As Restated | ||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||
| Balance, Beginning of period | $ | 1,394,090 | $ | — | $ | 13,544,983 | $ | — | $ | — | $ | — | $ | 1,394,090 | $ | — | $ | 13,544,983 | ||||||||||||||||||
| Comprehensive income attributable to SHUSA | 2,177,417 | — | 2,313,837 | 120,245 | — | 120,245 | 2,297,662 | — | 2,434,082 | |||||||||||||||||||||||||||
| Comprehensive income attributable to NCI | — | — | — | — | 383,175 | 383,175 | — | 383,175 | 383,175 | |||||||||||||||||||||||||||
| SC Change in Control | — | 3,872,370 | 3,872,370 | — | (402,935 | ) | (402,935 | ) | — | 3,469,435 | 3,469,435 | |||||||||||||||||||||||||
| Net stock option activity | — | — | — | — | 104,301 | 104,301 | — | 104,301 | 104,301 | |||||||||||||||||||||||||||
| Balance, End of period | $ | 3,560,557 | $ | 3,872,370 | $ | 22,240,033 | $ | 120,245 | $ | 84,541 | $ | 204,786 | $ | 3,680,802 | $ | 3,956,911 | $ | 22,444,819 | ||||||||||||||||||
| Six Month Period Ended June 30, 2014 | ||||||||||||||||||||||||||||||||||||
| Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | ||||||||||||||||||||||||||||
| As Reported | Corrections | As Restated | ||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||
| Balance, Beginning of period | $ | 1,394,090 | $ | — | $ | 13,544,983 | $ | — | $ | — | $ | — | $ | 1,394,090 | $ | — | $ | 13,544,983 | ||||||||||||||||||
| Comprehensive income attributable to SHUSA | 1,972,745 | — | 2,109,209 | 47,485 | — | 47,485 | 2,020,230 | — | 2,156,694 | |||||||||||||||||||||||||||
| Comprehensive income attributable to NCI | — | — | — | — | 277,589 | 277,589 | — | 277,589 | 277,589 | |||||||||||||||||||||||||||
| SC Chance in Control | — | 3,813,275 | 3,813,275 | — | (348,515 | ) | (348,515 | ) | — | 3,464,760 | 3,464,760 | |||||||||||||||||||||||||
| Net stock option activity | — | — | — | — | 104,301 | 104,301 | — | 104,301 | 104,301 | |||||||||||||||||||||||||||
| Balance, End of period | $ | 3,359,535 | $ | 3,813,275 | $ | 21,979,960 | $ | 47,485 | $ | 33,375 | $ | 80,860 | $ | 3,407,020 | $ | 3,846,650 | $ | 22,060,820 | ||||||||||||||||||
| Three Month Period Ended March 31, 2014 | ||||||||||||||||||||||||||||||||||||
| Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | Retained Earnings | Non-controlling Interest | Total Stockholder's Equity | ||||||||||||||||||||||||||||
| As Reported | Corrections | As Restated | ||||||||||||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||||||||
| Balance, Beginning of period | $ | 1,394,090 | $ | — | $ | 13,544,983 | $ | — | $ | — | $ | — | $ | 1,394,090 | $ | — | $ | 13,544,983 | ||||||||||||||||||
| Comprehensive income attributable to SHUSA | 1,769,903 | — | 1,861,086 | 3,568 | — | 3,568 | 1,773,471 | — | 1,864,654 | |||||||||||||||||||||||||||
| Comprehensive income attributable to NCI | — | — | — | — | 110,246 | 110,246 | — | 110,246 | 110,246 | |||||||||||||||||||||||||||
| SC Change in Control | — | 3,693,435 | 3,693,435 | — | (212,041 | ) | (212,041 | ) | — | 3,481,394 | 3,481,394 | |||||||||||||||||||||||||
| Net stock option activity | — | — | — | — | 104,301 | 104,301 | — | 104,301 | 104,301 | |||||||||||||||||||||||||||
| Balance, End of period | $ | 3,160,343 | $ | 3,693,435 | $ | 21,596,096 | $ | 3,568 | $ | 2,506 | $ | 6,074 | $ | 3,163,911 | $ | 3,695,941 | $ | 21,602,170 | ||||||||||||||||||
266
The following table summarizes the impact of the corrections on the Company's Consolidated Statements of Cash Flows for the three, six, and nine months ended March 31, 2015, June 30, 2015, and September 30, 2015. The line items noted below were limited to the Cash Flow line items impacted by the correction of the allowance for credit losses error described above.
| For the three months ended: | For the six months ended: | For the nine months ended: | ||||||||||||||||||||||||||||
| As reported | As restated | As reported | As restated | As reported | As restated | |||||||||||||||||||||||||
| March 31, 2015 | Corrections | March 31, 2015 | June 30, 2015 | Corrections | June 30, 2015 | September 30, 2015 | Corrections | September 30, 2015 | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||
| Cash Flows from Operating Activities | ||||||||||||||||||||||||||||||
| Net income including noncontrolling interest: | $ | 252,039 | $ | (99,199 | ) | $ | 152,840 | $ | 521,017 | $ | (89,834 | ) | $ | 431,183 | $ | 703,141 | $ | (163,085 | ) | $ | 540,056 | |||||||||
| Provision for credit losses | 872,184 | 172,029 | 1,044,213 | 1,873,938 | 160,688 | 2,034,626 | 2,728,118 | 285,112 | 3,013,230 | |||||||||||||||||||||
| Deferred tax expense | 467 | (72,830 | ) | (72,363 | ) | 11,246 | (70,854 | ) | (59,608 | ) | 224,417 | (122,027 | ) | 102,390 | ||||||||||||||||
The following table summarizes the impact of the corrections on the Company's Consolidated Statements of Cash Flows for the three, six, and nine months ended March 31, 2014, June 30, 2014, and September 30, 2014. The line items noted below were limited to the Cash Flow line items impacted by the correction of the allowance for credit losses error described above.
| For the three months ended: | For the six months ended: | For the nine months ended: | ||||||||||||||||||||||||||||
| As reported | As restated | As reported | As restated | As reported | As restated | |||||||||||||||||||||||||
| March 31, 2014 | Corrections | March 31, 2014 | June 30, 2014 | Corrections | June 30, 2014 | September 30, 2014 | Corrections | September 30, 2014 | ||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||||||||
| Cash Flows from Operating Activities | ||||||||||||||||||||||||||||||
| Net income including noncontrolling interest: | $ | 1,877,643 | $ | 6,074 | $ | 1,883,717 | $ | 2,216,958 | $ | 80,861 | $ | 2,297,819 | $ | 2,476,050 | $ | 204,787 | $ | 2,680,837 | ||||||||||||
| Provision for credit losses | 335,330 | (10,059 | ) | 325,271 | 1,021,364 | (135,501 | ) | 885,863 | 2,034,721 | (343,620 | ) | 1,691,101 | ||||||||||||||||||
| Deferred tax expense | 800,165 | 3,985 | 804,150 | 854,940 | 54,640 | 909,580 | 890,534 | 138,833 | 1,029,367 | |||||||||||||||||||||
The following corrections of certain footnote disclosures of the Company are as a result of the error identified in the allowance for credit losses and the error identified in TDRs. The following corrections made compared to what was previously reported are presented by line item as follows:
Allowance for Credit Losses Rollforward by Portfolio Segment (as restated compared to as reported)
| Three Month Period Ended September 30, 2015 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as restated) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 399,770 | $ | 2,390,191 | $ | 71,592 | $ | 2,861,553 | |||||||
| Provision for/ (Recovery of) loan and lease losses | 11,811 | 993,051 | (26,258 | ) | 978,604 | ||||||||||
| Allowance for loan and lease losses, end of period | $ | 391,233 | $ | 2,364,836 | $ | 45,334 | $ | 2,801,403 | |||||||
| Nine Month Period Ended September 30, 2015 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as restated) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 386,837 | $ | 1,330,782 | $ | 33,024 | $ | 1,750,643 | |||||||
| Provision for/ (Recovery of) loan and lease losses | 61,693 | 2,934,227 | 12,310 | 3,008,230 | |||||||||||
| Allowance for loan and lease losses, end of period | $ | 391,233 | $ | 2,364,836 | $ | 45,334 | $ | 2,801,403 | |||||||
267
| Three Month Period Ended September 30, 2015 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as reported) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 414,462 | $ | 2,584,404 | $ | 71,592 | $ | 3,070,458 | |||||||
| Provision for/ (Recovery of) loan and lease losses | 4,824 | 875,614 | (26,258 | ) | 854,180 | ||||||||||
| Allowance for loan and lease losses, end of period | $ | 398,937 | $ | 2,468,075 | $ | 45,334 | $ | 2,912,346 | |||||||
| Nine Month Period Ended September 30, 2015 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as reported) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 396,489 | $ | 1,679,304 | $ | 33,024 | $ | 2,108,817 | |||||||
| Provision for/ (Recovery of) loan and lease losses | 59,745 | 2,651,063 | 12,310 | 2,723,118 | |||||||||||
| Allowance for loan and lease losses, end of period | $ | 398,937 | $ | 2,468,075 | $ | 45,334 | $ | 2,912,346 | |||||||
| Three Month Period Ended June 30, 2015 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as restated) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 398,435 | $ | 1,831,505 | $ | 71,298 | $ | 2,301,238 | |||||||
| Provision for/ (Recovery of) loan and lease losses | 24,974 | 955,145 | 294 | 980,413 | |||||||||||
| Allowance for loan and lease losses, end of period | $ | 399,770 | $ | 2,390,191 | $ | 71,592 | $ | 2,861,553 | |||||||
| Six Month Period Ended June 30, 2015 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as restated) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 386,837 | $ | 1,330,782 | $ | 33,024 | $ | 1,750,643 | |||||||
| Provision for/ (Recovery of) loan and lease losses | 49,882 | 1,941,176 | 38,568 | 2,029,626 | |||||||||||
| Allowance for loan and lease losses, end of period | $ | 399,770 | $ | 2,390,191 | $ | 71,592 | $ | 2,861,553 | |||||||
| Three Month Period Ended June 30, 2015 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as reported) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 408,867 | $ | 2,013,074 | $ | 71,299 | $ | 2,493,240 | |||||||
| Provision for/ (Recovery of) loan and lease losses | 29,232 | 962,229 | 293 | 991,754 | |||||||||||
| Allowance for loan and lease losses, end of period | $ | 414,462 | $ | 2,584,404 | $ | 71,592 | $ | 3,070,458 | |||||||
| Six Month Period Ended June 30, 2015 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as reported) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 396,489 | $ | 1,679,304 | $ | 33,024 | $ | 2,108,817 | |||||||
| Provision for/ (Recovery of) loan and lease losses | 54,922 | 1,775,448 | 38,568 | 1,868,938 | |||||||||||
| Allowance for loan and lease losses, end of period | $ | 414,462 | $ | 2,584,404 | $ | 71,592 | $ | 3,070,458 | |||||||
268
| Three Month Period Ended March 31, 2015 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as restated) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 386,837 | $ | 1,330,782 | $ | 33,024 | $ | 1,750,643 | |||||||
| Provision for loan and lease losses | 24,908 | 986,030 | 38,275 | 1,049,213 | |||||||||||
| Allowance for loan and lease losses, end of period | $ | 398,434 | $ | 1,831,505 | $ | 71,299 | $ | 2,301,238 | |||||||
| Three Month Period Ended March 31, 2015 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as reported) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 396,489 | $ | 1,679,304 | $ | 33,024 | $ | 2,108,817 | |||||||
| Provision for loan and lease losses | 25,689 | 813,220 | 38,275 | 877,184 | |||||||||||
| Allowance for loan and lease losses, end of period | $ | 408,867 | $ | 2,013,074 | $ | 71,299 | $ | 2,493,240 | |||||||
| Three Month Period Ended September 30, 2014 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as restated) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 359,811 | $ | 895,209 | $ | 39,001 | $ | 1,294,021 | |||||||
| Provision for/ (Recovery of) loan and lease losses | 24,461 | 811,281 | (10,504 | ) | 825,238 | ||||||||||
| Allowance for loan and lease losses, end of period | $ | 364,434 | $ | 1,067,153 | $ | 28,497 | $ | 1,460,084 | |||||||
| Nine Month Period Ended September 30, 2014 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as restated) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 443,074 | $ | 363,647 | $ | 27,616 | $ | 834,337 | |||||||
| Provision for/ (Recovery of) loan and lease losses | (16,035 | ) | 1,771,255 | 881 | 1,756,101 | ||||||||||
| Allowance for loan and lease losses, end of period | $ | 364,433 | $ | 1,067,154 | $ | 28,497 | $ | 1,460,084 | |||||||
| Three Month Period Ended September 30, 2014 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as reported) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 359,811 | $ | 1,027,044 | $ | 39,001 | $ | 1,425,856 | |||||||
| Provision for/ (Recovery of) loan and lease losses | 31,506 | 1,012,355 | (10,504 | ) | 1,033,357 | ||||||||||
| Allowance for loan and lease losses, end of period | $ | 371,478 | $ | 1,405,414 | $ | 28,497 | $ | 1,805,389 | |||||||
| Nine Month Period Ended September 30, 2014 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as reported) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 443,074 | $ | 363,647 | $ | 27,616 | $ | 834,337 | |||||||
| Provision for/ (Recovery of) loan and lease losses | (8,990 | ) | 2,107,830 | 881 | 2,099,721 | ||||||||||
| Allowance for loan and lease losses, end of period | $ | 371,478 | $ | 1,405,414 | $ | 28,497 | $ | 1,805,389 | |||||||
269
| Three Month Period Ended June 30, 2014 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as restated) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 434,160 | $ | 626,386 | $ | 44,490 | $ | 1,105,036 | |||||||
| Provision for/ (Recovery of) loan and lease losses | (55,786 | ) | 626,867 | (5,489 | ) | 565,592 | |||||||||
| Allowance for loan and lease losses, end of period | $ | 359,811 | $ | 895,210 | $ | 39,001 | $ | 1,294,022 | |||||||
| Six Month Period Ended June 30, 2014 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as restated) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 443,074 | $ | 363,647 | $ | 27,616 | $ | 834,337 | |||||||
| Provision for/ (Recovery of) loan and lease losses | (40,496 | ) | 959,974 | 11,385 | 930,863 | ||||||||||
| Allowance for loan and lease losses, end of period | $ | 359,811 | $ | 895,210 | $ | 39,001 | $ | 1,294,022 | |||||||
| Three Month Period Ended June 30, 2014 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as reported) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 434,160 | $ | 631,942 | $ | 44,490 | $ | 1,110,592 | |||||||
| Provision for/ (Recovery of) loan and lease losses | (55,784 | ) | 752,307 | (5,489 | ) | 691,034 | |||||||||
| Allowance for loan and lease losses, end of period | $ | 359,811 | $ | 1,027,044 | $ | 39,001 | $ | 1,425,856 | |||||||
| Six Month Period Ended June 30, 2014 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as reported) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 443,074 | $ | 363,647 | $ | 27,616 | $ | 834,337 | |||||||
| Provision for/ (Recovery of) loan and lease losses | (40,496 | ) | 1,095,475 | 11,385 | 1,066,364 | ||||||||||
| Allowance for loan and lease losses, end of period | $ | 359,811 | $ | 1,027,044 | $ | 39,001 | $ | 1,425,856 | |||||||
| Three Month Period Ended March 31, 2014 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as restated) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 443,074 | $ | 363,647 | $ | 27,616 | $ | 834,337 | |||||||
| Provision for loan and lease losses | 15,291 | 333,107 | 16,873 | 365,271 | |||||||||||
| Allowance for loan and lease losses, end of period | $ | 434,160 | $ | 626,387 | $ | 44,489 | $ | 1,105,036 | |||||||
| Three Month Period Ended March 31, 2014 | |||||||||||||||
| Commercial | Consumer | Unallocated | Total | ||||||||||||
| (as reported) | |||||||||||||||
| (in thousands) | |||||||||||||||
| Allowance for loan and lease losses, beginning of period | $ | 443,074 | $ | 363,647 | $ | 27,616 | $ | 834,337 | |||||||
| Provision for loan and lease losses | 15,289 | 343,168 | 16,873 | 375,330 | |||||||||||
| Allowance for loan and lease losses, end of period | $ | 434,161 | $ | 631,942 | $ | 44,489 | $ | 1,110,592 | |||||||
270
Impaired Loans (as restated compared to as reported)
The line items noted below were limited to the Impaired Loans disaggregated by class of financing receivable line items impacted by the correction of the TDR error described above:
| September 30, 2015 | ||||||||||||||||
Recorded Investment(1) | Unpaid Principal Balance | Related Specific Reserves | Average Recorded Investment | |||||||||||||
| (as restated) | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | $ | 2,721 | $ | 4,144 | $ | — | $ | 6,625 | ||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 100,834 | 125,670 | — | 497,198 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial and industrial | 80,472 | 89,708 | 37,732 | 81,338 | ||||||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 3,393,316 | 3,734,191 | 666,902 | 1,710,869 | ||||||||||||
| Total: | ||||||||||||||||
| Commercial | $ | 292,548 | $ | 366,508 | $ | 59,964 | $ | 364,869 | ||||||||
| Consumer | 3,776,981 | 4,183,669 | 704,762 | 2,608,073 | ||||||||||||
| Total | $ | 4,069,529 | $ | 4,550,177 | $ | 764,726 | $ | 2,972,942 | ||||||||
| (1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
The Company recognized interest income of $325.0 million for the nine month period ended September 30, 2015 on approximately $3.4 billion of TDRs that were returned to performing status as of September 30, 2015.
| September 30, 2015 | ||||||||||||||||
Recorded Investment(1) | Unpaid Principal Balance | Related Specific Reserves | Average Recorded Investment | |||||||||||||
| (as reported) | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | $ | 2,721 | $ | 4,144 | $ | — | $ | 4,374 | ||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 100,835 | 125,670 | — | 124,591 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial and industrial | 80,472 | 89,708 | 34,555 | 73,329 | ||||||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 3,393,315 | 3,734,191 | 317,655 | 2,599,160 | ||||||||||||
| Total: | ||||||||||||||||
| Commercial | $ | 292,548 | $ | 366,508 | $ | 56,787 | $ | 343,845 | ||||||||
| Consumer | 3,776,981 | 4,183,669 | 355,515 | 3,005,441 | ||||||||||||
| Total | $ | 4,069,529 | $ | 4,550,177 | $ | 412,302 | $ | 3,349,286 | ||||||||
| (1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
The Company recognized interest income of $187.9 million for the nine month period ended September 30, 2015 on approximately $3.4 billion of TDRs that were returned to performing status as of September 30, 2015.
271
| June 30, 2015 | ||||||||||||||||
Recorded Investment(1) | Unpaid Principal Balance | Related Specific Reserves | Average Recorded Investment | |||||||||||||
| (as restated) | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | $ | 2,787 | $ | 4,371 | $ | — | $ | 6,658 | ||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 144,489 | 183,866 | — | 519,025 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial and industrial | 84,616 | 95,855 | 37,629 | 83,410 | ||||||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 3,352,684 | 3,730,905 | 511,643 | 1,690,553 | ||||||||||||
| Total: | ||||||||||||||||
| Commercial | $ | 316,550 | $ | 394,137 | $ | 61,207 | $ | 376,869 | ||||||||
| Consumer | 3,784,124 | 4,243,136 | 557,011 | 2,611,643 | ||||||||||||
| Total | $ | 4,100,674 | $ | 4,637,273 | $ | 618,218 | $ | 2,988,512 | ||||||||
| (1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
The Company recognized interest income of $247.6 million for the six month period ended June 30, 2015 on approximately $3.5 billion of TDRs that were returned to performing status as of June 30, 2015.
| June 30, 2015 | ||||||||||||||||
Recorded Investment(1) | Unpaid Principal Balance | Related Specific Reserves | Average Recorded Investment | |||||||||||||
| (as reported) | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | $ | 3,026 | $ | 4,626 | $ | — | $ | 4,526 | ||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 332,961 | 399,579 | — | 240,654 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial and industrial | 84,820 | 96,057 | 37,231 | 75,503 | ||||||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 3,256,884 | 3,618,706 | 331,869 | 2,530,945 | ||||||||||||
| Total: | ||||||||||||||||
| Commercial | $ | 316,993 | $ | 394,594 | $ | 60,809 | $ | 356,068 | ||||||||
| Consumer | 3,876,796 | 4,346,650 | 377,237 | 3,055,349 | ||||||||||||
| Total | $ | 4,193,789 | $ | 4,741,244 | $ | 438,046 | $ | 3,411,417 | ||||||||
| (1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
The Company recognized interest income of $65.0 million for the six month period ended June 30, 2015 on approximately $3.6 billion of TDRs that were returned to performing status as of June 30, 2015.
272
| March 31, 2015 | ||||||||||||||||
Recorded Investment(1) | Unpaid Principal Balance | Related Specific Reserves | Average Recorded Investment | |||||||||||||
| (as restated) | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | $ | 5,132 | $ | 6,433 | $ | — | $ | 7,830 | ||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 146,136 | 189,983 | — | 519,849 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial and industrial | 81,067 | 94,042 | 38,661 | 81,636 | ||||||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 2,586,190 | 2,902,397 | 216,586 | 1,307,306 | ||||||||||||
| Total: | ||||||||||||||||
| Commercial | $ | 376,865 | $ | 458,643 | $ | 79,032 | $ | 407,028 | ||||||||
| Consumer | 3,021,510 | 3,423,609 | 258,114 | 2,230,337 | ||||||||||||
| Total | $ | 3,398,375 | $ | 3,882,252 | $ | 337,146 | $ | 2,637,365 | ||||||||
| (1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
The Company recognized interest income of $121.8 million for the three month period ended March 31, 2015 on approximately $2.9 billion of TDRs that were returned to performing status as of March 31, 2015.
| March 31, 2015 | ||||||||||||||||
Recorded Investment(1) | Unpaid Principal Balance | Related Specific Reserves | Average Recorded Investment | |||||||||||||
| (as reported) | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | $ | 3,931 | $ | 5,202 | $ | — | $ | 4,979 | ||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 151,229 | 196,458 | — | 149,788 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial and industrial | 82,515 | 95,517 | 39,103 | 74,350 | ||||||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 2,677,764 | 3,002,462 | 237,745 | 2,241,385 | ||||||||||||
| Total: | ||||||||||||||||
| Commercial | $ | 377,112 | $ | 458,887 | $ | 79,474 | $ | 386,127 | ||||||||
| Consumer | 3,118,177 | 3,530,149 | 279,273 | 2,676,040 | ||||||||||||
| Total | $ | 3,495,289 | $ | 3,989,036 | $ | 358,747 | $ | 3,062,167 | ||||||||
| (1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
The Company recognized interest income of $80.5 million for the three month period ended March 31, 2015 on approximately $3.0 billion of TDRs that were returned to performing status as of March 31, 2015.
273
| September 30, 2014 | ||||||||||||||||
Recorded Investment(1) | Unpaid Principal Balance | Related Specific Reserves | Average Recorded Investment | |||||||||||||
| (as restated) | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | $ | 7,148 | $ | 16,799 | $ | — | $ | 10,140 | ||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 791,282 | 917,159 | — | 395,641 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial and industrial | 55,264 | 61,769 | 29,436 | 77,744 | ||||||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 6,467 | 6,631 | 1,926 | 3,234 | ||||||||||||
| Total: | ||||||||||||||||
| Commercial | $ | 405,228 | $ | 514,892 | $ | 73,075 | $ | 442,286 | ||||||||
| Consumer | 1,075,186 | 1,241,232 | 39,761 | 914,497 | ||||||||||||
| Total | $ | 1,480,414 | $ | 1,756,124 | $ | 112,836 | $ | 1,356,783 | ||||||||
| (1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
The Company recognized interest income of $48.5 million for the nine month period ended September 30, 2014 on approximately $1.1 billion of TDRs that were returned to performing status as of September 30, 2014.
| September 30, 2014 | ||||||||||||||||
Recorded Investment(1) | Unpaid Principal Balance | Related Specific Reserves | Average Recorded Investment | |||||||||||||
| (as reported) | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | $ | 6,335 | $ | 15,868 | $ | — | $ | 9,733 | ||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 111,032 | 146,248 | — | 55,516 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial and industrial | 56,065 | 62,674 | 29,553 | 78,145 | ||||||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 720,458 | 811,914 | 97,729 | 360,230 | ||||||||||||
| Total: | ||||||||||||||||
| Commercial | $ | 405,216 | $ | 514,866 | $ | 73,193 | $ | 442,281 | ||||||||
| Consumer | 1,028,927 | 1,275,604 | 135,564 | 931,370 | ||||||||||||
| Total | $ | 1,514,143 | $ | 1,790,470 | $ | 208,757 | $ | 1,373,651 | ||||||||
| (1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
The Company recognized interest income of $66.6 million for the nine month period ended September 30, 2014 on approximately $1.1 billion of TDRs that were returned to performing status as of September 30, 2014.
274
The Company recognized interest income of $66.6 million for the nine month period ended September 30, 2014 on approximately $1.1 billion of TDRs that were returned to performing status as of September 30, 2014.
| June 30, 2014 | ||||||||||||||||
Recorded Investment(1) | Unpaid Principal Balance | Related Specific Reserves | Average Recorded Investment | |||||||||||||
| (as restated) | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | $ | 5,203 | $ | 14,234 | $ | — | $ | 9,167 | ||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 269,446 | 321,276 | — | 134,723 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial and industrial | 100,027 | 107,054 | 39,523 | 100,126 | ||||||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 558 | 573 | 167 | 279 | ||||||||||||
| Total: | ||||||||||||||||
| Commercial | $ | 425,545 | $ | 537,600 | $ | 75,050 | $ | 452,444 | ||||||||
| Consumer | 1,027,142 | 1,152,530 | 131,858 | 890,476 | ||||||||||||
| Total | $ | 1,452,687 | $ | 1,690,130 | $ | 206,908 | $ | 1,342,920 | ||||||||
| (1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
The Company recognized interest income of $25.0 million for the six month period ended June 30, 2014 on approximately $923.7 million of TDRs that were returned to performing status as of June 30, 2014.
| June 30, 2014 | ||||||||||||||||
Recorded Investment(1) | Unpaid Principal Balance | Related Specific Reserves | Average Recorded Investment | |||||||||||||
| (as reported) | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | $ | 5,186 | $ | 14,196 | $ | — | $ | 9,158 | ||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 63,712 | 88,732 | — | 31,856 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial and industrial | 100,027 | 107,054 | 39,503 | 100,126 | ||||||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 256,397 | 288,973 | 53,916 | 128,198 | ||||||||||||
| Total: | ||||||||||||||||
| Commercial | $ | 425,528 | $ | 537,562 | $ | 75,050 | $ | 452,439 | ||||||||
| Consumer | 1,077,247 | 1,208,386 | 185,607 | 915,530 | ||||||||||||
| Total | $ | 1,502,775 | $ | 1,745,948 | $ | 260,657 | $ | 1,367,969 | ||||||||
| (1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
The Company recognized interest income of $54.1 million for the six month period ended June 30, 2014 on approximately $969.1 million of TDRs that were returned to performing status as of June 30, 2014.
275
| March 31, 2014 | ||||||||||||||||
Recorded Investment(1) | Unpaid Principal Balance | Related Specific Reserves | Average Recorded Investment | |||||||||||||
| (as restated) | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | $ | 6,113 | $ | 9,980 | $ | — | $ | 9,622 | ||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 99,697 | 131,032 | — | 49,849 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial and industrial | 98,788 | 105,342 | 49,709 | 99,506 | ||||||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 54 | 56 | 16 | 27 | ||||||||||||
| Total: | ||||||||||||||||
| Commercial | $ | 464,674 | $ | 545,046 | $ | 84,147 | $ | 472,009 | ||||||||
| Consumer | 853,167 | 956,875 | 135,916 | 803,488 | ||||||||||||
| Total | $ | 1,317,841 | $ | 1,501,921 | $ | 220,063 | $ | 1,275,497 | ||||||||
| (1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
The Company recognized interest income of $11.6 million for the three month period ended March 31, 2014 on approximately $760.4 million of TDRs that were returned to performing status as of March 31, 2014.
| March 31, 2014 | ||||||||||||||||
Recorded Investment(1) | Unpaid Principal Balance | Related Specific Reserves | Average Recorded Investment | |||||||||||||
| (as reported) | ||||||||||||||||
| (in thousands) | ||||||||||||||||
| With no related allowance recorded: | ||||||||||||||||
| Commercial: | ||||||||||||||||
| Commercial and industrial | $ | 6,104 | $ | 9,939 | $ | — | $ | 9,617 | ||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 28,563 | 50,433 | — | 14,281 | ||||||||||||
| With an allowance recorded: | ||||||||||||||||
| Commercial and industrial | 98,788 | 105,342 | 49,686 | 99,506 | ||||||||||||
| Consumer: | ||||||||||||||||
| Retail installment contracts and auto loans | 91,620 | 103,477 | 20,982 | 45,810 | ||||||||||||
| Total: | ||||||||||||||||
| Commercial | $ | 464,665 | $ | 545,005 | $ | 84,147 | $ | 472,007 | ||||||||
| Consumer | 873,599 | 979,697 | 156,882 | 813,705 | ||||||||||||
| Total | $ | 1,338,264 | $ | 1,524,702 | $ | 241,029 | $ | 1,285,712 | ||||||||
| (1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. |
The Company recognized interest income of $7.7 million for the three month period ended March 31, 2014 on approximately $780.1 million of TDRs that were returned to performing status as of March 31, 2014.
276
Troubled Debt Restructurings (as restated compared to as reported)
The following tables summarize the Company's performing and non-performing TDRs at the dates indicated:
| March 31, 2014 | June 30, 2014 | September 30, 2014 | March 31, 2015 | June 30, 2015 | September 30, 2015 | |||||||||||||||||||
| (as restated) | ||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Performing | $ | 760,437 | $ | 923,663 | $ | 1,062,783 | $ | 2,875,546 | $ | 3,524,296 | $ | 3,434,409 | ||||||||||||
| Non-Performing | 345,555 | 337,172 | 259,394 | 381,848 | 487,277 | 523,250 | ||||||||||||||||||
| Total | $ | 1,105,992 | $ | 1,260,835 | $ | 1,322,177 | $ | 3,257,394 | $ | 4,011,573 | $ | 3,957,659 | ||||||||||||
| March 31, 2014 | June 30, 2014 | September 30, 2014 | March 31, 2015 | June 30, 2015 | September 30, 2015 | |||||||||||||||||||
| (as reported) | ||||||||||||||||||||||||
| (in thousands) | ||||||||||||||||||||||||
| Performing | $ | 780,085 | $ | 969,098 | $ | 1,088,829 | $ | 2,962,052 | $ | 3,605,191 | $ | 3,434,409 | ||||||||||||
| Non-Performing | 346,329 | 341,825 | 267,077 | 392,256 | 499,497 | 523,250 | ||||||||||||||||||
| Total | $ | 1,126,414 | $ | 1,310,923 | $ | 1,355,906 | $ | 3,354,308 | $ | 4,104,688 | $ | 3,957,659 | ||||||||||||
Financial Impact and TDRs by Concession Type
The line items noted below were limited to the Financial Impact and TDRs by Concession Type line items impacted by the correction of the TDR error described above:
| Three Month Period Ended September 30, 2015 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as restated) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | 210 | $ | 6,845 | $ | 6,844 | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 57,162 | 896,061 | 894,867 | |||||||
| Total | 61,489 | $ | 914,449 | $ | 913,929 | |||||
| Nine Month Period Ended September 30, 2015 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as restated) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | 416 | $ | 13,625 | $ | 13,623 | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 203,195 | 3,083,422 | 3,078,152 | |||||||
| Total | 217,071 | $ | 3,182,322 | $ | 3,174,975 | |||||
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.
(2) Post-TDR modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred.
277
| Three Month Period Ended September 30, 2015 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as reported) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | 205 | $ | 7,034 | $ | 7,005 | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 46,034 | 829,574 | 823,967 | |||||||
| Total | 50,356 | $ | 848,151 | $ | 843,190 | |||||
| Nine Month Period Ended September 30, 2015 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as reported) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | 417 | $ | 13,694 | $ | 13,652 | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 201,970 | 3,071,671 | 3,059,425 | |||||||
| Total | 215,847 | $ | 3,170,640 | $ | 3,156,277 | |||||
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.
(2) Post-TDR modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred.
| Three Month Period Ended June 30, 2015 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as restated) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | 127 | $ | 4,272 | $ | 4,272 | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 70,544 | 1,074,735 | 1,072,920 | |||||||
| Total | 75,441 | $ | 1,111,476 | $ | 1,108,956 | |||||
| Six Month Period Ended June 30, 2015 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as restated) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | 208 | $ | 15,152 | $ | 12,438 | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 146,033 | 2,187,361 | 2,183,285 | |||||||
| Total | 155,582 | $ | 2,267,873 | $ | 2,261,044 | |||||
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.
(2) Post-TDR modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred.
278
| Three Month Period Ended June 30, 2015 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as reported) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | 115 | $ | 3,555 | $ | 3,858 | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 75,376 | 1,051,825 | 1,104,040 | |||||||
| Total | 80,261 | $ | 1,087,849 | $ | 1,139,662 | |||||
| Six Month Period Ended June 30, 2015 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as reported) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | 214 | $ | 15,032 | $ | 12,306 | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 155,936 | 2,242,097 | 2,235,458 | |||||||
| Total | 165,491 | $ | 2,322,489 | $ | 2,313,085 | |||||
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.
(2) Post-TDR modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred.
| Three Month Period Ended March 31, 2015 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as restated) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | 81 | $ | 10,880 | $ | 8,166 | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 75,489 | 1,112,626 | 1,110,365 | |||||||
| Total | 80,142 | $ | 1,157,244 | $ | 1,151,936 | |||||
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.
(2) Post-TDR modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred.
| Three Month Period Ended March 31, 2015 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as reported) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | 99 | $ | 11,477 | $ | 8,448 | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 80,560 | 1,190,272 | 1,131,418 | |||||||
| Total | 85,231 | $ | 1,235,487 | $ | 1,173,271 | |||||
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.
(2) Post-TDR modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred.
279
| Three Month Period Ended September 30, 2014 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as restated) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | 26 | $ | 769 | $ | 769 | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 40,649 | 560,329 | 557,795 | |||||||
| Total | 46,433 | $ | 620,634 | $ | 618,340 | |||||
| Nine Month Period Ended September 30, 2014 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as restated) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | 35 | $ | 988 | $ | 988 | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 65,761 | 845,601 | 837,990 | |||||||
| Total | 76,686 | $ | 1,010,047 | $ | 998,452 | |||||
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.
(2) Post-TDR modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred.
| Three Month Period Ended September 30, 2014 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as reported) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | — | $ | — | $ | — | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 43,602 | 608,408 | 559,565 | |||||||
| Total | 49,360 | $ | 667,944 | $ | 619,341 | |||||
| Nine Month Period Ended September 30, 2014 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as reported) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | — | $ | — | $ | — | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 78,216 | 1,027,275 | 900,642 | |||||||
| Total | 89,106 | $ | 1,190,733 | $ | 1,060,116 | |||||
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.
(2) Post-TDR modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred.
280
| Three Month Period Ended June 30, 2014 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as restated) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | 6 | $ | 153 | $ | 153 | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 14,764 | 182,401 | 179,238 | |||||||
| Total | 19,781 | $ | 243,523 | $ | 236,879 | |||||
| Six Month Period Ended June 30, 2014 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as restated) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | 9 | $ | 219 | $ | 219 | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 25,112 | 285,272 | 280,195 | |||||||
| Total | 30,253 | $ | 389,411 | $ | 380,112 | |||||
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.
(2) Post-TDR modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred.
| Three Month Period Ended June 30, 2014 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as reported) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | — | $ | — | $ | — | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 20,555 | 265,734 | 217,460 | |||||||
| Total | 25,566 | $ | 326,703 | $ | 274,948 | |||||
| Six Month Period Ended June 30, 2014 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as reported) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | — | $ | — | $ | — | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 34,614 | 418,867 | 341,077 | |||||||
| Total | 39,746 | $ | 522,787 | $ | 440,775 | |||||
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.
(2) Post-TDR modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred.
281
| Three Month Period Ended March 31, 2014 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as restated) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | 15 | $ | 18,859 | $ | 18,273 | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 10,348 | 102,871 | 100,957 | |||||||
| Total | 10,472 | $ | 145,889 | $ | 143,232 | |||||
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.
(2) Post-TDR modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred.
| Three Month Period Ended March 31, 2014 | ||||||||||
| Number of Contracts | Pre-Modification Outstanding Recorded Investment(1) | Post-Modification Outstanding Recorded Investment(2) | ||||||||
| (as reported) | ||||||||||
| (dollars in thousands) | ||||||||||
| Commercial: | ||||||||||
| Commercial and industrial | 12 | $ | 18,793 | $ | 18,207 | |||||
| Consumer: | ||||||||||
| Retail installment contracts and auto loans | 14,059 | 153,133 | 123,617 | |||||||
| Total | 14,180 | $ | 196,085 | $ | 165,826 | |||||
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month the modification occurred.
(2) Post-TDR modification outstanding recorded investment amount is the month-end balance for the month that the modification occurred.
TDRs Which Have Subsequently Defaulted
The line items noted below were limited to the TDRs which have subsequently defaulted line items impacted by the correction of the TDR error described above:
| Three Month Period Ended March 31, 2015 | Three Month Period Ended June 30, 2015 | Three Month Period Ended September 30, 2015 | |||||||||||||||
| Number of Contracts | Recorded Investment(1) | Number of Contracts | Recorded Investment(1) | Number of Contracts | Recorded Investment(1) | ||||||||||||
| (as restated) | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Commercial: | |||||||||||||||||
| Commercial and industrial | 10 | $ | 276 | 12 | $ | 410 | 10 | $ | 357 | ||||||||
| Consumer: | |||||||||||||||||
| RIC and auto loans | 9,693 | 142,534 | 12,143 | 184,270 | 15,416 | 241,952 | |||||||||||
| Total | 9,782 | 144,305 | 13,340 | 187,503 | 16,302 | 244,534 | |||||||||||
(1) The recorded investment represents the period-end balance at March 31, June 30, and September 30, 2015.
282
| Three Month Period Ended March 31, 2015 | Three Month Period Ended June 30, 2015 | Three Month Period Ended September 30, 2015 | |||||||||||||||
| Number of Contracts | Recorded Investment(1) | Number of Contracts | Recorded Investment(1) | Number of Contracts | Recorded Investment(1) | ||||||||||||
| (as reported) | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Commercial: | |||||||||||||||||
| Commercial and industrial | 10 | $ | 276 | 7 | $ | 242 | 8 | $ | 134 | ||||||||
| Consumer: | |||||||||||||||||
| RIC and auto loans | 13,355 | 130,290 | 14,577 | 166,665 | 991 | 60,959 | |||||||||||
| Total | 13,444 | 132,061 | 15,769 | 169,730 | 1,875 | 63,318 | |||||||||||
(1) The recorded investment represents the period-end balance at March 31, June 30, and September 30, 2015.
| Six Month Period Ended June 30, 2015 | Nine Month Period Ended September 30, 2015 | ||||||||||
| Number of Contracts | Recorded Investment(1) | Number of Contracts | Recorded Investment(1) | ||||||||
| (as restated) | |||||||||||
| (dollars in thousands) | |||||||||||
| Commercial: | |||||||||||
| Commercial and industrial | 22 | $ | 686 | 32 | $ | 1,043 | |||||
| Consumer: | |||||||||||
| RIC and auto loans | 21,836 | 326,804 | 37,252 | 568,756 | |||||||
| Total | 24,435 | 333,161 | 40,737 | 577,696 | |||||||
(1) The recorded investment represents the period-end balance at June 30 and September 30, 2015.
| Six Month Period Ended June 30, 2015 | Nine Month Period Ended September 30, 2015 | ||||||||||
| Number of Contracts | Recorded Investment(1) | Number of Contracts | Recorded Investment(1) | ||||||||
| (as reported) | |||||||||||
| (dollars in thousands) | |||||||||||
| Commercial | |||||||||||
| Commercial and industrial | 17 | $ | 518 | 25 | $ | 652 | |||||
| Consumer: | |||||||||||
| RIC and auto loans | 27,932 | 296,955 | 28,923 | 357,914 | |||||||
| Total | 30,526 | 303,144 | 32,401 | 366,463 | |||||||
(1) The recorded investment represents the period-end balance at June 30 and September 30, 2015.
| Three Month Period Ended March 31, 2014 | Three Month Period Ended June 30, 2014 | Three Month Period Ended September 30, 2014 | |||||||||||||||
| Number of Contracts | Recorded Investment(1) | Number of Contracts | Recorded Investment(1) | Number of Contracts | Recorded Investment(1) | ||||||||||||
| (as restated) | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Consumer: | |||||||||||||||||
| RIC and auto loans | 40 | $ | 304 | 450 | $ | 5,064 | 1,528 | $ | 19,737 | ||||||||
| Total | 52 | 2,219 | 731 | 6,459 | 2,350 | 20,961 | |||||||||||
(1) The recorded investment represents the period-end balance at March 31, June 30, and September 30, 2014.
283
| Three Month Period Ended March 31, 2014 | Three Month Period Ended June 30, 2014 | Three Month Period Ended September 30, 2014 | |||||||||||||||
| Number of Contracts | Recorded Investment(1) | Number of Contracts | Recorded Investment(1) | Number of Contracts | Recorded Investment(1) | ||||||||||||
| (as reported) | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Consumer: | |||||||||||||||||
| RIC and auto loans | 187 | $ | 1,743 | 592 | $ | 4,686 | 2,981 | $ | 17,811 | ||||||||
| Total | 199 | 3,658 | 873 | 6,081 | 3,803 | 19,035 | |||||||||||
(1) The recorded investment represents the period-end balance at March 31, June 30, and September 30, 2014.
| Six Month Period Ended June 30, 2014 | Nine Month Period Ended September 30, 2014 | ||||||||||
| Number of Contracts | Recorded Investment(1) | Number of Contracts | Recorded Investment(1) | ||||||||
| (as restated) | |||||||||||
| (dollars in thousands) | |||||||||||
| Consumer: | |||||||||||
RIC and auto loans(2) | 490 | $ | 5,368 | 2,018 | $ | 25,105 | |||||
| Total | 783 | 8,678 | 3,133 | 29,641 | |||||||
(1) The recorded investment represents the period-end balance at June 30 and September 30, 2014.
| Six Month Period Ended June 30, 2014 | Nine Month Period Ended September 30, 2014 | ||||||||||
| Number of Contracts | Recorded Investment(1) | Number of Contracts | Recorded Investment(1) | ||||||||
| (as reported) | |||||||||||
| (dollars in thousands) | |||||||||||
| Consumer: | |||||||||||
RIC and auto loans(2) | 779 | $ | 6,429 | 3,760 | $ | 24,240 | |||||
| Total | 1,072 | 9,739 | 4,875 | 28,776 | |||||||
(1) The recorded investment represents the period-end balance at June 30 and September 30, 2014.
Fair Value
The following table summarizes the impact of the corrections on the Company's Fair Value of Financial Instruments table within the Fair Value footnote for the periods below. The line item noted below was limited to the Fair Value of Financial Instruments line item impacted by the correction of the allowance for credit losses error described above.
| Carrying Value | ||||||||||||||||||
| For the periods ended: | ||||||||||||||||||
| March 31, 2014 | June 30, 2014 | September 30, 2014 | March 31, 2015 | June 30, 2015 | September 30, 2015 | |||||||||||||
| As restated | ||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||
| Financial assets: | ||||||||||||||||||
| Loans held for investment, net | $ | 72,962,082 | $ | 74,347,533 | $ | 73,065,049 | $ | 76,204,622 | $ | 76,603,076 | $ | 75,861,989 | ||||||
284
| Carrying Value | ||||||||||||||||||
| For the periods ended: | ||||||||||||||||||
| March 31, 2014 | June 30, 2014 | September 30, 2014 | March 31, 2015 | June 30, 2015 | September 30, 2015 | |||||||||||||
| As reported | ||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||
| Financial assets: | ||||||||||||||||||
| Loans held for investment, net | $ | 72,952,024 | $ | 74,212,032 | $ | 72,721,430 | $ | 76,026,925 | $ | 76,414,038 | $ | 75,797,375 | ||||||
Segments
The line items noted below were limited to the Results of Segment line items impacted by the correction of the allowance for credit losses error described above.
| Three Month Period Ended March 31, 2015 | Three Month Period Ended June 30, 2015 | Three Month Period Ended September 30, 2015 | ||||||||||||||||||||||
| SC | SC Purchase Price Adjustments | Eliminations | Total | SC | SC Purchase Price Adjustments | Eliminations | Total | SC | SC Purchase Price Adjustments | Eliminations | Total | |||||||||||||
| Non-GAAP measures | ||||||||||||||||||||||||
| (as restated) | ||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Total non-interest income | 321,640 | 59,202 | (15,723 | ) | 579,322 | 422,230 | 24,011 | (12,590 | ) | 697,337 | 356,546 | 122,345 | (9,990 | ) | 711,043 | |||||||||
| Provision for / (release of) credit losses | 674,688 | 322,524 | - | 1,044,212 | 616,072 | 337,342 | - | 990,414 | 771,913 | 225,315 | — | 978,604 | ||||||||||||
| Total expenses | 444.988 | 13,743 | (13,676 | ) | 996,285 | 465,348 | 14,662 | (13,198 | ) | 1,068,947 | 490,936 | 15,035 | (13,976 | ) | 1,116,237 | |||||||||
| Income/(loss) before income taxes | 361,969 | (182,297 | ) | (1,960 | ) | 192,984 | 569,355 | (180,936 | ) | 666 | 400,291 | 325,236 | (52,142 | ) | 4,102 | 299,464 | ||||||||
| Total average assets | 32,940,082 | 118,822,451 | 34,663,689 | 123,613,663 | 35,478,456 | 128,995,997 | ||||||||||||||||||
285
| Three Month Period Ended March 31, 2015 | Three Month Period Ended June 30, 2015 | Three Month Period Ended September 30, 2015 | ||||||||||
| SC | SC Purchase Price Adjustments | Eliminations | Total | SC | SC Purchase Price Adjustments | Eliminations | Total | SC | SC Purchase Price Adjustments | Eliminations | Total | |
| Non-GAAP measures | ||||||||||||
| (as reported) | ||||||||||||
| (dollars in thousands) | ||||||||||||
| Total non-interest income | 422,970 | 38,317 | (10,093) | 665,397 | 533,510 | 12,664 | (6,880) | 802,980 | 478,873 | 119,409 | (4,463) | 835,961 |
| Provision for / (release of) credit losses | 605,982 | 219,202 | — | 872,184 | 738,732 | 226,022 | — | 1,001,754 | 744,143 | 128,661 | — | 854,180 |
| Total expenses | 546,318 | (7,142) | (8,046) | 1,082,360 | 576,628 | 3,315 | (7,488) | 1,174,590 | 613,263 | 12,099 | (8,449) | 1,241,155 |
| Income/(loss) before income taxes | 430,675 | (78,975) | (1,960) | 365,012 | 446,695 | (69,616) | 666 | 388,951 | 353,006 | 44,512 | 4,102 | 423,888 |
| Total average assets | 32,940,082 | — | — | 118,822,451 | 34,663,689 | — | — | 123,613,663 | 35,478,456 | — | — | 128,995,997 |
| Six-Month Period Ended June 30, 2015 | Nine Month Period Ended September 30, 2015 | ||||||||||||||||
| SC | SC Purchase Price Adjustments | Eliminations | Total | SC | SC Purchase Price Adjustments | Eliminations | Total | ||||||||||
| Non-GAAP measures | |||||||||||||||||
| (as restated) | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Total non-interest income | 743,870 | 83,213 | (28,313 | ) | 1,276,879 | 1,100,418 | 205,558 | (38,304 | ) | 1,987,922 | |||||||
| Provision for / (release of) credit losses | 1,290,760 | 659,866 | — | 2,034,626 | 2,062,673 | 885,180 | — | 3,013,230 | |||||||||
| Total expenses | 910.336 | 28,404 | (26,873 | ) | 2,065,233 | 1,401,274 | 43,437 | (40,849 | ) | 3,181,470 | |||||||
| Income/(loss) before income taxes | 931,324 | 66,053 | (1,295 | ) | 1,022,557 | 1,256,560 | (415,370 | ) | 2,805 | 892,737 | |||||||
| Total average assets | 33,780,584 | 121,205,230 | 34,352,761 | 123,803,672 | |||||||||||||
286
| Six-Month Period Ended June 30, 2015 | Nine Month Period Ended September 30, 2015 | ||||||||||||||||
| SC | SC Purchase Price Adjustments | Eliminations | Total | SC | SC Purchase Price Adjustments | Eliminations | Total | ||||||||||
| Non-GAAP measures | |||||||||||||||||
| (as reported) | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Total non-interest income | 956,480 | 50,981 | (16,973 | ) | 1,468,597 | 1,435,354 | 170,391 | (21,437 | ) | 2,304,558 | |||||||
| Provision for / (release of) credit losses | 1,344,714 | 445,224 | — | 1,873,938 | 2,088,857 | 573,884 | — | 2,728,118 | |||||||||
| Total expenses | 1,122,946 | (3,828 | ) | (15,533 | ) | 2,256,951 | 1,736,210 | 8,270 | (23,982 | ) | 3,498,106 | ||||||
| Income/(loss) before income taxes | 877,370 | (148,589 | ) | (1,295 | ) | 753,961 | 1,230,376 | (104,074 | ) | 2,805 | 1,177,849 | ||||||
| Total average assets | 33,780,584 | — | — | 121,205,230 | 34,352,761 | — | — | 123,803,672 | |||||||||
| Three Month Period Ended March 31, 2014 | Three Month Period Ended June 30, 2014 | Three Month Period Ended September 30, 2014 | ||||||||||||||||||||||
| SC | SC Purchase Price Adjustments | Eliminations | Total | SC | SC Purchase Price Adjustments | Eliminations | Total | SC | SC Purchase Price Adjustments | Eliminations | Total | |||||||||||||
| Non-GAAP measures | ||||||||||||||||||||||||
| (as restated) | ||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Total non-interest income | 198,396 | 83,228 | (48,724 | ) | 403,081 | 255,547 | 161,914 | (23,977 | ) | 579,665 | 293,437 | 46,460 | (16,221 | ) | 605,643 | |||||||||
| Provision for / (release of) credit losses | 604,704 | (53,979 | ) | (225,454 | ) | 325,271 | 548,468 | 52,124 | — | 560,592 | 802,684 | 247,302 | — | 1,049,986 | ||||||||||
| Total expenses | 432.668 | 90,549 | (234,331 | ) | 740,646 | 360,496 | 14,603 | (7,418 | ) | 944,604 | 333,968 | 15,449 | (14,785 | ) | 922,568 | |||||||||
| Income/(loss) before income taxes | 223,226 | 2,713,818 | 66,925 | 3,105,439 | 430,234 | 204,154 | (16,559 | ) | 664,503 | 249,483 | (85,596 | ) | (1,407 | ) | 258,565 | |||||||||
| Total average assets | 18,287,600 | 96,780,130 | 29,409,369 | 109,090,141 | 30,648,333 | 112,609,244 | ||||||||||||||||||
287
| Three Month Period Ended March 31, 2014 | Three Month Period Ended June 30, 2014 | Three Month Period Ended September 30, 2014 | ||||||||||||||||||||||
| SC | SC Purchase Price Adjustments | Eliminations | Total | SC | SC Purchase Price Adjustments | Eliminations | Total | SC | SC Purchase Price Adjustments | Eliminations | Total | |||||||||||||
| Non-GAAP measures | ||||||||||||||||||||||||
| (as reported) | ||||||||||||||||||||||||
| (dollars in thousands) | ||||||||||||||||||||||||
| Total non-interest income | 239,311 | 83,228 | (60,004 | ) | 432,717 | 314,172 | 161,914 | (23,977 | ) | 638,290 | 374,872 | (4,075 | ) | (8,938 | ) | 643,826 | ||||||||
| Provision for / (release of) credit losses | 698,578 | (137,794 | ) | (225,454 | ) | 335,330 | 588,577 | 137,457 | — | 686,034 | 770,105 | 243,252 | — | 1,013,357 | ||||||||||
| Total expenses | 473,583 | 90,549 | (245,611 | ) | 770,281 | 419,121 | 14,603 | (7,418 | ) | 1,003,229 | 415,403 | (35,086 | ) | (7,502 | ) | 960,751 | ||||||||
| Income/(loss) before income taxes | 129,352 | 2,630,003 | 66,925 | 2,927,750 | 390,125 | 118,821 | (16,559 | ) | 539,061 | 282,062 | (81,546 | ) | (1,407 | ) | 295,194 | |||||||||
| Total average assets | 18,287,600 | — | — | 96,780,130 | 29,409,369 | — | — | 109,090,141 | 30,648,333 | — | — | 112,609,244 | ||||||||||||
| Six Month Period Ended June 30, 2014 | Nine Month Period Ended September 30, 2014 | ||||||||||||||||
| SC | SC Purchase Price Adjustments | Eliminations | Total | SC | SC Purchase Price Adjustments | Eliminations | Total | ||||||||||
| Non-GAAP measures | |||||||||||||||||
| (as restated) | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Total non-interest income | 454,229 | 245,142 | (72,700 | ) | 982,746 | 746,982 | 291,602 | (88,812 | ) | 1,588,389 | |||||||
| Provision for / (release of) credit losses | 1,153,172 | (1,855 | ) | (225,454 | ) | 885,863 | 1,955,856 | 245,447 | (225,453 | ) | 1,935,849 | ||||||
| Total expenses | 793,296 | 105,153 | (241,803 | ) | 1,685,349 | 1,126,875 | 120,601 | (256,479 | ) | 2,607,917 | |||||||
| Income/(loss) before income taxes | 653,614 | 2,750,340 | 50,421 | 3,602,212 | 902,802 | 2,664,745 | 49,013 | 3,860,777 | |||||||||
| Total average assets | 23,864,215 | 102,947,979 | 26,160,378 | 106,192,458 | |||||||||||||
| Six Month Period Ended June 30, 2014 | Nine Month Period Ended September 30, 2014 | ||||||||||||||||
| SC | SC Purchase Price Adjustments | Eliminations | Total | SC | SC Purchase Price Adjustments | Eliminations | Total | ||||||||||
| Non-GAAP measures | |||||||||||||||||
| (as reported) | |||||||||||||||||
| (dollars in thousands) | |||||||||||||||||
| Total non-interest income | 553,770 | 245,142 | (83,980 | ) | 1,071,007 | 927,958 | 241,067 | (92,809 | ) | 1,714,833 | |||||||
| Provision for / (release of) credit losses | 1,287,155 | (337 | ) | (225,454 | ) | 1,021,364 | 2,057,260 | 242,915 | (225,453 | ) | 2,034,721 | ||||||
| Total expenses | 892,837 | 105,153 | (253,083 | ) | 1,773,610 | 1,307,851 | 70,066 | (260,476 | ) | 2,734,361 | |||||||
| Income/(loss) before income taxes | 519,631 | 2,748,822 | 50,421 | 3,466,711 | 801,398 | 2,667,277 | 49,013 | 3,761,905 | |||||||||
| Total average assets | 23,864,215 | — | — | 102,947,979 | 26,160,378 | — | — | 106,192,458 | |||||||||
288
PART III
ITEM 10 - DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Directors of SHUSA
Stephen A. Ferriss - Age 70. Mr. Ferriss was appointed to SHUSA’s Board in 2012 and is a member of its Audit and Compensation Committees. Since 2015, he has served as Chairman of the Board of Santander BanCorp, where he is a member of the Compensation and Nomination Committees, and as the Chairman of the Board of Santander BanCorp’s banking subsidiary, Banco Santander Puerto Rico. He was appointed to SC’s Board in 2013 and is a member of SC’s Audit and Executive Committees. Mr. Ferriss is 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, Inc. Prior to his time at 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 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. Mr. Fishman was appointed to SHUSA’s and the Bank’s Boards in May 2015. He is a member of SHUSA’s Audit and Risk Committees and he is the Bank's Lead Independent Director, where he serves as the Chairman of the Audit Committee and a member of the Bank Secrecy Act/Anti-Money Laundering Oversight, Compliance, Executive, and Risk Committees. Since 2008, he 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, he 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 as Chairman of the Brooklyn Academy of Music and 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.
Juan Guitard- Age 56. Mr. Guitard was appointed to SHUSA’s Board in 2014 and is a member of its Compensation and Risk Committees. He 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 Johnson - Age 75. Mr. Johnson was appointed to SHUSA’s Board in May 2015 and the Bank’s Board in June 2015. He serves as SHUSA’s Lead Independent Director, Chairman of its Audit Committee, and a member of its Executive and 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 on the Board of Alleghany Corporation. From 1993 to 2004, he served as Chairman and Chief Executive Officer of GreenPoint Financial Corp. and GreenPoint Bank. Prior to his tenure at GreenPoint, Mr. Johnson served as President and Director of Manufacturers Hanover Trust Company from 1989 to 1991. Mr. Johnson’s career in banking started in 1969 at Chemical Bank and Chemical Banking Corporation, where he became President and Director in 1983. In addition, Mr. Johnson is a former director of R.R. Donnelly & Sons Co. Inc., The Phoenix Companies, Inc., Freddie Mac, 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. 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.
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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. Mr. Maldonado was appointed to SHUSA’s Board in April 2015, and has served as its Vice Chairman since October 2015. He is a member of SHUSA’s Executive and Risk Committees. He was appointed to SC’s Board in July 2015, and is a member of its Compensation Committee and its Regulatory and Oversight Committee. He was appointed to the Bank’s Board in June 2015 and is a member of its Risk Committee. Mr. Maldonado is a Director of Santander BanCorp, where he is Chairman of the Compensation and Nomination Committee, and a Director of Banco Santander Puerto Rico and Santander Investment Securities, Inc. 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. Mr. Matarranz was appointed to SHUSA’s Board in July 2015 and the Bank’s Board in June 2015. He is a member of SHUSA’s Compensation and Executive Committees, and a member of the Bank’s Compensation Committee. Since September 2014, he has served as a Senior Executive Vice President and the Head of Group Strategy at Santander. He is also Chief of Staff to the Group Executive Chairman. From 2012 to 2014, Mr. Matarranz worked at Santander UK, where he was the Director of Strategy, the Chief of Staff to the Chief Executive Officer, and a member of the Executive Committee. From 2004 to 2012, he worked at McKinsey & Company in Madrid, where he served as a partner, working primarily in 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 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.
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Scott Powell - Age 53. Mr. Powell was appointed as Director, President and Chief Executive Officer of SHUSA in March 2015 and as Director, President and Chief Executive Officer of the Bank in July 2015. He is a member of SHUSA’s and the Bank’s Executive Committees. Previously, from 2013 to 2014, Mr. Powell was Executive Chairman of National Flood Services Inc. From 2002 until 2012, he was employed at JPMorgan Chase & Co. and its predecessor Bank One Corporation. During this time, he served as Head of Home Lending Default from July 2011 to February 2012, Head of JPMorgan Chase’s Banking and Consumer Lending Operations from June 2010 to June 2011, Chief Executive Officer of Consumer Banking from January 2007 to May 2010, Head of its Consumer Lending businesses from March 2005 to December 2006, and Chief Risk Officer, Consumer from 2004 to February 2005. From May 2003 through June 2004, Mr. Powell was President of Retail Lending at Bank One, and from February 2002 to April 2003, he was its Chief Risk Officer, Consumer. Mr. Powell is a director of the Phipps Houses and The END Fund in New York City. He received a B.A. from the University of Minnesota and an M.B.A. from the University of Maryland. Mr. Powell brings extensive experience in retail banking, risk management and consumer and auto lending to SHUSA's 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 - Age 70. Mr. Ryan was appointed to SHUSA’s and the Bank's Boards in 2014 and serves as Chairman of each Board and their respective Executive 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 from 2013 to April 2014. From 2008 to 2012, he was President and Chief Executive Officer of the Securities Industry and Financial Markets Association and Chief Executive Officer 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 joining JPMorgan Chase in 1993, Mr. Ryan served as the Director of the OTS, a Director of the Resolution Trust Corporation and a 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. 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 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.
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. Mr. Spillenkothen was appointed to SHUSA’s and the Bank’s Boards in June 2015. He serves as a member of SHUSA’s Compensation and Risk Committees, and as Chairman of the Bank’s Bank Secrecy Act/Anti-Money Laundering Oversight, Compliance, and Risk Committees and a member of the Audit and Executive Committees. From 2007 to 2011, he served as a consultant and advisor at Deloitte & Touche LLP. From 1976 to 2006, he worked for the Board of Governors of the Federal Reserve System, where he served as Director of the Federal Reserve Board’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 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 2006. 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 date of this filing is set forth below:
Kenneth Goldman - Age 46. Mr. Goldman has 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. Prior to joining SHUSA, from 2006 to 2010, he was Chief Financial Officer and Executive Vice President 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.
Brian Gunn - Age 43. Mr. Gunn has served as Chief Risk Officer and Senior Executive Vice President of SHUSA since June 2015 and is a member of SHUSA’s CEO Executive Committee. In February 2016, he was named Chief Risk Officer and Senior Executive Vice President of the Bank. He was appointed to the Board of SC in December 2015 and serves as a member of its Risk Committee. Prior to joining Santander, from 2011 to 2015, Mr. Gunn served as the Chief Risk Officer of Ally Financial Services. Prior to that role, Mr. Gunn was Chief Risk Officer of Ally’s Global Automotive Services division. Before joining Ally, he spent 10 years in a variety of risk management positions at GE Money, including as Chief Risk Officer of GE Money Canada. Mr. Gunn received a B.S. from Providence College and an M.B.A. from Hofstra University.
Michael Lipsitz - Age 51. Mr. Lipsitz has served as Chief Legal Officer and Senior Executive Vice President of SHUSA since August 2015 and is a member of SHUSA’s CEO Executive Committee. Prior to joining SHUSA, he was Managing Director and General Counsel for Retail and Community Banking at JPMorgan Chase & Co. Prior to that, Mr. Lipsitz held multiple senior and general counsel roles supporting consumer banking and lending, corporate and regulatory activities, and M&A at JPMorgan Chase and its predecessor companies. Mr. Lipsitz received a B.A. from Northwestern University and a law degree 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. For a description of Mr. Powell's business experience, please see "Directors of SHUSA" above.
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Julio Somoza - Age 44. Mr. Somoza has served as the Managing Director of Technology and Operations and Senior Executive Vice President of SHUSA since 2013 and is a member of SHUSA’s CEO Executive Committee. From 2013 to 2014, he served as Managing Director of Technology and Operations for the Bank. Mr. Somoza previously was the Chief Internal Auditor of SHUSA and the Bank 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. She received a B.S. from St. Joseph’s University.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires SHUSA's officers and directors, and any persons owning ten percent or more of SHUSA's common stock or any class of SHUSA's preferred stock, to file in their personal capacities initial statements of beneficial ownership, statements of changes in beneficial ownership and annual statements of beneficial ownership with the SEC with respect to their ownership of securities of SHUSA. Persons filing such beneficial ownership statements are required by SEC regulation to furnish SHUSA with copies of all such statements filed with the SEC. The rules of the SEC regarding the filing of such statements require that “late filings” of such statements be disclosed by SHUSA. Based solely on SHUSA's review of copies of such statements received by it, and on written representations from SHUSA's directors and officers, SHUSA believes that all such statements were timely filed in 2015. Since Santander's acquisition of SHUSA, none of the filers has owned any of SHUSA's common stock or shares of any class of SHUSA's preferred stock.
Code of Ethics
SHUSA adopted a Code of Ethics that applies to the Chief Executive Officer and senior financial officers (including the Chief Financial Officer and Chief Accounting Officer of SHUSA and the Bank). 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, 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 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 to recommend nominees to SHUSA's Board.
Matters Relating to the Audit Committee of the Board
Mr. Johnson was appointed Chairman of the Audit Committee in May 2015. Mr. Ferriss served as Chairman of the Audit Committee from 2012 to May 2015, and Mr. Schoellkopf served 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. The Board of Directors has determined that Messrs.Ferriss, Fishman, Johnson, and Schoellkopf and Ms. Keating qualify as audit committee financial experts for purposes of the SEC's rules.
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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 executive officers.” Santander Holdings USA, Inc. (who we refer to in this Item as “we,” “us,” “or “our”) is a wholly owned subsidiary of Banco Santander S.A. (which we refer to in this Item as “Santander Group”). 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, our named executive officers were:
| • | Scott Powell, our President and Chief Executive Officer; |
| • | Gerald Plush, our Chief Financial Officer and Principal Financial Officer; |
| • | Brian Gunn, our Chief Risk Officer; |
| • | Michael Lipsitz, our Chief Legal Officer; |
| • | Julio Somoza, our Head of Technology and Operations; |
| • | Román Blanco, our former President and Chief Executive Officer; and |
| • | Guillermo Sabater, our former co‑Principal Financial Officer and Comptroller. |
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 business objectives; |
| • | link pay to performance, while appropriately balancing risk and financial results and complying with directives from our regulators; |
| • | align, to an appropriate extent, the interests of management with those of Santander Group and its shareholders; and |
| • | use our compensation practices to support our core values and strategic mission and vision. |
We aim 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. Within this framework, Santander Group considers both total compensation and each individual component (i.e., salary and incentives) of each named executive officer’s compensation package independently. Other perquisites are also considered independently of total compensation. When setting each of the named executive officer’s compensation for 2015, we took into account market competitive pay, historical pay, our budget, level of duties and responsibilities, 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 We 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 the named executive officers. We set forth the various parties, including both Board committees and Management committees involved in contributing to and determining executive compensation and their specific responsibilities below.
The Role of Our Board Compensation Committee
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 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 corporate goals and objectives with respect to our Chief Executive Officer’s compensation, evaluating the Chief Executive Officer’s performance in light of these corporate goals, and determining and approving the compensation of our Chief Executive Officer based on this evaluation and 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 and our safety and soundness and do not encourage employees, including our named executive officers, to take excessive risk; |
| • | reviewing and approving the overall goals and purpose of our incentive compensation programs and providing guidance to our Board and management so that the Boards' policies and procedures are appropriately carried out in a manner that achieves balance and is consistent with safety and soundness; |
| • | approving amounts paid under the incentive compensation programs according to Santander Group guidelines, including the Executive Bonus Program; |
| • | overseeing the administration of our qualified retirement plan and other employee benefit plans under which all eligible employees can participate, including the named executive officers, as well as certain other deferred compensation plans in which our named eligible officers are eligible to participate; |
| • | evaluating the applicability of any clawback provisions applicable to our senior executive officers, including the named executive officers; |
| • | at least annually, reviewing, and recommending 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; and |
| • | approving the Compensation Committee Report for inclusion in our filings with the SEC, including this Annual Report on Form 10‑K. |
Our Board Compensation Committee met eight times in 2015.
The Role of Santander Group’s Risk on Remuneration Corporate Committee
Santander Group’s Risk on Remuneration Corporate Committee has the authority and responsibility to, among other things, ensure that all present and future risks that might affect 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 clawback and malus-related clauses to deferred payments. Findings are presented to Santander Group’s Remuneration Committee
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 Board Remuneration Committee
Santander Group’s Board Remuneration Committee has the authority and responsibility to, among other things, review, revise, and then present to Santander Group’s Board of Directors the compensation of Santander Group’s senior executives, which include each of the named executive officers.
The Role of Santander Group’s Board of Directors
Santander Group’s Board of Directors approves the compensation of certain of Santander Group’s management, including our named executive officers.
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 and makes recommendations to our Compensation Committee with respect to our incentive compensation programs. A key responsibility of our Human Resources Committee is to review our incentive compensation programs to ensure the programs do not incentivize excessive risk and make recommendations to our Compensation Committee in accordance with applicable laws. The members of the Human Resources Committee include the heads of our risk compliance, legal, finance, technology and operations, as well as human resources departments. The Human Resources Committee met eight times in 2015.
Our management also played a role in other parts of the compensation process with respect to the named executive officers in 2015. Our Chief Executive Officer generally performed (or delegated to our Human Resources Department) management’s responsibilities (except with respect to his own compensation) in accordance with the rules set forth by Santander Group. 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 and to the applicable committees at Santander Group.
None of the named executive officers determined or approved any portion of their own compensation for 2015.
The Role of Outside Independent Compensation Advisors
Santander Group’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 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 the request of our compensation committee, we engaged McLagan Partners, Inc. to provide competitive market compensation ranges for our senior executive officers, including the named executive officers.
Components of Executive Compensation
For 2015, the compensation that we provided to our named executive officers consisted primarily of base salary and both short and long‑term incentive opportunities, as we describe more fully below. In addition, the named executive officers are eligible for participation in benefits 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 performance. The base salaries of the named executive officers were generally set in accordance with each named executive officer’s employment or letter agreement and Santander Group’s International Mobility Policy for expatriate executives of similar levels, if applicable. While each of the named executive officer’s employment or letter agreements provide 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 process.
Our Chief Human Resources Officer consulted with Santander Group’s Human Resources department to ensure named executive officers’ salaries are competitive and take into account market competitive pay, salary history, our budget, level of duties and responsibilities, individual performance, and historical track record within the organization. Santander Group’s Human Resources Department consulted with the Remuneration Committee and Santander Group’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 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 by Mr. Powell and Santander Group’s Chief Executive Officer, given the change in his duties and responsibilities.
Incentive Compensation
We provide annual incentive opportunities for 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 participants to achieve and exceed these objectives at the Santander Group, country, and business level, as well as to reward the progressive improvement of individual performance. All named executive officers are designated as Identified Staff and subject to the compensation guidelines and limits of the European Union Capital Requirements Directive IV (CRD IV). These 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/American Depositary Receipts (“ADRs”), with a mandatory one-year holding period upon delivery, and no more than 50% in cash.
Executive Bonus Program
Our incentive program establishes both financial and non‑financial measures to determine the award pool from which we pay annual bonuses. The Executive Bonus Program is aligned with Santander Group’s corporate bonus program for executives of similar levels across the Santander Group platform. We refer to this bonus award program as the “Executive Bonus Program.”
On December 10, 2015, our Compensation Committee approved the 2015 Executive Bonus Program for the named executive officers as presented by the Human Resources Committee. The Executive Bonus Program provides for variance in the amount of awards, higher or lower than their target bonus amount (which we describe below), in order to reinforce our pay for performance philosophy. Each of the named executive officers participated in the Executive Bonus Program for 2015.
The structure incorporates both Santander Group and Santander U.S. metrics to ensure that the plan links the pay of its executives to performance and the pay of other executives of similar levels within the Santander Group platform. Our Compensation Committee worked with Mr. Powell and Santander Group’s Remuneration Committee to validate that the proposed 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. Our Compensation Committee 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 calculations 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 making the use of country-specific accounting standards infeasible.
Structure: The metrics used to determine the pool for 2015 included the following and correspond to the visual below. For purposes of the Executive Bonus Program, “Santander U.S.” means us and 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.
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Part I: Calculations
| • | 20% determined based upon the Santander Group’s net operating profit for 2015 versus budget 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. |
| • | 10% determined based upon the Santander Group’s RoRWA for 2015 versus budget 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 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% |
Part II: Discretionary Adjustments (see separate benchmarking section for full list of peer companies that we considered in making these adjustments)
| • | 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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| • | Contribution to the Santander Group 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 of the additional reduction 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 and unexpected circumstances. |
Pool Calculations: The final pool is based on the sum of target incentives being multiplied by the results of the calculations that we set forth below. The results for 2015 included the following:
Santander Group’s Result: 30.9% (30% weighting)
| 1. | 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 by Santander’s Remuneration Committee to be 0.5%, which is a combination of two discretionary decisions outlined below:
| • | Results benchmarking versus peers considered for each unit within Santander Group (including us) relative to a peer group and determined to be a 0% adjustment. |
| • | Risk / Balance / Quality Assessment considered all current and future risks for each unit within the Santander Group (including us) that may have an impact on bonuses and drove an 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 50th percentile and therefore the result = 0%. |
| • | 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: The final pool calculation was 70.1% (Santander Group's results 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 funding level of 86% was appropriate for 2015.
Santander Group used different peer groups in benchmarking Santander U.S.’s performance for the purposes of calculating the Executive 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. We determined the target bonus awards taking into account market competitive pay, historical pay, our budget, level of duties and responsibilities, individual performance, and historical track record within the organization for each individual. We review these factors annually and the target bonus amounts for 2015 were subject to management review as well as Compensation Committee review as needed.
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 bonus amount was subject to a discretionary adjustment, either upwards or downwards, based on the pool calculation 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 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.
We conducted a detailed assessment of each named executive officer’s accomplishments versus pre‑established goals for the year with respect to the individual performance evaluation results. These goals included specific objectives directly related to the named executive officer’s job responsibilities. These goals are not all objective, formulaic, or quantifiable. Rather they include both quantitative and qualitative measures that cut across critical objectives related to business strategy and performance; regulatory, compliance and risk management; our customers and clients; as well as our employees and culture.
On December 10, 2015, our Compensation Committee approved the awards for 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 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 functional objectives included, but were not limited to, developing a plan and begin making improvements on outstanding regulatory issues, including the transformation and fundamentals of the risk, finance, 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 continuing to implement our employee satisfaction 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, Mr. Plush was paid at 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 functional objectives included, but were not limited to, implementing an effective technology and operations infrastructure for us and our affiliates, including controls, teams and governance; and executive data models and data management programs that allow the appropriate level of aggregation, for us 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. Based on his performance results, Mr. Somoza was paid below his target bonus level.
Mr. Blanco’s 2015 functional objectives included, but were not limited to, improving our customer service, customer experience and customer satisfaction; establishing a clear trend of sustainable growth in total customers and in loyal customers. Improve financials and outline key milestones to meet competitive financial targets; working with us to enhance earnings and define strategic plan (capital allocation, IT strategy, etc.); improving risk and compliance management including implementing the requirements and commitments defined by intermediate holding company regulatory requirements and us including focus on Comprehensive Capital Research and Analysis and enhanced prudential standards; improving engagement scores, managing attrition to be at peer’s level; and providing enhanced leadership and talent at and for key positions. Based on his performance results, Mr. Blanco was not paid a bonus for 2015 with respect to his service with us.
Mr. Sabater’s 2015 functional objectives included, but were not limited to, risk management objectives including proactively reviewing external and internal environment 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; promoting of a risk 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 to Santander Group according to requirements; and improving risk and compliance management including implementing the requirements and commitments defined by the holding company. Based on his performance results, Mr. Sabater was paid below his pro-rated target bonus level, with respect to his service with us.
Bonus Delivery: We delivered current awards to the named executive officers under the Executive Bonus Program for 2015 as a combination of short-term and long-term incentive awards. These amounts include payments made with respect to each of the named executive officer’s individual performance and the performance of Santander Group and us, as applicable. All named executive officers are designated as Identified Staff and subject to the compensation guidelines and limits of the European Union Capital Requirements Directive IV (CRD IV).
Short-term/Immediate: Under the Executive Bonus Program, the named executive officers receive the short-term award 50% in cash and 50% in Santander common stock/ADRs (vested immediately). Any award made in shares 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.
Long-term/Deferred: Under the Executive Bonus Program, the named executive officers are required to defer a portion of their bonus. Santander Group classifies Mr. Powell as “Country Head” and therefore he must defer 50% of his overall bonus award. Santander Group classifies Messrs. Plush, Gunn, Lipsitz, Somoza, and Sabater, as “Other Executives” and therefore they each must defer 40% of their respective overall bonus awards. Mr. Blanco did not receive a bonus for 2015 so he did not defer any amounts under the Executive Bonus Program.
Deferred amounts under the Executive Bonus Program are delivered 50% in cash and 50% in Santander Group common stock/ADRs. The deferred amounts are paid out in equal installments over three or five years, depending on the participant’s level (see chart below) and the participant remaining employed through the applicable payment date (except in certain limited circumstances) as long as none of the following occurs:
| • | 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. |
| Named Executive Officer | Percentage of Award Deferred | Deferral Period | ||
| Mr. Powell | 50% | 5 years | ||
| Other Named Executive Officers | 40% | 3 years | ||
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Additional Long‑Term Incentive Compensation
Our named executive officers are also eligible to participate in the Performance Shares Plan. The Performance Shares Plan, which Santander Group sponsors for certain eligible employees, consists of a multi-year bonus plan under which Santander Group may award 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% of the participant’s target or reference bonus under the Executive Bonus 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 of a hypothetical investment in ordinary shares of each of the members of a peer group and Santander Group in the fifteen trading days before the end of 2014 and the value of the same investment during the fifteen day period before the beginning of 2014. Santander will consider dividends and similar amounts received by shareholders as if such amounts were invested in more shares of the same kind of stock. |
| • | 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. |
| • | The TSR goals and 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 4th 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. |
| Santander's Position in the TSR ranking | Final Maximum Amount Percentage | |
| 1st to 8th | 100% | |
| 9th to 12th | 50% | |
| 13th to 16th | 0% | |
| • | A participant vests in shares awarded under the first cycle ratably over different periods depending on Santander Group’s achievement of multi-year TSR targets versus the same peer group it uses to determine the maximum amount, as follow: |
| Vesting Period | Percentage Vesting | |
| 2014 through 2015 | 33.3% | |
| 2014 through 2016 | 33.3% | |
| 2014 through 2017 | 33.3% | |
| • | The associated possible percentages of the maximum amount that participants may earn under each vesting period in the first cycle are as follows: |
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| 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 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 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. |
| • | Payment of shares for 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 the named executive officers participated in the first cycle, except for Messrs. Powell, Gunn, and Lipsitz because it relates 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 named executive officers, are eligible 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, and Santander’s shareholders approved the second cycle at its annual meeting of shareholders on March 27, 2015. The second cycle has different features 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 under the Executive Bonus Program. We refer to this number as the “reference value.” |
| • | Santander Group calculates an approved initial share value of shares under 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: |
| 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 | |
| 2015 ROTE (% with respect to budgeted 2015 ROTE) | 2015 ROTE Coefficient | |
| ≥ 90% | 1 | |
| > 75% but < 90% | 0.75-1 | |
| ≤ 75% | 0 | |
| • | Santander Group calculates the approved initial share value through the following formula: |
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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 E1 + 0.075 x E2)
| • | 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
In certain cases, we award annual discretionary bonuses to the named executive officers to motivate and reward outstanding performance outside of our incentive compensation program, which we described above. These awards permit us to apply discretion in determining awards rather than applying a formulaic approach that may inadvertently reward inappropriate risk‑taking. None of the named executive officers received discretionary bonuses outside 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 description of the named executive officers employment and letter agreements.
Other Compensation
We model the compensation packages for 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 to the significant commitment he must make in connection with 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 appointment to Santander Group locations globally as Santander Group senior management deems appropriate. Additionally, Santander Group reviewed compensation surveys of human resources advisory firms, which have shown that these types of benefits and perquisites are common elements of expatriate programs of global companies.
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After a period of time of employment 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 to the named executive officers below in the notes to the Summary Compensation Table.
Retirement Benefits
Each of the named executive officers is eligible to participate in our qualified 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 benefits 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
In 2015, Santander Group benchmarked our named executive officers’ compensation for reference:
| • | when hiring Scott Powell; |
| • | in determining the pool funding under 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
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 of 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.
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Compensation Committee Interlocks and Insider Participation
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 | ||||||||||||||||||
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Footnotes:
| 1. | 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. |
| 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. |
| 6. | 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. |
| 9. | 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 a bonus for 2015 with respect to his service with us. Amounts reflect the portion of Mr. Sabater’s bonus that he earned for service with us.
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 with A.S.C. Topic 718. The fair value was estimated using a Monte Carlo model and included the following assumptions: Santander Group 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 Plan in the Compensation Discussion & Analysis section.
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11. Includes the following amounts that we paid to or on behalf of the named executive officers with respect to service for us:
| 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 | ||||||||||||||||
| (*) | 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. |
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Grants of Plan-Based Awards-2015
| 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 | ||||||||
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’s Board of Directors revised 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 for all of 2014. In June 2015, the Board of Directors adjusted the exchange rate used to determine the number of shares subject to the awards to 1.1875, which was the average exchange rate for the period of January 1, 2015, through January 15, 2015. As a result, on July 21, 2015, we granted additional shares to impacted employees, including Messrs. Plush, Somoza, Blanco, and Sabater, as set forth above, based on the adjusted exchange rate. These shares are reflected as additional shares in footnotes (4) and (5) above.
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Outstanding Equity Awards at Fiscal 2015 Year End
| 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 | ||||||||
Footnotes:
| (1) | Santander Group awarded these shares on February 3, 2013, under 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. |
| (2) | Santander Group awarded these shares on February 8, 2014, under the deferral feature of the 2013 Executive Bonus Program. One-third 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. |
| (3) | Santander Group awarded these shares on February 27, 2015, under the deferral feature of 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. |
| (4) | 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. |
| (5) | 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.” |
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Option Exercises 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 the Compensation Discussion and Analysis, the named executive officers receive a portion of their compensation in Santander common stock (or American Depositary Shares, in the case of native U.S. participants or participants who elect to have their shares delivered in the U.S.) under the Executive Bonus Program and the Performance Shares Plan. We set forth below information about the potential shares that our named executive officers may receive under these programs.
Executive Bonus Program
Our named executive officers deferred the following amounts into the Executive Bonus Program 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 shares based 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 the tax-equalization provisions of the named executive officer’s respective employment or letter agreement, if applicable.
** 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 we describe in detail under the caption “Additional Long-Term Incentive Compensation.”
The maximum value of shares payable under the first cycle as determined and awarded to the named executive officers is as follows:
| Named Executive Officer | Maximum Value | |
| Scott Powell | $0 | |
| Gerald Plush | $180,000 | |
| Brian Gunn | $0 | |
| Michael Lipsitz | $0 | |
| Julio Somoza | $99,000 | |
| Román Blanco | $270,000 | |
| Guillermo Sabater | $120,000 | |
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The value of shares payable under the second cycle has not been determined as of the date of the filing of this Annual Report on Form 10-K.
Description of Employment and Related Agreements
We and/or Santander Group have entered into letter agreements with our named executive officers that were in effect in 2015. We describe each of the agreements below.
Scott Powell
We entered into a letter agreement with Mr. Powell, dated as of February 27, 2015.
Mr. Powell’s letter agreement provides that he will serve as our Chief Executive Officer and as a member of our Board of Directors. The agreement does not have a term.
The letter agreement provides for a base salary of $2,000,000. In addition, Mr. Powell received a sign‑on restricted share grant whereby on the effective date of the agreement, he was paid $2,750,000, of which he was required to use the net after‑tax proceeds to purchase shares, which he may not transfer for three years.
Mr. Powell is eligible to participate in our annual bonus plan contingent upon the achievement of annual performance objectives. Mr. Powell's annual bonus target for 2015 was $1,500,000 and the letter agreement provides that the bonus for 2015 will not be lower than the target bonus (provided Mr. Powell was employed with us on December 31, 2015). The bonus was paid partially in cash and partially in shares, in accordance with the terms of Santander’s executive bonus program.
The letter agreement also provides, among other things, that Mr. Powell will participate in the Performance Shares Plan, which provides for an award for 2015 equal to 20% of his target bonus paid in shares, subject to attainment of performance goals and the other provisions of the Performance Shares Plan.
The letter agreement provides that Santander will reimburse Mr. Powell for relocation expenses (including any taxes on that reimbursement), provided Mr. Powell relocates to Boston within two years of the effective date of the agreement.
Gerald Plush
We entered into a letter agreement with Mr. Plush, dated as of March 17, 2014. We entered into a new letter agreement with Mr. Plush effective August 24, 2015. The new letter agreement supplements the original letter agreement.
Mr. Plush’s original letter agreement provides for him to serve as our Chief Financial Officer commencing on April 1, 2014. His agreements do not have a term.
The original letter agreement provides for a base salary of $600,000. In addition, Mr. Plush is eligible to receive an annual bonus contingent upon the achievement of annual performance objectives. Mr. Plush’s annual bonus target was $1.0 million. Mr. Plush’s new letter agreement provides for a base salary of $1 million and an annual bonus target of $1.2 million. See the discussion under the caption “Short‑Term Incentive Compensation” for more information about the bonus program that Mr. Plush participated in and the bonuses paid for 2015.
The original letter agreement also provides, among other things, that Mr. Plush has a right to participate in all long‑term incentive compensation programs and all other employee benefit plans and programs available to senior executives. See the description of our long‑term incentive compensation programs under the caption “Incentive Compensation” for more information on the long‑term incentive plans
.
The original letter agreement provides for:
| • | a monthly car allowance of $750; |
| • | paid parking; |
| • | relocation expenses for Mr. Plush and his family in accordance with our policies (which Mr. Plush must reimburse to us in the event he voluntarily terminates employment or is terminated for cause (as defined in the agreement) before completing one year of service); and |
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| • | up to 180 days of paid temporary housing in accordance with our policies (which Mr. Plush must reimburse to us in the event he voluntarily terminates employment or is terminated for cause (as defined in the agreement) before completing one year of service). |
Mr. Plush’s new letter agreement provides that he is entitled to receive a retention bonus in the amount of $500,000 if he remains employed with us for 24 consecutive months from the date of the new letter agreement. Mr. Plush will forfeit this bonus if he voluntary terminates employment or is terminated by us for “cause” before that date.
The original and new agreements provide that Mr. Plush will be subject to confidentiality and non-solicitation requirements upon his termination of employment. The new letter agreement requires Mr. Plush provide us with 90 days’ notice in the event of his termination of employment.
The benefits that Mr. Plush actually received in 2015 under the terms of his letter agreements are reflected in the “Summary Compensation Table.”
Brian Gunn
We entered into a letter agreement with Mr. Gunn, dated as of May 15, 2015, and amended as of June 29, 2015.
Mr. Gunn’s letter agreement provides for him to serve as our Chief Risk Officer. The agreement does not have a term.
The letter agreement provides for a base salary of $1,000,000. In addition, Mr. Gunn is eligible to receive an annual bonus contingent upon the achievement of annual performance objectives. Mr. Gunn’s annual bonus target for 2015 was $1,500,000 and the letter agreement provides that the bonus for 2015 will not be lower than the target bonus.
The letter agreement also provides, among other things, that Mr. Gunn will participate in the Performance Shares Plan subject to its terms, except that for 2015, Mr. Gunn’s reference value is equal to 15% of his target bonus.
Mr. Gunn’s letter agreement provides that:
| • | 30% of his variable compensation will be paid in cash; |
| • | 30% of his variable compensation will be paid in shares, subject to a one‑year holding requirement; and |
| • | the remaining 40% of his variable compensation will be deferred and payable in equal parts over three years (with each years payment paid ½ in cash and ½ in shares subject to a one‑year holding requirement). |
Payment of deferred shares is subject to Mr. Gunn not having voluntarily terminated or been terminated for cause through the date of payment as well as conditioned on none of the following circumstances occurring during the deferral period:
| • | Material deficient performance by Santander Group as a result, at least in part, due to Mr. Gunn’s conduct; |
| • | Failure by Mr. Gunn to comply with internal rules, specifically including those relating to risk; |
| • | Material reformulation of Santander Group’s financial statements (other than due to change in regulations); or |
| • | Significant negative variations in Santander Group’s economic capital or risk profile. |
The letter agreement also provides that Mr. Gunn will receive a sign‑on bonus paid in three installments with each paid on the first regularly scheduled payroll following the first, second, and third year of employment, respectively. The amount of the sign- on bonus was equal to the total value of equity awards that Mr. Gunn forfeited as a result of leaving his prior employment and accepting employment with Santander. We will pay Mr. Gunn $1,592,609 as compensation for his forfeited equity in three equal installments. No payment is made if Mr. Gunn has voluntarily terminated or been terminated for cause through the date of payment.
In the event that Mr. Gunn provides sufficient documentation that his former employer is no longer obligated to make certain payments to Mr. Gunn under a deferred compensation arrangement maintained by that employer, we will pay Mr. Gunn those amounts in the same calendar year as the amounts were otherwise payable by his former employer.
Under the letter agreement, we will provide housing accommodations in Boston for twelve months. If Mr. Gunn voluntarily terminates employment or is terminated for cause prior to competing 24 months of service, Mr. Gunn will reimburse Santander for this cost.
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Michael Lipsitz
We entered into a letter agreement with Mr. Lipsitz, dated as of May 18, 2015.
Mr. Lipsitz’s letter agreement provides for him to serve as our Chief Legal Officer and General Counsel. The agreement does not have a term.
The letter agreement provides for a base salary of $650,000. In addition, Mr. Lipsitz is eligible to receive an annual bonus contingent upon the achievement of annual performance objectives. Mr. Lipsitz’s annual bonus target for 2015 was $950,000 and the letter agreement provides that the bonus for 2015 will not be lower than the target bonus.
The letter agreement also provides, among other things, that Mr. Lipsitz will participate in the Performance Shares Plan subject to its terms, except that for 2015, Mr. Lipsitz’s reference value is equal to 15% of his target bonus.
Mr. Lipsitz’s letter agreement provides that:
| • | 30% of his variable compensation will be paid in cash; |
| • | 30% of his variable compensation will be paid in shares, subject to a one‑year holding requirement; and |
| • | the remaining 40% of his variable compensation will be deferred and payable in equal parts over three years (with each years payment paid ½ in cash and ½ in shares subject to a one-year holding requirement). |
Payment of deferred shares is subject to Mr. Lipsitz not having voluntarily terminated or been terminated for cause through the date of payment as well as conditioned on none of the following circumstances occurring during the deferral period:
| • | Material deficient performance by Santander Group as a result, at least in part, due to Mr. Lipsitz’s conduct; |
| • | Failure by Mr. Lipsitz to comply with internal rules, specifically including those relating to risk; |
| • | Material reformulation of Santander Group’s financial statements (other than due to change in regulations); or |
| • | Significant negative variations in Santander Group’s economic capital or risk profile. |
The letter agreement also provides that Mr. Lipsitz will receive a sign‑on bonus paid in three installments of $700,000 each paid within 30 days, six months and one-year of employment, respectively. No payment is made if Mr. Lipsitz has voluntarily terminated or been terminated for cause through the date of payment.
We will provide for travel arrangements and travel expenses between Chicago, Illinois, and Boston, Massachusetts. We will provide lodging in Boston or will reimburse him, on an after-tax basis, for lodging in Boston, which will not exceed $48,000 net on an annual basis.
Julio Somoza
Santander Group entered into a letter agreement with Mr. Somoza, dated as of June 24, 2011, as amended as of September 12, 2013.
Mr. Somoza’s agreement provides for him to serve as our Managing Director Technology and Operations. The agreement provides that the international assignment extends until August 19, 2016.
The letter agreement currently provides for a base salary of $400,000 and a return to Spain salary of €160,000. In addition, Mr. Somoza is eligible to receive a base bonus of $500,000 and is eligible for participation in Santander Group’s long-term incentive plan.
In connection with Mr. Somoza’s expatriation from Spain to the United States, the agreement provides for:
| • | a guaranteed exchange rate of €1 to $1.4385 for transfers from Spain to the United States; |
| • | a monthly housing allowance of $8,500 on a grossed-up basis for federal, state, and local income and employment tax purposes; |
| • | coverage under Santander Group’s expatriate medical insurance plan and life and accident insurance plan for Mr. Somoza and his family; |
| • | relocation expenses for Mr. Somoza and his family of up to $5,000, on a grossed‑up basis; |
| • | reimbursement for the cost of annual visits by Mr. Somoza and his family to Spain pursuant to Santander Group’s travel policy; |
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| • | an allowance for installation costs related to relocation equal to $25,574; |
| • | payment of registration and fees associated with schooling for Mr. Somoza’s dependents; and |
| • | assistance with immigration and visa requirements as well as tax planning and preparation and relocation assistance services. |
In addition, Mr. Somoza’s letter agreement provided additional housing and relocation reimbursements with respect to his initial relocation to the U.S. in 2011.
In accordance with Santander Group’s policy applicable to all Santander Group employees who relocate to the United States from abroad in connection with their employment with us, in the event that Santander Group terminates Mr. Somoza‘s employment without cause, Santander Group will provide for all reasonable moving and relocation expenses incurred in relocating him and his family to Spain.
Román Blanco
Santander Group entered into a letter agreement with Mr. Blanco, dated as of August 10, 2013, in connection with his employment at Santander Bank.
Mr. Blanco’s agreement had a fixed term of three years, but either party could terminate the agreement by notifying the other party in writing at least 90 days prior to the termination date. Mr. Blanco terminated employment with us and Santander Bank effective January 29, 2016, but remains employed with Santander Group.
The agreement provided for a base salary of $1,280,000, which we could increase in accordance with existing policies. In addition, Mr. Blanco was eligible to receive an annual bonus with a base amount of $1,800,000, contingent upon the achievement of annual performance objectives. Because Mr. Blanco terminated employment in 2015, he did not receive a bonus for 2015.
In connection with Mr. Blanco’s expatriation from Spain to the United States, the agreement provided for:
| • | a guaranteed exchange rate of €1 to $1.308 for transfers from Spain to the United States, up to $218,000 per year. |
| • | a monthly housing allowance of $30,000 with an additional allowance of $1,000 for utilities on a grossed-up basis for federal, state, and local income and employment tax purposes; |
| • | coverage under Santander Group’s expatriate medical insurance plan and life and accident insurance plan for Mr. Blanco and his family; |
| • | relocation expenses for Mr. Blanco and his family of up to $17,396, on a grossed-up basis; |
| • | moving expenses, or $6,550 in lieu thereof, and an allowance for installation costs equal to $16,350 as well as reimbursement for spousal expenses of $6,550; |
| • | lodging and per diem of $208 for up to 30 days upon initial arrival; |
| • | travel expenses; |
| • | payment of admission and tuition fees associated with schooling for Mr. Blanco’s dependents through high school; |
| • | language lessons for Mr. Blanco and his household family members up to a maximum of 50 hours per family member; |
| • | reimbursement for the cost of annual visits by Mr. Blanco and his family to Spain pursuant to Santander Group’s travel policy; and |
| • | assistance with immigration and visa requirements as well as tax planning and preparation services. |
In accordance with our policy applicable to all Santander Group employees who relocate to the United States from abroad in connection with their employment with us, Santander Group provides for reasonable moving and relocation expenses incurred in relocating Mr. Blanco and his family to Spain upon his termination of employment. The benefits that Mr. Blanco received in 2015 under the terms of his letter agreement are reflected in the summary compensation table.
Guillermo Sabater
Santander Group entered into a letter agreement with Mr. Sabater, dated as of February 11, 2009, in connection with his employment with Santander Bank.
Mr. Sabater’s agreement has a fixed term of three years but either party may terminate the agreement by notifying the other party in writing at least 90 days prior to the termination date.
The agreement provides for a base salary of $255,448, which Santander Group may increase in accordance with existing policies. In addition, Mr. Sabater is eligible to receive an annual bonus, contingent upon the achievement of annual performance objectives. See the discussion under the caption “Short-Term Incentive Compensation” for more information about the bonuses paid for 2015.
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The agreement also provides, among other things, that Mr. Sabater has a right to participate in all long-term incentive compensation programs and all other employee benefit plans and programs available to senior executives. In addition, Mr. Sabater will be covered by the Santander Group health, life, disability, and accidental death insurance plans for expatriates.
In connection with Mr. Sabater’s expatriation from Spain to the United States, the agreement provides for:
| • | a monthly housing allowance of $10,000 (with the cost of utilities for such housing borne by us), on a grossed-up basis for federal, state, and local income and employment tax purposes; |
| • | relocation expenses for Mr. Sabater and his family of up to $17,396 on a grossed-up basis; |
| • | moving expenses, or €7,000 ($7,600, based on the average exchange rate on December 31, 2015) in lieu thereof; |
| • | travel expenses; |
| • | reimbursement for the cost of annual visits by Mr. Sabater and his family to Spain pursuant to Santander Group’s travel policy; |
| • | payment of admission and tuition fees associated with schooling for Mr. Sabater’s dependents through high school; |
| • | language lessons for Mr. Sabater and his household family members up to a maximum of €1,500 ($1,629 based on the average exchange rate on December 31, 2015) per family member; and |
| • | a one‑time payment of $62,627, on a grossed‑up basis, for Mr. Sabater’s expatriation to the United States and other benefits inherent in his previous assignment in Chile, which he received in 2009. |
In addition to the foregoing, Santander Group will reimburse Mr. Sabater for any tax benefits he would have been able to deduct had he remained in Spain, reimburse him for tax planning and preparation services, and provide him with a guaranteed exchange rate of €1 to $1.3917 for transfers from the United States to Spain, up to $68,615 per year.
In accordance with Santander Group’s policy applicable to all Santander Group employees who relocate to the United States from abroad in connection with their employment with us, in the event Santander Group terminates Mr. Sabater’s employment without cause, Santander Group will provide for all reasonable moving and relocation expenses incurred in relocating Mr. Sabater and his family to Spain.
Mr. Sabater terminated employment with us effective June 19, 2015, but remains employed with Santander Group in a comparable role as comptroller in Chile. He received no compensation in connection with his termination was us. The benefits that Mr. Sabater actually received in 2015 under the terms of his letter agreement are reflected in the “Summary Compensation Table.”
Deferred Compensation Arrangements
Deferred Compensation Plan
We maintain the Sovereign Bancorp, Inc. 2007 Nonqualified Deferred Compensation Plan, which we refer to as the “Deferred Compensation Plan.” The Deferred Compensation Plan has the following features:
| • | Participants may defer up to 100% of their cash bonus and choose among various investment options upon which we will base the rate of return on amounts deferred. We adjust participants’ accounts periodically to reflect the deemed gains and losses attributable to the deferred amounts. The specific investment options mirror the investment options in our qualified retirement plan, with some additional alternative investments available. |
| • | We distribute all account balances in cash. |
| • | Participants are always 100% vested in all amounts deferred. |
| • | Our and Santander Bank’s directors may defer receipt of cash fees received for service as a director into the Deferred Compensation Plan. |
| • | Distribution events will be only as permitted under Internal Revenue Code Section 409A. |
No named executive officer deferred any salary or bonus earned in 2015 into the Deferred Compensation Plan.
Other Arrangements
Messrs. Somoza, Blanco, and Sabater began participating in the Sistema de Previsión para Directivos before they commenced their employment with Santander Bank. Under this arrangement, Santander Group makes an annual discretionary contribution to participants’ accounts based on a percentage of their respective reference salaries from their home country. Under this arrangement, Messrs. Somoza, Blanco, and Sabater are entitled to receive amounts in their account, plus or minus investment gains and losses, upon retirement, death, or permanent disability.
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Nonqualified Deferred Compensation-2015
| Name | Executive Contributions in Last Fiscal Year ($) | Employer Contributions in Last Fiscal Year ($) | Aggregate Earnings in Last Fiscal Year ($) | Aggregate Withdrawals/ Distributions ($) | Aggregate Balance At Last Fiscal Year End ($) | |||||||||||||||
| Julio Somoza | $ | — | $ | 38,219 | $ | 5,511 | $ | — | $ | 205,658 | ||||||||||
| Román Blanco | $ | — | $ | 298,584 | $ | 33,345 | $ | — | $ | 1,297,431 | ||||||||||
| Guillermo Sabater | $ | — | $ | 31,053 | $ | 10,185 | $ | — | $ | 347,529 | ||||||||||
Potential Payments upon Termination or Change in Control
The table below sets forth the value of the benefits (other than payments that were generally available to salaried employees) that would have been due to the named executive officers if they had terminated employment with Santander Group on December 31, 2015, under their respective employment or letter agreement. We describe these agreements, including the material conditions or obligations applicable to the receipt of these benefits, under the caption “Description of Employment and Related Agreements.” Mr. Powell was not entitled to any such benefits upon termination of his employment if he had terminated employment on December 31, 2015.
| Termination for Death | Termination for Disability | Involuntary Termination Other than for Cause | Voluntary Termination or Termination for Cause | ||||||||||||||
| Scott Powell | Total | $ | — | $ | — | $ | — | — | |||||||||
| Gerald Plush | Retention Bonus | $ | 500,000 | $ | 500,000 | $ | 500,000 | — | |||||||||
Exec. Bonus Program(1) | $ | 239,048 | $ | 239,048 | $ | 239,048 | — | ||||||||||
Performance Share Plan(2) | $ | 119,656 | $ | 119,656 | $ | 119,656 | — | ||||||||||
| Total | $ | 858,704 | $ | 858,704 | $ | 858,704 | — | ||||||||||
| Brian Gunn | Sign-On Bonus | $ | 1,592,609 | $ | 1,592,609 | $ | 1,592,609 | — | |||||||||
| Total | $ | 1,592,609 | $ | 1,592,609 | $ | 1,592,609 | — | ||||||||||
| Michael Lipsitz | Sign-On Bonus | $ | 1,400,000 | $ | 1,400,000 | $ | 1,400,000 | — | |||||||||
| Total | $ | 1,400,000 | $ | 1,400,000 | $ | 1,400,000 | — | ||||||||||
| Julio Somoza | Exec. Bonus Program(1) | $ | 288,046 | $ | 288,046 | $ | 288,046 | — | |||||||||
Performance Share Plan(2) | $ | 65,813 | $ | 65,813 | $ | 65,813 | — | ||||||||||
| Relocation Expenses | $ | 46,000 | $ | 46,000 | $ | 46,000 | — | ||||||||||
| Total | $ | 399,859 | $ | 399,859 | $ | 399,859 | — | ||||||||||
| Román Blanco | Exec. Bonus Program(1) | $ | 1,262,934 | $ | 1,262,934 | $ | 1,262,934 | — | |||||||||
Performance Share Plan(2) | $ | 179,484 | $ | 179,484 | $ | 179,484 | — | ||||||||||
| Relocation Expenses | $ | 54,000 | $ | 54,000 | $ | 54,000 | — | ||||||||||
| Total | $ | 1,496,418 | $ | 1,496,418 | $ | 1,496,418 | — | ||||||||||
| Guillermo Sabater | Exec. Bonus Program(1) | $ | 274,149 | $ | 274,149 | $ | 274,149 | — | |||||||||
Performance Share Plan(2) | $ | 79,771 | $ | 79,771 | $ | 79,771 | — | ||||||||||
| Total | $ | 353,920 | $ | 353,920 | $ | 353,920 | — | ||||||||||
| (1) | Amounts shown for the Executive Bonus Program are amounts that were deferred in 2015 that are payable in three annual installments. Payment is not accelerated due to termination of employment. |
| (2) | Amounts shown for the Performance Share Plan are the maximum amount that could be payable assuming the highest targets are achieved for future years. Payment is not accelerated due to termination of employment. |
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Director Compensation in Fiscal Year 2015
We believed that the amount, form, and methods used to determine compensation of our non‑executive directors were important factors in:
| • | attracting and retaining directors who were independent, interested, diligent, and actively involved in our affairs and who satisfy the standards of Santander Group, the sole shareholder of our common stock; and |
| • | providing a simple, straight-forward package that compensates our directors for the responsibilities and demands of the role of director. |
The following table sets forth a summary of the compensation that we paid to each SHUSA director for service as a director of us and of Santander Bank in 2015.
| Name | Fees Earned or Paid in Cash(2) ($) | Other Compensation ($) | Total ($) | |||||||||
Jose Antonio Alvarez(1) | $ | — | $ | — | $ | — | ||||||
Román Blanco(1) | $ | — | $ | — | $ | — | ||||||
Thomas Dundon(1) | $ | — | $ | — | $ | — | ||||||
| Stephen Ferriss | $ | 230,833 | $ | — | $ | 230,833 | ||||||
| Alan Fishman | $ | 112,917 | $ | — | $ | 112,917 | ||||||
Jose Maria Fuster(1) | $ | — | $ | — | $ | — | ||||||
| Juan Guitard | $ | — | $ | — | $ | — | ||||||
John P. Hamill(1) | $ | 120,000 | $ | — | $ | 120,000 | ||||||
Marian L. Heard(1) | $ | 87,500 | $ | — | $ | 87,500 | ||||||
| Thomas S. Johnson | $ | 112,917 | $ | — | $ | 112,917 | ||||||
| Catherine Keating | $ | 131,250 | $ | — | $ | 131,250 | ||||||
| Jason Kulas | $ | — | $ | — | $ | — | ||||||
Gonzalo de Las Heras(1) | $ | — | $ | — | $ | — | ||||||
| Javier Maldonado | $ | — | $ | — | $ | — | ||||||
| Victor Matarranz | $ | — | $ | — | $ | — | ||||||
| Juan Olaizola | $ | — | $ | — | $ | — | ||||||
| Scott Powell | $ | — | $ | — | $ | — | ||||||
| T. Timothy Ryan, Jr. | $ | 1,125,000 | $ | — | $ | 1,125,000 | ||||||
Alberto Sánchez(1) | $ | — | $ | — | $ | — | ||||||
| Wolfgang Schoellkopf | $ | 347,083 | $ | — | $ | 347,083 | ||||||
Manuel Soto(1) | $ | 157,500 | $ | — | $ | 157,500 | ||||||
| Richard Spillenkothen | $ | 115,833 | $ | — | $ | 115,833 | ||||||
Footnotes:
| 1. | Ms. Heard and Messrs. Alvarez, Blanco, Dundon, Fuster, Hamill, de Las Heras, Sánchez, and Soto terminated service as directors on March 31, 2015, January 2, 2015, July 29, 2015, July 1, 2015, January 20, 2015, May 29, 2015, May 29, 2015, May 31, 2015, and May 29, 2015, respectively. |
| 2. | Reflects amounts paid in 2015 for the fourth quarter of 2014 and the first three quarters of 2015. Messrs. Alvarez, Blanco, Dundon, Fuster, Guitard, de Las Heras, Kulas, Maldonado, Matarranz, Olaizola, Powell, and Sánchez did not receive compensation as directors for 2015. |
Director Compensation
Our Board adopted the following compensation program for non-executive directors for service on our Board and on the Santander Bank Board for 2015:
| • | $150,000 in cash annually; plus |
| • | $20,000 in cash annually if the non-executive director also serves as a director of Santander Bank; |
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| • | $20,000 in cash annually if the non-executive director also serves as a Director of Santander Consumer USA Inc.; plus |
| • | $70,000 in cash annually if the non-executive director serves as chair of our Risk Committee, Audit Committee or Compensation Committee; plus |
| • | $20,000 in cash annually if the non-executive director serves as a non-chair member of our Executive Committee, Risk Committee, Audit Committee or Compensation Committee; plus |
| • | $5,000 in cash annually if the non-executive director also serves as a non-chair member of the corresponding committee of Santander Bank; plus |
| • | $5,000 in cash annually if the non-executive director also serves as a non-chair member of the corresponding committee of Santander Consumer USA Inc. |
We pay these amounts quarterly in arrears.
Mr. Ryan serves as our non-executive chair. We entered into an arrangement under which Mr. Ryan will be paid an annual cash retainer of $900,000 for serving as our chair and a $450,000 cash retainer for serving as Santander Bank’s chair. The initial term of the arrangement is three years. Under the arrangement, if Mr. Ryan forfeits any equity or equity-based awards in connection with his service with J.P. Morgan Chase & Co., we will pay him an amount equal to the present value of such equity awards. Mr. Ryan is also eligible to receive equity compensation on the same basis as other non-executive members of our or Santander Bank’s Board.
For 2016, we expect that the compensation program for non-executive directors will remain substantially the same.
Directors Participation in Deferred Compensation Plan
The Deferred Compensation Plan provides for the participation of our and Santander Bank's non-executive directors. The relevant terms of the Deferred Compensation Plan, as we describe in the section entitled “Deferred Compensation Arrangements,” apply in the same manner to participants who are directors as they do to participants who are executive officers.
No director deferred fees earned for 2015 into the Deferred Compensation Plan.
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ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT RELATED STOCKHOLDER MATTERS
As noted elsewhere in this Form 10-K, on January 30, 2009, SHUSA became a wholly-owned subsidiary of Santander (the "Santander Transaction"). As a result, following January 30, 2009, all of SHUSA’s voting securities are owned by Santander.
As a result of the Santander Transaction, there are no longer any outstanding equity awards under SHUSA’s equity incentive compensation plans. Pursuant to the transaction with Santander, (i) all stock options outstanding immediately prior to the transaction were canceled and any positive difference between the exercise price of any given stock option and the closing price of SHUSA’s common stock on January 29, 2009 was paid in cash to the option holder, and (ii) all shares of restricted stock outstanding immediately prior to the transaction vested and were treated the same way as all other shares of SHUSA common stock in the transaction.
ITEM 13 - RELATED PARTY TRANSACTIONS
Certain Relationships and Related Transactions
During each of 2013, 2014 and 2015, SHUSA and/or the Bank were participants in the transactions described below in which a “related person” (as defined in Item 404(a) of Regulation S-K, which includes directors and executive officers who served during the applicable fiscal year) had a direct or indirect material interest and the amount involved in such transaction exceeded $120,000.
Santander Relationship: Santander owns 100% of SHUSA's common stock. As a result, Santander has the right to elect the members of SHUSA's Board of Directors. In addition, certain individuals who serve as officers of SHUSA are also employees or officers of, or may be deemed to be officers of, Santander and/or its affiliates. The following transactions occurred during the 2013, 2014 and 2015 fiscal years between SHUSA or the Bank and their affiliates, on the one hand, and Santander or its affiliates, on the other hand.
The Bank has established a derivatives trading program with Santander pursuant to which Santander and its subsidiaries and affiliates provide advice with respect to derivative trades, coordinate trades with counterparties, and act as counterparty in certain transactions. The agreement and the trades are on market rate terms and conditions. In 2013, the aggregate notional amount of $6.6 billion, $5.6 billion, and $6.0 billion were completed during the years ended December 31, 2013, 2014, and 2015, respectively, in which Santander and its subsidiaries and affiliates participated.
As of December 31, 2013, 2014 and 2015, SHUSA had $2.0 billion, $2.5 billion and $5.0 billion respectively, of public securities consisting of various senior note obligations, trust preferred securities obligations and preferred stock issuances. As of such dates, Santander owned approximately 30.1%, 4.9% and 3.0% of these securities, respectively.
On June 28, 2013, the Bank entered into a servicing and sourcing agreement with SC for FCA dealer lending opportunities, under which SC provides servicing on loans originated by the Bank. On August 16, 2013, the Company purchased performing dealer loans with an outstanding balance of $204.8 million from SC, which have been classified as commercial and industrial loans.
In 2013, 2014 and 2015, the Company and its subsidiaries borrowed money and obtained credit from Santander and its affiliates. Each of the transactions was done in the ordinary course of business and on market terms prevailing at the time for comparable transactions with persons not related to Santander and its affiliates, including interest rates and collateral, and did not involve more than the normal risk of collectability or present other unfavorable features. The transactions are as follows:
| • | In 2006, Santander extended a $425 million unsecured line of credit to the Bank for federal funds and Eurodollar borrowings and for the confirmation of standby letters of credit issued by the Bank. The line was increased to $2.5 billion in 2009. In the third quarter of 2011 this line was decreased to $1.5 billion and in the fourth quarter of 2011 this line was further decreased to $1.0 billion, and in 2012 this line was further reduced to $500.0 million. This line of credit can be canceled by either the Bank or Santander at any time and can be replaced by the Bank at any time. For 2012, the highest balance outstanding was $250 million and the principal balance as of December 31, 2012 was $1.7 million, all of which was for confirmation of standby letters of credit. For 2013, the highest balance outstanding was $35.2 million and the principal balance as of December 31, 2013 was $34.4 million, all of which was for confirmation of standby letters of credit. The Bank paid approximately $2.5 million, and $0.3 million, in fees to Santander in 2012 and 2013, respectively, in connection with this line of credit. The line of credit was not renewed after December 31, 2013. |
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| • | In March 2010, SHUSA issued to Santander a $750.0 million subordinated note due March 15, 2020 bearing interest at a rate of 5.75% through March 14, 2015 and 6.25% beginning March 15, 2015 until the note is repaid. SHUSA paid Santander $43.1 million, $6.1 million, and $0.0 million in interest on this note in 2013, 2014, and 2015, respectively. This note was subsequently converted to common stock in February 2014. |
| • | In 2010 the Company established a $1.5 billion line of credit with Santander's New York branch. This line can be canceled by either the Company or Santander at any time and can be replaced by the Company at any time. The line of credit was not renewed after December 31, 2013. For 2013, the highest balance outstanding (and the balance as of December 31, 2013) was $0. The Company did not pay any interest to Santander with respect to this line of credit for 2013. |
In 2013, 2014 and 2015, the Company and its affiliates entered into, or were subject to, various service agreements with Santander and its affiliates. Each of the agreements was made in the ordinary course of business and on market terms. The agreements are as follows:
| • | NW Services Co., a Santander affiliate doing business as Aquanima, is under contract with the Bank to provide procurement services, with total fees paid in 2013, 2014 and 2015 in the amount of $3.3 million, $3.5 million, and $3.3 million respectively. |
| • | During the year ended December 31, 2015, the Company paid $6.4 million in rental payments to Santander compared to $6.7 million in 2014 and $2.5 million in 2013. |
| • | Geoban, S.A., a Santander affiliate, is under contract with the Bank to provide administrative services, consulting and professional services, application support and back-office services, including debit card disputes and claims support, and consumer and mortgage loan set-up and review; with total fees paid in 2013, 2014 and 2015 in the amount of $15.7 million, $13.4 million and $9.8 million, respectively. |
| • | Ingenieria De Software Bancario S.L., a Santander affiliate, is under contract with the Bank to provide information technology development, support and administration, with total fees paid in 2013, 2014 and 2015 in the amount of $125.8 million, $108.5 million and $95.0 million respectively. |
| • | Produban Servicios Informaticos Generales S.L., a Santander affiliate, is under contract with the Bank to provide professional services, and administration and support of information technology production systems, telecommunications and internal/external applications, with total fees paid in 2013, 2014 and 2015 in the amount of $93.9 million, $83.2 million and $106.8 million, respectively. |
| • | Santander Back-Offices Globales Mayoristas S.A., a Santander affiliate, is under contract with the Bank to provide administrative services and back-office support for the Bank's derivative, foreign exchange and hedging transactions and programs, with total fees paid in each of 2013, 2014 and 2015 of $0.4 million, $0.7 million and $1.3 million. |
| • | SGF, a Santander affiliate, is under contracts with the Bank to provide: (a) administration and management of employee benefits and payroll functions for the Bank and other affiliates, including employee benefits and payroll processing services provided by third party sponsorship by SGF; and (b) property management and related services; with total fees paid in 2013, 2014 and 2015 in the amount of $11.6 million, $12.3 million and $8.0 million, respectively. |
| • | Santander Securities, LLC, a Santander affiliate, is under contract with the Company to act as an introducing broker dealer for the northeast United States, with total payments made by the Company in 2013, 2014 and 2015 in the amount of $0.2 million, $0.1 million and $0.0 million, respectively. |
| • | Santander Securities, LLC in under a contract with the Bank to provide networking and marketing in connection with insurance and securities offerings, with total net payments made to the Bank in 2015, 2014 and 2013 of $46.5 million, $51.7 million and $49.5 million, respectively. |
| • | The Company is a party to federal and state tax-sharing agreements with the Bank and certain affiliates. These agreements generally provide for an allocation for certain periods of the consolidated return tax liability of the parties based on their separate taxable incomes and the payment of tax benefits measured by the difference between their separate return tax liability and their allocated share of consolidated return tax. The Company received $0 million from its affiliates under the federal tax-sharing agreements in 2013, 2014 and 2015, and paid to its affiliates $2 million in 2013, $1.0 million in 2014 and $0 million in 2015 under the state tax-sharing agreement. |
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| • | Santander, through its New York branch, is under an agreement with the Bank to provide support for derivatives transactions to the Bank. The Bank is under agreements with Santander, through its New York branch, to provide credit risk analysis and investment advisory services to Santander. |
SC relationship: On January 28, 2014, the Company obtained a controlling financial interest in SC in connection with the Change in Control. The financial information set forth in Item 8 gives effect to the Company’s consolidation of SC as a result of the Change in Control. The following transactions occurred during the 2015 and 2014 fiscal years between SHUSA or the Bank and SC, on the one hand, and Santander or its affiliates, on the other hand. Those agreements include the following:
| • | SC has a line of credit agreement with Santander. During the years ended December 31, 2015 and December 31, 2014, SC incurred interest expense, including unused fees of $96.8 million and $92.2 million, respectively, which includes $6.0 million and $7.8 million, respectively, of accrued interest payable. SC also has a letter of credit facility with Santander for which it incurred $0.0 million and $0.5 million of interest expense, including unused fees and $0.0 million and $0.1 million payable in 2015 and 2014, respectively. In August 2015, under a new agreement with Santander, SC agreed to begin paying Santander a fee of 12.5 basis points (per annum) on certain warehouse facilities, as they renew, for which Santander provides a guarantee of SC's servicing obligations. |
| • | SC has a $300 million line of credit agreement with SHUSA. The outstanding balance as well as any expenses or fees incurred in conjunction with this line eliminates in the consolidation of SHUSA. |
| • | SC has entered into derivative agreements with Santander and its affiliates, which consist primarily of swap agreements to hedge interest rate risk. These contracts had notional values of $13.9 billion and $16.3 billion at December 31, 2015 and December 31, 2014, respectively, which are included in Note 15 of these financial statements. |
| • | As of December 31, 2013, SC had an agreement with SBNA under which SC provided SBNA with the first right to review and assess Chrysler Capital dealer lending opportunities and, if SBNA elected, to provide the proposed financing. SC provided servicing on all loans originated under this arrangement. For the year ended December 31, 2014, SC sold $18.2 million of receivables from dealers to SBNA. Effective October 1, 2014, the origination and servicing agreements were terminated and replaced with revised agreements requiring SC to permit SBNA the first right to review and assess FCA dealer lending opportunities and requiring SBNA to pay SC a relationship management fee based upon the performance and yields of Chrysler Capital dealer loans held by SBNA. These agreements also transferred the servicing of all Chrysler Capital receivables from dealers, including receivables held by SBNA and by SC, from SC to SBNA. All revenue, expenses, and gains or losses related to these sales eliminate in the consolidation of SHUSA. |
| • | In December 2015, SC formed a new wholly-owned subsidiary, Santander Consumer International PR, LLC (SCI), and SCI opened deposit accounts with Banco Santander Puerto Rico, an affiliated entity. |
| • | During 2014, SC entered into a flow agreement with SBNA whereby SBNA has the first right to review and approve Chrysler Capital consumer vehicle lease applications. SC may review any applications declined by SBNA for the Company’s own portfolio. SC provides servicing and receives an origination fee on all leases originated under this agreement. Pursuant to the Chrysler Agreement, SC pays FCA on behalf of SBNA for residual gains and losses on the flowed leases. On June 27, 2014, SC executed a bulk sale of Chrysler Capital leases with a depreciated net capitalized cost of $369.1 million and a net book value of $317.3 million in Chrysler Capital leases to SBNA. This sale was effected through the transfer of a special unit of beneficial interest in SC’s titling trust. Proceeds from the sale were $322.9 million. SC retained servicing on the sold leases. During April 2015, the Bank and SC determined not to renew this direct origination agreement which expired by its terms on May 9, 2015. |
| • | On June 30, 2014, SC entered into an indemnification agreement with SBNA whereby SC indemnifies SBNA for any credit or residual losses on a pool of $48.2 million in leases originated under the flow agreement. The covered leases are non-conforming units because they did not meet SBNA’s credit criteria at origination. At time of the agreement, SC established a $48.2 million collateral account with SBNA in restricted cash that will be released over time to SBNA, in the case of losses, and SC, in the case of payments and sale proceeds. As of December 31, 2015 and 2014 the balances in the collateral account were $34.5 million and $44.8 million. |
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| • | During the years ended December 31, 2015 and December 31, 2014, SC originated $23.5 million and $17.4 million, respectively, in unsecured revolving loans under terms of a master service agreement with a company in which it has a cost method investment and holds a warrant to increase its ownership if certain vesting conditions are satisfied. The MSA enables SC to review credit applications of retail store customers. During the year ended December 31, 2015, SC fully impaired its cost method investment in this entity. |
| • | On July 2, 2015, SC announced the departure of Thomas G. Dundon from his roles as Chairman of the Board and CEO of SC, effective as of the close of business on July 2, 2015. Refer to Note 1 and Note 20 for additional discussion. |
| • | SC paid certain expenses incurred by Mr. Dundon in the operation of a private plane in which he owns a partial interest when used for SC business within the contiguous 48 states. Under this practice, payment is based on a set flight time hourly rate. For the years ended, December 31, 2015 and December 31, 2014, the Company paid $0.4 million and $0.6 million, respectively, to Meregrass Company, Inc., the company managing the plane's operations, with an average rate of $5,800 per hour in both years. |
| • | Under an agreement with Mr. Dundon, SC is provided access to a suite at an event center that is leased by Mr. Dundon, and which SC uses for business purposes. SC reimburses Mr. Dundon for the use of this space on a periodic basis. During the year ended December 31, 2015, SC reimbursed Mr. Dundon $0.2 million for the use of this space. |
| • | During the years ended December 31, 2015, 2014 and 2013, the Company recorded expenses of $2.5 million, $10.8 million and $10.8 million, respectively, related to transactions with SC. In addition, as of December 31, 2015 and December 31, 2014, the Company had receivables and prepaid expenses with SC in the amounts of $19.3 million and $21.4 million, respectively. The activity is primarily related to SC's servicing of certain SHUSA outstanding loan portfolios and dividends paid by SC to SHUSA. Transactions that occurred after the Change in Control, which was effective January 28, 2014, have been eliminated from the Consolidated Statements of Operations at December 31, 2015 and December 31, 2014 as intercompany transactions. |
Loans to Directors and Executive Officers
SHUSA, through the Bank, is in the business of gathering deposits and making loans. Like many financial institutions, SHUSA actively encourages its directors and the companies which they control and/or are otherwise affiliated with to maintain their banking business with the Bank, rather than with a competitor.
In addition, the Bank provides certain other banking services to its directors and entities with which they are affiliated. In each case, these services are provided in the ordinary course of the Bank's business and on substantially the same terms as those prevailing at the time for comparable transactions with others.
As part of its banking business, the Bank also extends loans to directors, executive officers and employees of SHUSA and the Bank and their respective subsidiaries. Such loans are provided in the ordinary course of the Bank’s business, are on substantially the same general terms (including interest rates, collateral and repayment terms) as, and follow credit underwriting procedures that are not less stringent than, those prevailing at the time for comparable transactions with others not affiliated with the Bank and do not involve more than the normal risk of collectability. As permitted by Regulation O, certain loans to directors and employees of SHUSA and the Bank, including SHUSA’s executive officers, are priced at up to a 1.00% discount to market and require no application fee, but contain no other terms different than terms available in comparable transactions with non-employees. The 1.00% discount is discontinued when an employee terminates his or her employment with SHUSA or the Bank. No such loans have been non-accrual, past due, restructured, or potential problem loans. Such loans to SHUSA’s directors and executive officers consist of:
| • | An adjustable rate first mortgage loan to Melissa Ballenger, an executive officer who serves as chief financial officer of the Bank, in the original principal amount of $700,000. The interest rate on this loan is 1.625%. For 2015, the highest outstanding balance was $700,000, and the balance outstanding at December 31, 2015 was $692,429. Ms. Ballenger paid $7,571 in principal and $5,572 in interest on this loan in 2015. |
| • | A fixed-rate first mortgage loan to Marcelo Brutti, a former executive officer, in the original principal amount of $631,200. The current interest rate on this loan is 2.875%. For 2015, the highest outstanding balance was $631,200, and the balance outstanding at December 31, 2015 was $617,745. Mr Brutti paid $13,455 in principal and $17,971 in interest on this loan in 2015. For 2014, the highest outstanding balance was $631,200, and the balance outstanding at December 31, 2014 was $631,200. Mr Brutti paid $0 in principal and $750 in interest on this loan in 2014. |
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| • | A fixed-rate first mortgage loan to David Chaos, a former executive officer, in the original principal amount of $700,000. The current interest rate on this loan is 2.375%. For 2015, the highest outstanding balance was $484,587 and the balance outstanding at December 31, 2015 was $0. Mr. Chaos paid $484,587 in principal and $10,998 in interest on this loan in 2015. For 2014, the highest outstanding balance was $697,327 and the balance outstanding at December 31, 2014 was $484,587. Mr. Chaos paid $212,740 in principal and $12,058 in interest on this loan in 2014. |
| • | A line of credit to Mr. Chaos in the original principal amount of $532,000. The interest rate on this line is 2.24%. The balance outstanding on this line at December 31, 2014 was $0. In 2015 the original principal amount was reduced to $91,800, with an interest rate of 3.74%. This line was closed in the third quarter of 2015. |
| • | An adjustable rate first mortgage loan to Alfonso de Castro, a former executive officer, in the original principal amount of $950,000. The current interest rate on this loan is 2.375%. For 2015, the highest outstanding balance was $899,762, and the balance outstanding at December 31, 2015 was $853,075. Mr. de Castro paid $46,687 in principal and $23,732 in interest on this loan in 2015. For 2014, the highest outstanding balance was $946,181, and the balance outstanding at December 31, 2014 was $899,762. Mr. de Castro paid $46,419 in principal and $21,969 in interest on this loan in 2014. For 2013, the highest outstanding balance was $950,000, and the balance outstanding at December 31, 2013 was $946,181. Mr. de Castro paid $3,819 in principal and $3,196 in interest on this loan in 2013. |
| • | A fixed-rate first mortgage loan to Mr. de Las Heras, one of our directors, in the original principal amount of $400,000. The interest rate on this loan is 3.99%. For 2015, the highest outstanding balance was $356,309, and the balance outstanding at December 31, 2015 was $345,601. Mr. de Las Heras paid $10,708 in principal and $14,022 in interest on this loan in 2015. 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. |
| • | A fixed-rate first mortgage loan to Mr. de Las Heras, a former director, in the original principal amount of $255,000. The interest rate on this loan is 2.375%. For 2015, the highest outstanding balance was $236,419, and the balance outstanding at December 31, 2015 was $230,072. Mr. de Las Heras paid $6,347 in principal and $5,546 in interest on this loan in 2015. 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. |
| • | A fixed-rate first mortgage loan to Kenneth Goldman, an executive officer who serves as Chief Accounting Officer, in the original principal amount of $824,000. The interest rate on this loan is 2.875%. For 2015, the highest outstanding balance was $783,758, and the balance outstanding at December 31, 2015 was $765,021. Mr. Goldman paid $18,737 in principal and $22,287 in interest on this loan in 2015. For 2014, the highest outstanding balance was $801,965, and the balance outstanding at December 31, 2014 was $782,217. Mr. Goldman paid $18,207 in principal and $22,818 in interest on this loan in 2014. For 2013, the highest outstanding balance was $819,656, and the balance outstanding at December 31, 2013 was $801,965. Mr. Goldman paid $17,691 in principal and $23,333 in interest on this loan in 2013. |
| • | An adjustable rate first mortgage loan to Carol Hunley, a former executive officer of the Bank, in the original principal amount of $926,400. The current interest rate on this loan is 1.625%. For 2015, the highest outstanding balance was $858,999, and the balance outstanding at December 31, 2015 was $833,733. Ms. Hunley paid $25,265 in principal and $13,771 in interest on this loan in 2015. For 2014, the highest outstanding balance was $883,857, and the balance outstanding at December 31, 2014 was $858,999. Ms. Hunley paid $24,859 in principal and $14,178 in interest on this loan in 2014. For 2013, the highest outstanding balance was $908,315, and the balance outstanding at December 31, 2013 was $883,857. Ms. Hunley paid $24,458 in principal and $14,579 in interest on this loan in 2013. |
| • | A adjustable rate first mortgage loan to Cameron Letters, an executive officer of the Bank, in the original principal amount of $950,000. The interest rate on this loan is 1.75%. For 2015, the highest outstanding balance was $890,891, and the balance outstanding at December 31, 2015 was $865,553. Mr. Letters paid $25,338 in principal and $15,388 in interest on this loan in 2015. |
| • | A adjustable rate first mortgage loan to John Murphy, a former executive officer of the Bank, in the original principal amount of $535,000. The interest rate on this loan is 2.0%. For 2015, the highest outstanding balance was $497,554, and the balance outstanding at December 31, 2015 was $483,648. Mr. Murphy paid $13,905 in principal and $9,824 in interest on this loan in 2015. |
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| • | An adjustable rate first mortgage loan to Federico Papa, an executive officer of the Bank, in the original principal amount $995,000. The current interest rate on this loan is 2.00%. For 2015, the highest outstanding balance was $928,682, and the balance outstanding at December 31, 2015 was $902,888. Mr. Papa paid $25,794 in principal and $18,338 in interest on this loan in 2015. For 2014, the highest outstanding balance was $953,967, and the balance outstanding at December 31, 2014 was $928,682. Mr. Papa paid $25,284 in principal and $18,848 in interest on this loan in 2014. For 2013, the highest outstanding balance was $978,750, and the balance outstanding at December 31, 2013 was $953,967. Mr. Papa paid $24,784 in principal and $19,349 in interest on this loan in 2013. |
| • | A fixed-rate first mortgage loan to Mr. Pfirrman, a former executive officer, in the original principal amount of $240,000. The interest rate on this loan is 2.29%. For 2015, the highest outstanding balance was $218,239, and the balance outstanding at December 31, 2015 was $203,771. Mr. Pfirrman paid $14,468 in principal and $4,846 in interest on this loan in 2015. For 2014, the highest outstanding balance was $232,380, and the balance outstanding at December 31, 2014 was $218,239. Mr. Pfirrman paid $14,141 in principal and $5,174 in interest on this loan in 2014. For 2013, the highest outstanding balance was $245,000, and the balance outstanding at December 31, 2013 was $232,380. Mr. Pfirrman paid $12,620 in principal and $4,587 in interest on this loan in 2013. |
| • | An adjustable rate first mortgage loan to Mr. Sabater, a former executive officer, in the original principal amount of $545,000. The current interest rate on this loan is 1.875%. For 2015, the highest outstanding balance was $398,207, and the balance outstanding at December 31, 2015 was $0. Mr. Sabater paid $398,207 in principal and $5,437 in interest on this loan in 2015. For 2014, the highest outstanding balance was $414,343, and the balance outstanding at December 31, 2014 was $398,207. Mr. Sabater paid $16,136 in principal and $7,631 in interest on this loan in 2014. For 2013, the highest outstanding balance was $477,695, and the balance outstanding at December 31, 2013 was $414,343. Mr. Sabater paid $63,352 in principal and $8,414 in interest on this loan in 2013. |
| • | A fixed-rate first mortgage loan to Alberto Sanchez, one of our former directors, in the original principal amount of $341,000. The interest rate on this loan is 3.875%. For 2015, the highest outstanding balance was $247,334, and the balance outstanding at December 31, 2015 was $222,591. Mr. Sanchez paid $25,744 in principal and $9,179 in interest on this loan in 2015. For 2014, the highest outstanding balance was $262,350, and the balance outstanding at December 31, 2014 was $247,334. Mr. Sanchez paid $15,015 in principal and $9,950 in interest on this loan in 2014. For 2013, the highest outstanding balance was $285,769, and the balance outstanding at December 31, 2013 was $262,350. Mr. Sanchez paid $23,419 in principal and $11,470 in interest on this loan in 2013. |
| • | A fixed-rate first mortgage loan to Lisa VanRoekel, an executive officer of the Bank, in the original principal amount of $400,000. The interest rate on this loan is 2.50%. For 2015, the highest outstanding balance was $358,009, and the balance outstanding at December 31, 2015 was $338,730. Ms. VanRoekel paid $19,279 in principal and $8,722 in interest on this loan in 2015. For 2014, the highest outstanding balance was $382,432, and the balance outstanding at December 31, 2014 was $358,009. Ms. VanRoekel paid $24,423 in principal and $9,923 in interest on this loan in 2014. |
Approval of Related Party Transactions
SHUSA's policies require that all related person transactions be reviewed for compliance and applicable banking and securities laws and be approved by, or approved pursuant to procedures approved by, the Bank's “Business Activities Committee.” Moreover, SHUSA's policies require that all material transactions be approved by SHUSA's Board or the Bank's Board.
Director Independence
As noted elsewhere in this Form 10-K, SHUSA is a wholly-owned subsidiary of Santander. As a result, all of SHUSA's voting common equity securities are owned by Santander. However, the depository shares of SHUSA's Series C non-cumulative preferred stock continue to be listed on the NYSE. In accordance with the NYSE rules, because SHUSA does not have common equity securities but rather only preferred and debt securities listed on the NYSE, the SHUSA Board is not required to have a majority of “independent” directors. Nevertheless, this Item 13 requires SHUSA to identify each director that is “independent” using a definition of independence of a national securities exchange, such as the NYSE's listing standards (to which SHUSA is not currently subject). Based on the foregoing, although the SHUSA Board has not made a formal determination on the matter, under current NYSE listing standards (to which SHUSA is not currently subject), SHUSA believes that Directors Ryan, Fishman, Ferriss, Keating, Johnson, Spillenkothen and Schoellkopf would be independent under such standards.
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ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees of the Independent Auditor
The following tables set forth the aggregate fees for services rendered to the Company, for the fiscal year ended December 31, 2015 by our principal accounting firm, Deloitte & Touche LLP.
Fiscal Year Ended December 31, 2015(1) | |||
Audit Fees (2) | $ | 5,764,206 | |
Audit-Related Fees (3) | 1,172,200 | ||
Tax Fees (4) | 152,000 | ||
All Other Fees (5) | 3,760,000 | ||
| Total Fees | $ | 10,848,406 | |
(1) Represents proposed fees approved by the Audit Committee of the Board of Directors.
(2) Audit fees include fees associated with the annual audit of the financial statements and the audit of internal control over financial reporting of the Company, and the reviews of the Quarterly Reports on Form 10-Q.
(3) Audit-related fees principally include audits of employee benefit plans, audits of separate subsidiary financial statements required by their formation agreements, attestation reports required under services agreements, consent to use its report in connection with various documents filed with the SEC, and comfort letters issued to underwriters for securities offerings.
(4) Tax fees include tax compliance, tax advice and tax planning.
(5) All other fees in 2015 included procedures performed over the Governance Risk & Control SAP implementation and BSA/AML Transformation Implementation. These were non-recurring fees charged in 2015.
The following tables set forth the aggregate fees for services rendered to the Company for the fiscal year ended December 31, 2014 by our principal accounting firm, Deloitte & Touche LLP.
Fiscal Year Ended December 31, 2014(1) | |||
Audit Fees (2) | $ | 5,382,781 | |
Audit-Related Fees (3) | 1,950,600 | ||
Tax Fees (4) | 152,000 | ||
| All Other Fees | 949,300 | ||
| Total Fees | $ | 8,434,681 | |
(1) Represents final actual fees paid.
(2) Audit fees include fees associated with the annual audit of the financial statements and the audit of internal control over financial reporting of the Company, and the reviews of the Quarterly Reports on Form 10-Q.
(3) Audit-related fees in 2014 principally included audits of employee benefit plans, audits of separate subsidiary financial statements required by their formation agreements, attestation reports required under services agreements, consent to use its report in connection with various documents filed with the SEC, and comfort letters issued to underwriters for securities offerings. In 2014, this also included non-recurring consultation expenses related to the Change in Control event in 2014.
(4) Tax fees include tax compliance, tax advice and tax planning.
The following tables set forth the aggregate fees for services rendered to the SC for the fiscal year ended December 31, 2015 and 2014 by its principal accounting firm, Deloitte & Touche LLP.
| December 31, 2015 | December 31, 2014 | ||||||
Audit Fees (1) | $ | 4,291,140 | $ | 3,004,295 | |||
Audit-Related Fees (2) | 676,000 | 1,820,261 | |||||
Tax Fees (3) | — | — | |||||
| All Other Fees | — | — | |||||
| Total Fees | $ | 4,967,140 | $ | 4,824,556 | |||
(1) Represents fees billed for the audit of our financial statements included in our Annual Report on Form 10-K, review of financial statements included in our Quarterly Reports on Form 10-Q, and the audit of our internal controls over financial reporting.
(2) Represents fees billed for assurance and consultative related services. Such services during 2015 and 2014 principally included attestation reports required under services agreements, certain accounting consultations, consent to use its report in connection with various documents filed with the SEC, and comfort letters issued to underwriters for securities offerings and the Company’s initial public offering and certain other agreed upon procedures.
(3) Represents fees billed for tax compliance, including review of tax returns, tax advice and tax planning.
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Audit Committee Pre-Approval of Audit and Permissible Non-Audit Services by Independent Auditor
During 2015 SHUSA’s Audit Committee pre-approved audit and non-prohibited, non-audit services provided by the independent auditor after its appointment as such. These services may have included audit services, audit-related services, tax services and other services. The Audit Committee adopted a policy for the pre-approval of services provided by the independent auditor. Under the policy, pre-approval was generally provided for up to one year and any pre-approval was detailed as to the particular service or category of services and was subject to a specific budget. In addition, the Audit Committee may also have pre-approved particular services on a case-by-case basis. For each proposed service, the Audit Committee received detailed information sufficient to enable it to pre-approve and evaluate such service. The Audit Committee may have delegated pre-approval authority to one or more of its members. Any pre-approval decision made under delegated authority was communicated to the Audit Committee at or before its next scheduled meeting. There were no waivers by the Audit Committee of the pre-approval requirement for permissible non-audit services in 2015.
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PART IV
ITEM 15 - EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)
1. Financial Statements.
The following financial statements are filed as part of this report:
| Consolidated Balance Sheets | |||
| Consolidated Statements of Operations | |||
| Consolidated Statements of Comprehensive Income | |||
| Consolidated Statements of Stockholder's Equity | |||
| Consolidated Statements of Cash Flows | |||
| Notes to Consolidated Financial Statements | |||
Audited consolidated financial statements of SC of December 31, 2015 and 2014 and for each of the three years in the period ended December 31, 2015 are filed with this Report as Exhibit 99.2 and incorporated herein by reference.
2. Financial Statement Schedules.
Financial statement schedules are omitted because the required information is either not applicable, not required or is shown in the respective financial statements or in the notes thereto.
(b)Exhibit Index
| (2.1) | Transaction Agreement, dated as of October 13, 2008, between Santander Holdings USA, Inc. and Banco Santander, S.A. (Incorporated by reference to Exhibit 2.1 to SHUSA's Current Report on Form 8-K filed October 16, 2008) (Commission File Number 333-172807) |
| (3.1) | Amended and Restated Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed January 30, 2009) (Commission File Number 333-172807) |
| (3.2) | Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA, Inc.'s Current Report on Form 8-K filed March 27, 2009) (Commission File Number 333-172807) |
| (3.3) | Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed February 5, 2010) (Commission File Number 333-172807) |
| (3.4) | Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.2 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed June 21, 2011) (Commission File Number 333-172807) |
| (3.5) | Amended and Restated Bylaws of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 of Santander Holdings USA, Inc.’s Current Report on Form 8-K filed January 30, 2012) (Commission File Number 333-172807) |
| (4.1) | Santander Holdings USA, Inc. has certain debt obligations outstanding. None of the instruments evidencing such debt authorizes an amount of securities in excess of 10% of the total assets of Santander Holdings USA, Inc. and its subsidiaries on a consolidated basis; therefore, copies of such instruments are not included as exhibits to this Quarterly Report on Form 10-Q. Santander Holdings USA, Inc. agrees to furnish copies to the SEC on request. |
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| (10.1) | Underwriting Agreement dated January 22, 2014 among Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as representatives of the underwriters listed therein, Santander Consumer USA Holdings Inc., Santander Consumer Illinois, Santander Holdings USA, Inc. and the other Selling Stockholders listed in Schedule II thereto (Incorporated by reference to Exhibit 1.1 to the Company's Current Report on Form 8-K filed January 28, 2014 (Commission File Number 001-16581) |
| (10.2) | Shareholders Agreement dated January 28, 2014 among the Company, Santander Consumer USA Holdings Inc., Sponsor Holdings, DDFS, Thomas G. Dundon and Banco Santander, S.A. (Incorporated by reference to Exhibit 1.2 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed January 28, 2014 (Commission File Number 001-16581) |
| (10.3) | Written Agreement, dated as of September 15, 2014, by and between Santander Holdings USA, Inc. and the Federal Reserve Bank of Boston (Incorporated by reference to Exhibit 99.1 of Santander Holdings USA, Inc.’s Current Report on Form 8-K filed September 18, 2014 (Commission File Number 001-16581) |
| (10.4) | Written Agreement, dated as of July 2, 2015, by and between Santander Holdings USA, Inc. and the Federal Reserve Bank of Boston (Incorporated by reference to Exhibit 99.1 of Santander Holdings USA, Inc.’s Current Report on Form 8-K filed July 7, 2015 (Commission File Number 001-16581) |
| (21.1) | Subsidiaries of Registrant (Filed herewith) |
| (23.1) | Consent of Deloitte & Touche LLP (Santander Holdings USA, Inc.) (Filed herewith) |
| (23.2) | Consent of Deloitte & Touche LLP (Santander Consumer USA Holdings Inc.) (Filed herewith) |
| (31.1) | Chief Executive Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith) |
| (31.2) | Chief Financial Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith) |
| (32.1) | Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith) |
| (32.2) | Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith) |
| (99.1) | Santander Consumer USA Holdings Inc. Form 10-K as of December 31, 2015 and 2014 and for the years ended December 31, 2015, 2014, and 2013. (Commission File Number 001-36270) |
| (101) | Interactive Data File (XBRL). (Filed herewith) |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
SANTANDER HOLDINGS USA, INC. (Registrant) | |||
| Date: | April 14, 2016 | /s/ Scott E. Powell | |
| Scott E. Powell | |||
President and Chief Executive Officer (Authorized Officer) | |||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| Signature | Title | Date |
| /s/ Scott E. Powell Scott E. Powell | Director, President Chief Executive Officer (Principal Executive Officer) | April 14, 2016 |
| /s/ Gerald P. Plush Gerald P. Plush | Senior Executive Vice President Chief Financial Officer (Principal Financial Officer) | April 14, 2016 |
| /s/ T. Timothy Ryan, Jr. T. Timothy Ryan Jr. | Director Chairman of the Board | April 14, 2016 |
/s/ Javier Maldonado Javier Maldonado | Director | April 14, 2016 |
| /s/ Thomas Johnson Thomas Johnson | Director | April 14, 2016 |
| /s/ Stephen Ferriss Stephen Ferriss | Director | April 14, 2016 |
| /s/ Alan Fishman Alan Fishman | Director | April 14, 2016 |
/s/ Juan Guitard Juan Guitard | Director | April 14, 2016 |
| /s/ Catherine Keating Catherine Keating | Director | April 14, 2016 |
| /s/ Jason Kulas Jason Kulas | Director | April 14, 2016 |
| /s/ Victor Matarranz Victor Matarranz | Director | April 14, 2016 |
| /s/ Juan Olaizola Juan Olaizola | Director | April 14, 2016 |
| /s/ Wolfgang Schoellkopf Wolfgang Schoellkopf | Director | April 14, 2016 |
/s/ Richard Spillenkothen Richard Spillenkothen | Director | April 14, 2016 |
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