UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2017March 31, 2018
OR
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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)
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Virginia (State or other jurisdiction of incorporation or organization) | | 23-2453088 (I.R.S. Employer Identification No.) |
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75 State Street, Boston, Massachusetts (Address of principal executive offices) | | 02109 (Zip Code) |
(617) 346-7200
Registrant’s telephone number including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ. No o.
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation ST (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ. No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer o | | Accelerated filer o |
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Non-accelerated filer þ | | (Do not check if smaller reporting company) |
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| | Smaller reporting company o |
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| | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o. No þ.
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
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Class | | Outstanding at July 31, 2017April 30, 2018 |
Common Stock (no par value) | | 530,391,043 shares |
INDEX
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Ex-31.1 Certification |
Ex-31.2 Certification |
Ex-32.1 Certification |
Ex-32.2 Certification |
EX-101 INSTANCE DOCUMENT |
EX-101 SCHEMA DOCUMENT |
EX-101 CALCULATION LINKBASE DOCUMENT |
EX-101 LABELS LINKBASE DOCUMENT |
EX-101 PRESENTATION LINKBASE DOCUMENT |
EX-101 DEFINITION LINKBASE DOCUMENT |
FORWARD-LOOKING STATEMENTS
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
This Quarterly Report on Form 10-Q of Santander Holdings USA, Inc. (“SHUSA” or the “Company”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the financial condition, results of operations, business plans and future performance of the Company. Words such as “may,” “could,” “should,” “looking forward,” “will,” “would,” “believe,” “expect,” “hope,” “anticipate,” “estimate,” “intend,” “plan,” “assume," "goal," "seek" or similar expressions are intended to indicate forward-looking statements.
Although SHUSA believes that the expectations reflected in these forward-looking statements are reasonable as of the date on which the statements are made, these statements are not guarantees of future performance and involve risks and uncertainties based on various factors and assumptions, many of which are beyond the Company's control. For more information regarding these risks and uncertainties as well as additional risks that the Company faces, refer to the Risk Factors detailed in Item 1A of Part 1 of the Company's annual report on Form 10-K for the year ended December 31, 2016. Among the factors that could cause SHUSA’s financial performance to differ materially from that suggested by forward-looking statements are:
the effects of regulation and/or policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the "FDIC"), the Office of the Comptroller of the Currency (the “OCC”) and the Consumer Financial Protection Bureau (the “CFPB”), includingand other changes in trade, monetary and fiscal policies and laws,regulations, including interest rate policies of the Federal Reserve, as well as in the impact of changes in and interpretations of generally accepted accounting principles in the United States of America ("GAAP"), the failure to adhere to which could subject SHUSA to formal or informal regulatory compliance and enforcement actions;
the slowing or reversal of the current U.S. economic expansion and the strength of the United StatesU.S. economy in general and regional and local economies in which SHUSA conducts operations in particular, which may affect, among other things, the level of non-performing assets, charge-offs, and provisions for credit losses;
the ability of certain European member countries to continue to service their debt and the risk that a weakened European economy could negatively affect U.S.-based financial institutions, counterparties with which SHUSA does business, as well as the stability of global financial markets;
inflation, interest rate, market and monetary fluctuations, which may, among other things, reduce net interest margins and impact funding sources and affect the ability to originate and distribute financial products in the primary and secondary markets;
regulatory uncertainties and changes faced by financial institutions in the U.S. and globally arising from the U.S. presidential administration and Congress and the potential impact those uncertainties and changes could have on SHUSA's business, results of operations, financial condition or strategy;
adverse movements and volatility in debt and equity capital markets and adverse changes in the securities markets, including those related to the financial condition of significant issuers in SHUSA’s investment portfolio;
SHUSA’s ability to 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;requirements;
SHUSA’s ability to effectively manage its capital and liquidity, including approval of its capital plans by its regulators;regulators and its ability to continue to receive dividends from its subsidiaries or other investments;
changes in credit ratings assigned to SHUSA or its subsidiaries;
the ability to manage risks inherent in our businesses, including through effective use of systems and controls, insurance, derivatives and capital management;
SHUSA’s ability to manage credit risk that may increase to the extent our loans are concentrated by loan type, industry segment, borrower type or location of the borrower or collateral;
SHUSA’s ability to timely develop competitive new products and services in a changing environment that are responsive to the needs of SHUSA's customers and are profitable to SHUSA, the acceptance of such products and services by customers, and the potential for new products and services to impose additional unexpected costs on SHUSAor losses not anticipated at their initiation, 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 perceptionscompetitors of SHUSA as a suitable service providerthat may have greater financial resources or counterparty;lower costs, may innovate more effectively, or may develop products and technology that enable those competitors to compete more successfully than SHUSA;
changes in customer spending or savings behavior;
the ability of SHUSA and its third-party vendors to convert and maintain SHUSA’s data processing and related systems on a timely and acceptable basis and within projected cost estimates;
SHUSA's ability to control operational risks, data security breach risks and outsourcing risks, and the possibility of errors in quantitative models SHUSA uses to manage its business, including as a result of cyber-attacks, technological failure, human error, fraud or malice, and the possibility that SHUSA's controls will prove insufficient, fail or be circumvented;
the risk of a disruption of SHUSA's operational systems, including a breach of SHUSA's security systems or infrastructure or those of SHUSA's third-party vendors or other service providers, including as a result of cyber attacks, technological failure, human error, fraud or malice;
the impact of changes or potential changes in, and/or interpretation of financial services policies, laws and/or 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 has been 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;
changes to income tax laws and regulations;
acts of terrorism or domestic or foreign military conflicts; and acts of God, including natural disasters;
the costs and effects of regulatory or judicial proceedings; and
adverse publicity, and negative public opinion, whether specific to SHUSA or regarding other industry participants or industry-wide factors, or other reputational harm; and
SHUSA’s success in managing the risks involved in the foregoing.harm.
GLOSSARY OF ABBREVIATIONS AND ACRONYMS
SHUSA provides the following list of abbreviations and acronyms as a tool for the readers that are used in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Condensed Consolidated Financial Statements and the Notes to Condensed Consolidated Financial Statements.
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ABS: Asset-backed securities | | DCF: Discounted cash flow |
ACL: Allowance for credit losses | | DDFS: Dundon DFS LLC |
AFS: Available-for-sale | | DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act |
ALLL: Allowance for loan and lease losses | | Deka LawsuitDOJ:: Purported securities class action lawsuit filed against SC on August 26, 2014 Department of Justice
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Alt-A: Loans originated through brokers outside the Bank's geographic footprint, often lacking full documentation | | DFA: DRIVEDodd-Frank Wall Street Reform and Consumer Protection Act: Drive Auto Receivables Trust
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AOD:ASC Assurance of Discontinuance
| | DOJ: Department of Justice
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APR: Annual percentage rate: Accounting Standards Codification
| | DTI: Debt-to-income |
ASCASU: Accounting Standards CodificationUpdate
| | ECOA: Equal Credit Opportunity Act |
ASUATM:: Accounting Standards Update Automated teller machine
| | EPS: Enhanced Prudential Standards |
ATM:Bank Automated teller machine: Santander Bank, National Association
| | ETR: Effective tax rate |
BankBEA: Santander Bank, National AssociationBureau of Economic Analysis
| | Exchange Act: Securities Exchange Act of 1934, as amended |
BHC: Bank holding company | | FASB: Financial Accounting Standards Board |
BOLI: Bank-owned life insurance | | FBO: Foreign banking organization |
BSI: Banco Santander International | | FCA: Fiat Chrysler Automobiles US LLC |
BSPR: Banco Santander Puerto Rico | | FDIA: Federal Deposit Insurance Corporation Improvement Act |
CBP: Citizens Bank of Pennsylvania | | FDIC: Federal Deposit Insurance Corporation |
CCAR: Comprehensive Capital Analysis and Review | | Federal Reserve: Board of Governors of the Federal Reserve System |
CD: Certificate(s) of deposit | | FHLB: Federal Home Loan Bank |
CEVFCEF: Commercial equipment vehicle financingClosed end fund
| | FHLMC: Federal Home Loan Mortgage Corporation |
CET1CEO: Common equity Tier 1Chief Executive Officer
| | FICO®: Fair Isaac Corporation credit scoring model |
CFPBCEVF: Consumer Financial Protection BureauCommercial equipment vehicle financing
| | Final Rule: Rule implementing certain of the EPS mandated by Section 165 of the DFA |
CET1: Common equity Tier 1 | | FINRA: Financial Industrial Regulatory Authority |
CFPB: Consumer Financial Protection Bureau | | FNMA: Federal National Mortgage Association |
Change in Control: First quarter 2014 change in control and consolidation of SC | | FNMA: FOB:Federal National Mortgage Association Financial Oversight and Management Board of Puerto Rico
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Chrysler Agreement: Ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC, formerly Chrysler Group LLC, signed by SC | | FRB: Federal Reserve Bank |
Chrysler Capital: Trade name used in providing services under the Chrysler Agreement | | FTP: Funds transfer pricing
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CLTV: Combined loan-to-value
| | FVO: Fair value option |
CMO:CID Collateralized mortgage obligation: Civil investigative demand
| | GAAP: Accounting principles generally accepted in the United States of America |
CMP:CLTV: Civil monetary penaltyCombined loan-to-value
| | GAP: Guaranteed auto protection |
CMO: Collateralized mortgage obligation | | GCB: Global Corporate Banking |
CMP: Civil monetary penalty | | HFI: Held for investment |
CODM: Chief Operating Decision Maker | | HQLA:HTM High-quality liquid assets: Held to maturity
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Company: Santander Holdings USA, Inc. | | IHC: U.S. intermediate holding company |
Consent Order: Consent order signed by the Bank with the CFPB on July 14, 2016 regarding the Bank’s overdraft coverage practices for ATM and one-time debit card transactions | | IPO: Initial public offering |
COSO: Committee of Sponsoring Organizations | | IRS: Internal Revenue Service |
Covered Fund: hedge fund or a private equity fund under the Volcker Rule | | IRS:ISDA: Internal Revenue ServiceInternational Swaps and Derivatives Association, Inc.
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CPR: Changes in anticipated loan prepayment rates | | ISDA:LendingClub: International Swaps and Derivatives Association, Inc.LendingClub Corporation, a peer-to-peer personal lending platform company from which SC acquires loans under flow agreements
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CRA: Community Reinvestment Act | | IT:LCR: Information technologyLiquidity coverage ratio
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CRE: Commercial Real Estate | | |
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| | LHFI: Loans held-for-investment |
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Lending Club: LendingClub Corporation, a peer-to-peer personal lending platform company from which SC acquired loans under flow agreements
| | RV: Recreational vehicle
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LCR: Liquidity coverage ratio
| | RWA: Risk-weighted assets
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LHFI: Loans held-for-investment
| | S&P: Standard & Poor's
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LHFS: Loans held-for-sale | | Santander NY: BancoNew York branch of Santander S.A. |
LIBOR: London Interbank Offered Rate | | Santander BanCorp: Santander BanCorp and its subsidiaries |
LIHTC: Low Income Housing Tax Credit
| | Santander NY: New York branch of Banco Santander, S.A.
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LTD: Long-term debt
| | Santander UK: Santander UK plc
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LTV:LTD: Loan-to-valueLong-term debt
| | SBNA: Santander Bank, National Association |
MBS:LTV: Mortgage-backed securitiesLoan-to-value
| | SC: Santander Consumer USA Holdings Inc. and its subsidiaries |
Massachusetts AG:MBS: Massachusetts Attorney GeneralMortgage-backed securities
| | SC Common Stock: Common shares of SC |
MD&A: Management's Discussion and Analysis of Financial Condition and Results of Operations | | SCF: Statement of cash flows |
MSR: Mortgage servicing right | | SCRA: Servicemembers Civil Relief Act |
MVE: Market value of equity | | SDART: Santander Drive Auto Receivables Trust, a SC securitization platform |
NCI: Non-controlling interest | | SDGT: Specially Designated Global Terrorist |
NMD: Non-maturity deposits | | SEC: Securities and Exchange Commission |
NPL:NMTC Non-performing loan: New market tax credits
| | Securities Act: Securities Act of 1933, as amended |
NSFR:NPL: Net stable funding ratioNon-performing loan
| | Separation Agreement: Agreement entered into by Thomas Dundon, the former Chief Executive Officer of SC, DDFS, SC and Santander on July 2, 2015 |
NSFR: Net stable funding ratio | | SFS: Santander Financial Services, Inc. |
NYSE: New York Stock Exchange | | SFSSHUSA: Santander Financial Services,Holdings USA, Inc.
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OCC: Office of the Comptroller of the Currency | | SHUSASIS:: Santander Holdings USA,Investment Securities Inc.
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OEM: Original equipment manufacturer | | SIS: Santander Investment Securities Inc.
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OIS: Overnight indexed swap
| | SPAIN: Santander Prime Auto Issuing Note Trust, a securitization platform |
Order:OREO: OCC consent order signed by SBNA on January 26, 2012 which replaced a prior order signed by the Bank and other parties with the OTSOther real estate owned
| | SPE: Special purpose entity |
OREO:OTTI: Other real estate ownedOther-than-temporary impairment
| | Sponsor Holdings: Sponsor Auto Finance Holding Series LP |
OTTI:Parent Company: Other-than-temporary impairmentthe parent holding company of SBNA and other consolidated subsidiaries
| | SSLLC: Santander Securities LLC |
Parent Company:PROMESA the parent holding company of Santander Bank, National Association: Puerto Rico Management and other consolidated subsidiariesEconomic Stability Act
| | TDR:Subvention: Troubled debt restructuring
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Pledge Agreement: Agreement which, pursuantReimbursement of the finance provider by a manufacturer for the difference between a market loan or lease rate and the below-market rate given to the loan agreement, 29,598,506 shares of SC’s common stock owned by DDFS LLC are pledged as collateral under a related pledge agreement.
| | TLAC: Total loss-absorbing capacitycustomer.
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REIT: Real estate investment trust | | Trusts:TCJA Securitization trusts: Tax Cut and Jobs Act of 2017
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RIC: Retail installment contract | | VIE:TDR: Variable interest entityTroubled debt restructuring
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RV: Recreational vehicle | | TLAC: Total loss-absorbing capacity |
RWA: Risk-weighted assets | | Trusts: Securitization trusts |
S&P: Standard & Poor's | | UPB: Unpaid principal balance |
Santander: Banco Santander, S.A. | | VOE: Voting interestrights entity |
Santander BanCorp: Santander BanCorp and its subsidiaries | | |
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PART II. FINANCIAL INFORMATION
ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)(unaudited)
| | | June 30, 2017 | | December 31, 2016 | March 31, 2018 | | December 31, 2017 |
| (in thousands) | (in thousands) |
ASSETS | | | | | | |
Cash and cash equivalents | $ | 7,539,679 |
| | $ | 10,035,859 |
| $ | 7,900,607 |
| | $ | 6,519,967 |
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Investment securities: | | | | | | |
Available-for-sale at fair value | 18,399,590 |
| | 17,024,225 |
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Held-to-maturity (fair value of $1,549,011 and $1,635,413 as of June 30, 2017 and December 31, 2016, respectively) | 1,575,037 |
| | 1,658,644 |
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Trading securities | 10,245 |
| | 1,630 |
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Other investments | 723,201 |
| | 730,831 |
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Loans held-for-investment (1) (5) | 82,956,779 |
| | 85,819,785 |
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Allowance for loan and lease losses (5) | (3,953,608 | ) | | (3,814,464 | ) | |
Net loans held-for-investment | 79,003,171 |
| | 82,005,321 |
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Loans held-for-sale (2) | 2,503,811 |
| | 2,586,308 |
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Available-for-sale ("AFS") at fair value | | 13,321,594 |
| | 14,413,183 |
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Held-to-maturity ("HTM") (fair value of $2,797,698 and $1,773,938 as of March 31, 2018 and December 31, 2017, respectively) | | 2,877,357 |
| | 1,799,808 |
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Other investments (includes Trading securities of $3,024 and $1 as of March 31, 2018 and December 31, 2017, respectively) | | 765,041 |
| | 658,864 |
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Loans held-for-investment ("LHFI")(1) (5) | | 80,118,328 |
| | 80,740,852 |
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Allowance for loan and lease losses ("ALLL") (5) | | (3,853,209 | ) | | (3,911,575 | ) |
Net LHFI | | 76,265,119 |
| | 76,829,277 |
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Loans held-for-sale ("LHFS") (2) | | 1,960,695 |
| | 2,522,486 |
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Premises and equipment, net (3) | 909,227 |
| | 996,498 |
| 791,882 |
| | 849,061 |
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Operating lease assets, net (5)(6) | 9,914,860 |
| | 9,747,223 |
| 10,770,896 |
| | 10,474,308 |
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Accrued interest receivable (5) | 551,425 |
| | 599,321 |
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Equity method investments | 231,997 |
| | 255,344 |
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Goodwill | 4,454,925 |
| | 4,454,925 |
| 4,444,389 |
| | 4,444,389 |
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Intangible assets, net | 566,329 |
| | 597,244 |
| 520,468 |
| | 535,753 |
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Bank-owned life insurance | 1,783,348 |
| | 1,767,101 |
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Bank-owned life insurance ("BOLI") | | 1,804,133 |
| | 1,795,700 |
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Restricted cash (5) | 3,280,999 |
| | 3,016,948 |
| 3,810,962 |
| | 3,818,807 |
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Other assets (4) (5) | 3,307,851 |
| | 2,882,868 |
| 3,994,748 |
| | 3,632,427 |
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TOTAL ASSETS | $ | 134,755,695 |
| | $ | 138,360,290 |
| $ | 129,227,891 |
| | $ | 128,294,030 |
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LIABILITIES | | | | | | |
Accrued expenses and payables | $ | 3,046,733 |
| | $ | 2,821,712 |
| $ | 2,949,708 |
| | $ | 2,825,263 |
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Deposits and other customer accounts | 62,956,555 |
| | 67,240,690 |
| 61,841,175 |
| | 60,831,103 |
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Borrowings and other debt obligations (5) | 43,379,055 |
| | 43,524,445 |
| 38,350,245 |
| | 39,003,313 |
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Advance payments by borrowers for taxes and insurance | 177,538 |
| | 163,498 |
| 209,088 |
| | 159,321 |
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Deferred tax liabilities, net | 1,553,283 |
| | 1,420,315 |
| 1,037,909 |
| | 969,996 |
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Other liabilities (5) | 745,277 |
| | 810,872 |
| 996,685 |
| | 799,403 |
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TOTAL LIABILITIES | 111,858,441 |
| | 115,981,532 |
| 105,384,810 |
| | 104,588,399 |
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STOCKHOLDER'S EQUITY | | | | | | |
Preferred stock (no par value; $25,000 liquidation preference; 7,500,000 shares authorized; 8,000 shares outstanding at both June 30, 2017 and December 31, 2016) | 195,445 |
| | 195,445 |
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Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 shares outstanding at both June 30, 2017 and December 31, 2016) | 16,581,877 |
| | 16,599,497 |
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Preferred stock (no par value; $25,000 liquidation preference; 7,500,000 shares authorized; 8,000 shares outstanding at both March 31, 2018 and December 31, 2017) | | 195,445 |
| | 195,445 |
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Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 shares outstanding at both March 31, 2018 and December 31, 2017) | | 17,732,184 |
| | 17,723,010 |
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Accumulated other comprehensive loss | (151,813 | ) | | (193,208 | ) | (370,281 | ) | | (198,431 | ) |
Retained earnings | 3,315,083 |
| | 3,020,149 |
| 3,685,111 |
| | 3,462,674 |
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TOTAL SHUSA STOCKHOLDER'S EQUITY | 19,940,592 |
| | 19,621,883 |
| 21,242,459 |
| | 21,182,698 |
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Noncontrolling interest | 2,956,662 |
| | 2,756,875 |
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Noncontrolling interest ("NCI") | | 2,600,622 |
| | 2,522,933 |
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TOTAL STOCKHOLDER'S EQUITY | 22,897,254 |
| | 22,378,758 |
| 23,843,081 |
| | 23,705,631 |
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY | $ | 134,755,695 |
| | $ | 138,360,290 |
| $ | 129,227,891 |
| | $ | 128,294,030 |
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(1) Loans held-for-investment ("LHFI")LHFI includes $207.2$167.6 million and $217.2$186.5 million of loans recorded at fair value at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.
(2) RecordedIncludes $162.5 million and $197.7 million of loans recorded at the fair value option ("FVO") or lower of cost or fair value.at March 31, 2018 and December 31, 2017, respectively.
(3) Net of accumulated depreciation of $1.3$1.5 billion and $1.2$1.4 billion at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.
(4) Includes mortgage servicing rights ("MSRs") of $146.1$160.1 million and $146.6$146.0 million at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively, for which the Company has elected the FVO. See Note 8 to these Condensed Consolidated Financial Statements for additional information.
(5) The Company has interests in certain securitization trusts ("Trusts") that are considered variable interest entities ("VIEs") for accounting purposes. The Company consolidatesAt March 31, 2018 and December 31, 2017, LHFI included $22.1 billion and $22.7 billion, Operating leases assets, net included $10.6 billion and $10.2 billion, restricted cash included $2.4 billion and $2.0 billion, other assets included $810.5 million and $733.1 million, Borrowings and other debt obligations included $28.6 billion and $28.5 billion, and Other Liabilities included $0.2 billion and $0.2 billion of assets or liabilities that were included within VIEs, where it is deemed the primary beneficiary.respectively. See Note 6 to these Condensed Consolidated Financial Statements for additional information.
(6) Net of accumulated depreciation of $2.8$3.1 billion and $2.8$3.4 billion at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)(unaudited)
| | | Three-Month Period Ended June 30, | | Six-Month Period Ended June 30, | Three-Month Period Ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 |
| (in thousands) | (in thousands) |
INTEREST INCOME: | | | | | | | | | | |
Loans | $ | 1,868,918 |
| | $ | 1,925,269 |
| | $ | 3,707,856 |
| | $ | 3,866,116 |
| $ | 1,747,734 |
| | $ | 1,838,938 |
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Interest-earning deposits | 20,476 |
| | 14,473 |
| | 38,910 |
| | 28,507 |
| 32,513 |
| | 18,433 |
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Investment securities: | | | | | | | | | | |
Available-for-sale | 95,015 |
| | 81,268 |
| | 176,441 |
| | 174,973 |
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Held-to-maturity | 10,011 |
| | — |
| | 20,643 |
| | — |
| |
AFS | | 73,505 |
| | 81,427 |
|
HTM | | 17,064 |
| | 10,632 |
|
Other investments | 5,025 |
| | 8,399 |
| | 11,188 |
| | 17,583 |
| 5,248 |
| | 6,163 |
|
TOTAL INTEREST INCOME | 1,999,445 |
| | 2,029,409 |
| | 3,955,038 |
| | 4,087,179 |
| 1,876,064 |
| | 1,955,593 |
|
INTEREST EXPENSE: | | | | | | | | | | |
Deposits and other customer accounts | 58,824 |
| | 73,354 |
| | 120,818 |
| | 148,847 |
| 75,424 |
| | 61,993 |
|
Borrowings and other debt obligations | 298,872 |
| | 291,169 |
| | 589,907 |
| | 577,642 |
| 304,690 |
| | 291,035 |
|
TOTAL INTEREST EXPENSE | 357,696 |
| | 364,523 |
| | 710,725 |
| | 726,489 |
| 380,114 |
| | 353,028 |
|
NET INTEREST INCOME | 1,641,749 |
| | 1,664,886 |
| | 3,244,313 |
| | 3,360,690 |
| 1,495,950 |
| | 1,602,565 |
|
Provision for credit losses | 604,768 |
| | 613,767 |
| | 1,340,214 |
| | 1,512,229 |
| 502,534 |
| | 735,445 |
|
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES | 1,036,981 |
| | 1,051,119 |
| | 1,904,099 |
| | 1,848,461 |
| 993,416 |
| | 867,120 |
|
NON-INTEREST INCOME: | | | | | | | | | | |
Consumer and Commercial fees | 162,334 |
| | 180,320 |
| | 316,702 |
| | 360,997 |
| |
Mortgage banking income, net | 15,092 |
| | 11,546 |
| | 28,266 |
| | 27,896 |
| |
Bank-owned life insurance | 14,052 |
| | 16,437 |
| | 31,351 |
| | 30,165 |
| |
Consumer and commercial fees | | 138,561 |
| | 154,349 |
|
Lease income | 489,043 |
| | 456,946 |
| | 985,087 |
| | 877,802 |
| 540,896 |
| | 496,045 |
|
Miscellaneous income, net | 39,377 |
| | 24,528 |
| | 86,415 |
| | 62,844 |
| |
Miscellaneous income, net(1) | | 124,570 |
| | 77,505 |
|
TOTAL FEES AND OTHER INCOME | 719,898 |
| | 689,777 |
| | 1,447,821 |
| | 1,359,704 |
| 804,027 |
| | 727,899 |
|
Other-than-temporary impairment recognized in earnings | — |
| | (34 | ) | | — |
| | (44 | ) | |
Net gain on sale of investment securities | 9,049 |
| | 30,798 |
| | 9,569 |
| | 58,058 |
| |
Net gain recognized in earnings | 9,049 |
| | 30,764 |
| | 9,569 |
| | 58,014 |
| |
Net (losses)/gains on sale of investment securities | | (663 | ) | | 519 |
|
TOTAL NON-INTEREST INCOME | 728,947 |
| | 720,541 |
| | 1,457,390 |
| | 1,417,718 |
| 803,364 |
| | 728,418 |
|
GENERAL AND ADMINISTRATIVE EXPENSES: | | | | | | | | | | |
Compensation and benefits | 455,616 |
| | 420,319 |
| | 907,857 |
| | 855,951 |
| 469,406 |
| | 452,241 |
|
Occupancy and equipment expenses | 163,553 |
| | 151,453 |
| | 326,264 |
| | 297,284 |
| 159,340 |
| | 162,712 |
|
Technology expense | 66,502 |
| | 71,370 |
| | 122,275 |
| | 126,589 |
| |
Outside services | 59,003 |
| | 68,618 |
| | 107,278 |
| | 145,011 |
| |
Marketing expense | 36,754 |
| | 21,564 |
| | 68,218 |
| | 42,042 |
| |
Technology, outside service, and marketing expense | | 152,282 |
| | 135,509 |
|
Loan expense | 95,872 |
| | 104,261 |
| | 194,217 |
| | 206,891 |
| 96,814 |
| | 98,324 |
|
Lease expense | 369,240 |
| | 322,159 |
| | 728,032 |
| | 614,993 |
| 424,266 |
| | 358,792 |
|
Other administrative expenses | 95,096 |
| | 105,128 |
| | 197,334 |
| | 201,493 |
| 103,554 |
| | 102,238 |
|
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES | 1,341,636 |
| | 1,264,872 |
| | 2,651,475 |
| | 2,490,254 |
| 1,405,662 |
| | 1,309,816 |
|
OTHER EXPENSES: | | | | | | | | | | |
Amortization of intangibles | 15,424 |
| | 17,754 |
| | 30,915 |
| | 35,686 |
| 15,288 |
| | 15,491 |
|
Deposit insurance premiums and other expenses | 17,596 |
| | 13,505 |
| | 35,426 |
| | 39,017 |
| 16,761 |
| | 17,830 |
|
Loss on debt extinguishment | 3,991 |
| | 45,573 |
| | 10,740 |
| | 78,445 |
| 2,212 |
| | 6,749 |
|
Other miscellaneous expenses | 7,535 |
| | 1,286 |
| | 10,541 |
| | 5,563 |
| 3,601 |
| | 3,006 |
|
TOTAL OTHER EXPENSES | 44,546 |
| | 78,118 |
| | 87,622 |
| | 158,711 |
| 37,862 |
| | 43,076 |
|
INCOME BEFORE INCOME TAX PROVISION | 379,746 |
| | 428,670 |
| | 622,392 |
| | 617,214 |
| 353,256 |
| | 242,646 |
|
Income tax provision | 91,983 |
| | 153,256 |
| | 170,920 |
| | 232,117 |
| 95,321 |
| | 78,937 |
|
NET INCOME INCLUDING NONCONTROLLING INTEREST | 287,763 |
| | 275,414 |
| | 451,472 |
| | 385,097 |
| |
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST | 104,724 |
| | 108,472 |
| | 155,352 |
| | 179,747 |
| |
NET INCOME INCLUDING NCI | | 257,935 |
| | 163,709 |
|
LESS: NET INCOME ATTRIBUTABLE TO NCI | | 74,397 |
| | 50,628 |
|
NET INCOME ATTRIBUTABLE TO SANTANDER HOLDINGS USA, INC. | $ | 183,039 |
| | $ | 166,942 |
| | $ | 296,120 |
| | $ | 205,350 |
| $ | 183,538 |
| | $ | 113,081 |
|
(1) Includes impact of $70.5 million and $66.1 million in 2018 and 2017 of lower of cost or market adjustments on a portion of the Company's LHFS portfolio.
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEINCOME/(LOSS)
(Unaudited)(unaudited)
|
| | | | | | | | | | | | | | | |
| Three-Month Period Ended June 30, | | Six-Month Period Ended June 30, |
| 2017 | | 2016 | | 2017 | | 2016 |
| (in thousands) |
NET INCOME INCLUDING NONCONTROLLING INTEREST | $ | 287,763 |
| | $ | 275,414 |
| | $ | 451,472 |
| | $ | 385,097 |
|
OTHER COMPREHENSIVE INCOME, NET OF TAX | | | | | | | |
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments, net of tax (1) | 6,523 |
| | (14,772 | ) | | 4,036 |
| | (47,300 | ) |
Net unrealized gains on available-for-sale investment securities, net of tax | 15,349 |
| | 33,675 |
| | 36,318 |
| | 179,204 |
|
Pension and post-retirement actuarial gains, net of tax | 556 |
| | 565 |
| | 1,041 |
| | 1,130 |
|
TOTAL OTHER COMPREHENSIVE INCOME, NET OF TAX | 22,428 |
| | 19,468 |
| | 41,395 |
| | 133,034 |
|
COMPREHENSIVE INCOME | 310,191 |
| | 294,882 |
| | 492,867 |
| | 518,131 |
|
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST | 104,724 |
| | 108,472 |
| | 155,352 |
| | 179,747 |
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA | $ | 205,467 |
| | $ | 186,410 |
| | $ | 337,515 |
| | $ | 338,384 |
|
|
| | | | | | | |
| Three-Month Period Ended March 31, |
| 2018 | | 2017 |
| (in thousands) |
NET INCOME INCLUDING NCI | $ | 257,935 |
| | $ | 163,709 |
|
OTHER COMPREHENSIVE INCOME, NET OF TAX | | | |
Net unrealized losses on cash flow hedge derivative financial instruments, net of tax (1) | (17,365 | ) | | (2,487 | ) |
Net unrealized (losses) / gains on AFS investment securities, net of tax (2) | (110,929 | ) | | 20,969 |
|
Pension and post-retirement actuarial (losses) / gains, net of tax | (4,462 | ) | | 485 |
|
TOTAL OTHER COMPREHENSIVE LOSS, NET OF TAX | (132,756 | ) | | 18,967 |
|
COMPREHENSIVE INCOME | 125,179 |
| | 182,676 |
|
NET INCOME ATTRIBUTABLE TO NCI | 74,397 |
| | 50,628 |
|
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA | $ | 50,782 |
| | $ | 132,048 |
|
(1) Excludes $3.2$4.1 million and $0.2$3.0 million of other comprehensive lossincome attributable to non-controlling interest ("NCI")NCI for the three-month period ended March 31, 2018 and six-month periods ended June 30, 2017, respectively, comparedrespectively.
(2) Excludes $39.1 million impact of other comprehensive income reclassified to $6.0 million and $21.7 million forRetained earnings as a result of the corresponding periods in 2016.adoption of ASU 2018-02.
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
FOR THE SIX-MONTHTHREE-MONTH PERIODS ENDED JUNE 30,MARCH 31, 2018 AND 2017 AND 2016(in thousands)
(Unaudited)
(in thousands)(unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares Outstanding | | Preferred Stock | | Common Stock and Paid-in Capital | | Accumulated Other Comprehensive (Loss)/Income | | Retained Earnings | | Noncontrolling Interest | | Total Stockholder's Equity |
Balance, January 1, 2016 | 530,391 |
| | $ | 270,445 |
| | $ | 16,629,822 |
| | $ | (170,530 | ) | | $ | 2,672,393 |
| | $ | 2,444,970 |
| | $ | 21,847,100 |
|
Comprehensive income attributable to Santander Holdings USA, Inc. | — |
| | — |
| | — |
| | 133,034 |
| | 205,350 |
| | — |
| | 338,384 |
|
Other comprehensive loss attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | (21,726 | ) | | (21,726 | ) |
Net income attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | 179,747 |
| | 179,747 |
|
Impact of Santander Consumer USA Holdings Inc. stock option activity | — |
| | — |
| | 69 |
| | — |
| | — |
| | 10,572 |
| | 10,641 |
|
Redemption of Preferred Stock | | | (75,000 | ) | | — |
| | — |
| | — |
| | — |
| | (75,000 | ) |
Capital contribution from Shareholder | — |
| | — |
| | 100 |
| | — |
| | — |
| | — |
| | 100 |
|
Stock issued in connection with employee benefit and incentive compensation plans | — |
| | — |
| | 395 |
| | — |
| | — |
| | — |
| | 395 |
|
Dividends paid on preferred stock | — |
| | — |
| | — |
| | — |
| | (7,829 | ) | | — |
| | (7,829 | ) |
Balance, June 30, 2016 | 530,391 |
| | $ | 195,445 |
| | $ | 16,630,386 |
| | $ | (37,496 | ) | | $ | 2,869,914 |
| | $ | 2,613,563 |
| | $ | 22,271,812 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Shares Outstanding | | Preferred Stock | | Common Stock and Paid-in Capital | | Accumulated Other Comprehensive (Loss)/Income | | Retained Earnings | | Noncontrolling Interest | | Total Stockholder's Equity |
Balance, January 1, 2017 | 530,391 |
| | $ | 195,445 |
| | $ | 16,599,497 |
| | $ | (193,208 | ) | | $ | 3,020,149 |
| | $ | 2,756,875 |
| | $ | 22,378,758 |
|
Cumulative-effect adjustment upon adoption of ASU 2016-09 (Note 1) | — |
| | — |
| | (26,456 | ) | | — |
| | 14,764 |
| | 37,401 |
| | 25,709 |
|
Comprehensive income attributable to Santander Holdings USA, Inc. | — |
| | — |
| | — |
| | 41,395 |
| | 296,120 |
| | — |
| | 337,515 |
|
Other comprehensive loss attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | (166 | ) | | (166 | ) |
Net income attributable to noncontrolling interest | — |
| | — |
| | — |
| | — |
| | — |
| | 155,352 |
| | 155,352 |
|
Impact of Santander Consumer USA Holdings Inc. stock option activity | — |
| | — |
| | — |
| | — |
| | — |
| | 7,200 |
| | 7,200 |
|
Capital contribution from Shareholder | — |
| | — |
| | 9,000 |
| | — |
| | — |
| | — |
| | 9,000 |
|
Stock issued in connection with employee benefit and incentive compensation plans | — |
| | — |
| | (164 | ) | | — |
| | — |
| | — |
| | (164 | ) |
Dividends declared not yet paid on common stock | — |
| | — |
| | — |
| | — |
| | (5,000 | ) | | — |
| | (5,000 | ) |
Dividends declared not yet paid on preferred stock | — |
| | — |
| | — |
| | — |
| | (3,650 | ) | | — |
| | (3,650 | ) |
Dividends paid on preferred stock | — |
| | — |
| | — |
| | — |
| | (7,300 | ) | | — |
| | (7,300 | ) |
Balance, June 30, 2017 | 530,391 |
| | $ | 195,445 |
| | $ | 16,581,877 |
| | $ | (151,813 | ) | | $ | 3,315,083 |
| | $ | 2,956,662 |
| | $ | 22,897,254 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Common Shares Outstanding | | Preferred Stock | | Common Stock and Paid-in Capital | | Accumulated Other Comprehensive (Loss)/Income | | Retained Earnings | | Noncontrolling Interest | | Total Stockholder's Equity |
Balance, January 1, 2017 | 530,391 |
| | 195,445 |
| | 16,599,497 |
| | (193,208 | ) | | 3,020,149 |
| | 2,756,875 |
| | 22,378,758 |
|
Cumulative effect adjustment upon adoption of ASU 2016-09 | — |
| | — |
| | (26,456 | ) | | — |
| | 14,764 |
| | 37,401 |
| | 25,709 |
|
Comprehensive (loss)/income attributable to SHUSA | — |
| | — |
| | — |
| | 18,967 |
| | 113,081 |
| | — |
| | 132,048 |
|
Other comprehensive income attributable to NCI | — |
| | — |
| | — |
| | — |
| | — |
| | 2,990 |
| | 2,990 |
|
Net income attributable to NCI | — |
| | — |
| | — |
| | — |
| | — |
| | 50,628 |
| | 50,628 |
|
Impact of SC stock option activity | — |
| | — |
| | — |
| | — |
| | — |
| | 4,431 |
| | 4,431 |
|
Capital from shareholder | — |
| | — |
| | 9,000 |
| | — |
| | — |
| | — |
| | 9,000 |
|
Stock issued in connection with employee benefit and incentive compensation plans | — |
| | — |
| | (164 | ) | | — |
| | — |
| | — |
| | (164 | ) |
Dividends paid on preferred stock | — |
| | — |
| | — |
| | — |
| | (3,650 | ) | | — |
| | (3,650 | ) |
Balance, March 31, 2017 | 530,391 |
| | $ | 195,445 |
| | $ | 16,581,877 |
| | $ | (174,241 | ) | | $ | 3,144,344 |
| | $ | 2,852,325 |
| | $ | 22,599,750 |
|
| | | | | | | | | | | | | |
Balance, January 1, 2018 | 530,391 |
| | 195,445 |
| | 17,723,010 |
| | (198,431 | ) | | 3,462,674 |
| | 2,522,933 |
| | 23,705,631 |
|
Cumulative-effect adjustment upon adoption of new accounting standards and other (Note 1) | — |
| | — |
| | — |
| | (39,094 | ) | | 47,549 |
| | — |
| | 8,455 |
|
Comprehensive income attributable to SHUSA | — |
| | — |
| | — |
| | (132,756 | ) | | 183,538 |
| | — |
| | 50,782 |
|
Other comprehensive income attributable to NCI | — |
| | — |
| | — |
| | — |
| | — |
| | 4,079 |
| | 4,079 |
|
Net income attributable to NCI | — |
| | — |
| | — |
| | — |
| | — |
| | 74,397 |
| | 74,397 |
|
Contribution from shareholder and related tax impact (Note17) | — |
| | — |
| | 9,174 |
| | — |
| | — |
| | — |
| | 9,174 |
|
Impact of stock issued in connection with employee benefit and incentive compensation plans | — |
| | — |
| | — |
| | — |
| | — |
| | 4,961 |
| | 4,961 |
|
Dividends paid on common stock | — |
| | — |
| | — |
| | — |
| | (5,000 | ) | | — |
| | (5,000 | ) |
Dividends paid to NCI | — |
| | — |
| | — |
| | — |
| | — |
| | (5,748 | ) | | (5,748 | ) |
Dividends paid on preferred stock | — |
| | — |
| | — |
| | — |
| | (3,650 | ) | | — |
| | (3,650 | ) |
Balance, March 31, 2018 | 530,391 |
| | $ | 195,445 |
|
| $ | 17,732,184 |
| | $ | (370,281 | ) | | $ | 3,685,111 |
| | $ | 2,600,622 |
| | $ | 23,843,081 |
|
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)(unaudited)
| |
| Six-Month Period Ended June 30, | Three-Month Period Ended March 31, |
| 2017 |
| 2016 | 2018 |
| 2017 |
| | | | | | |
| (in thousands) | (in thousands) |
CASH FLOWS FROM OPERATING ACTIVITIES: | | | | | | |
Net income including noncontrolling interest | $ | 451,472 |
| | $ | 385,097 |
| |
Net income including NCI | | $ | 257,935 |
| | $ | 163,709 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Provision for credit losses | 1,340,214 |
| | 1,512,229 |
| 502,534 |
| | 735,445 |
|
Deferred tax expense | 162,613 |
| | 177,801 |
| 84,567 |
| | 75,276 |
|
Depreciation, amortization and accretion(2) | 436,025 |
| | 452,321 |
| 437,506 |
| | 349,747 |
|
Net loss on sale of loans | 169,072 |
| | 175,329 |
| 66,370 |
| | 77,753 |
|
Net gain on sale of investment securities | (9,569 | ) | | (58,058 | ) | |
Net loss/(gain) on sale of investment securities | | 663 |
| | (519 | ) |
Net gain on sale of operating leases | (100 | ) | | (399 | ) | (131 | ) | | (319 | ) |
Other-than-temporary impairment ("OTTI") recognized in earnings | — |
| | 44 |
| |
Loss on debt extinguishment | 10,740 |
| | 78,445 |
| 2,212 |
| | 6,749 |
|
Net (gain)/loss on real estate owned and premises and equipment | (4,910 | ) | | 4,639 |
| |
Net loss on real estate owned and premises and equipment | | 1,476 |
| | 2,285 |
|
Stock-based compensation | (736 | ) | | 9,408 |
| 274 |
| | (1,406 | ) |
Equity loss on equity method investments | 1,506 |
| | 5,140 |
| 2,164 |
| | 2,368 |
|
Originations of loans held-for-sale, net of repayments | (2,438,217 | ) | | (3,383,263 | ) | |
Purchases of loans held-for-sale | (3,217 | ) | | (2,912 | ) | |
Proceeds from sales of loans held-for-sale | 2,462,255 |
| | 2,434,399 |
| |
Originations of LHFS, net of repayments | | (1,225,975 | ) | | (1,209,200 | ) |
Purchases of LHFS | | (550 | ) | | (1,450 | ) |
Proceeds from sales of LHFS | | 1,789,969 |
| | 1,559,128 |
|
Purchases of trading securities | (10,331 | ) | | (335,950 | ) | (3,776 | ) | | (17,756 | ) |
Proceeds from sales of trading securities | 13,640 |
| | 349,755 |
| 1,640 |
| | 9,145 |
|
Net change in: | | | | | | |
Revolving personal loans | (78,697 | ) | | (310,103 | ) | 5,723 |
| | (5,064 | ) |
Other assets and bank-owned life insurance | (240,130 | ) | | (219,456 | ) | |
Other assets and BOLI | | (305,866 | ) | | (403,187 | ) |
Other liabilities | (29,872 | ) | | 241,570 |
| 346,354 |
| | 272,351 |
|
NET CASH PROVIDED BY OPERATING ACTIVITIES | 2,231,758 |
| | 1,516,036 |
| 1,963,089 |
| | 1,615,055 |
|
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES: | | | | | | |
Proceeds from sales of available-for-sale investment securities | 997,306 |
| | 6,755,299 |
| |
Proceeds from prepayments and maturities of available-for-sale investment securities | 2,552,576 |
| | 3,652,101 |
| |
Purchases of available-for-sale investment securities | (5,144,019 | ) | | (8,683,528 | ) | |
Proceeds from repayments and maturities of held to maturity investment securities | 78,696 |
| | — |
| |
Proceeds from sales of AFS investment securities | | 39,446 |
| | — |
|
Proceeds from prepayments and maturities of AFS investment securities | | 605,286 |
| | 1,311,490 |
|
Purchases of AFS investment securities | | (840,948 | ) | | (2,841,388 | ) |
Proceeds from prepayments and maturities of HTM investment securities | | 86,097 |
| | 35,121 |
|
Proceeds from sales of other investments | 117,081 |
| | 290,449 |
| 25,946 |
| | 64,469 |
|
Purchases of other investments | (88,987 | ) | | (94,461 | ) | (109,576 | ) | | (13,199 | ) |
Net change in restricted cash | (278,509 | ) | | (649,992 | ) | |
Proceeds from sales of LHFI | 288,805 |
| | 1,137,359 |
| 681,754 |
| | 257,943 |
|
Proceeds from the sales of equity method investments | 17,717 |
| | — |
| — |
| | 17,717 |
|
Distributions from equity method investments | 4,305 |
| | 2,918 |
| 1,111 |
| | 1,144 |
|
Contributions to equity method and other investments | (35,673 | ) | | (14,261 | ) | (23,832 | ) | | (11,660 | ) |
Proceeds from settlements of BOLI policies | | 6,043 |
| | 12,426 |
|
Purchases of LHFI | (136,550 | ) | | (96,491 | ) | (225,226 | ) | | (64,046 | ) |
Net change in loans other than purchases and sales | 1,684,297 |
| | (2,011,658 | ) | (421,195 | ) | | 1,410,582 |
|
Purchases and originations of operating leases | (3,055,983 | ) | | (3,323,553 | ) | (2,155,881 | ) | | (1,615,629 | ) |
Proceeds from the sale and termination of operating leases | 2,133,433 |
| | 1,128,297 |
| |
Proceeds from the sale and termination of operating leases(1) | | 1,164,362 |
| | 940,879 |
|
Manufacturer incentives | 551,100 |
| | 786,760 |
| 213,784 |
| | 326,946 |
|
Proceeds from sales of real estate owned and premises and equipment | 63,485 |
| | 37,539 |
| 12,017 |
| | 14,187 |
|
Purchases of premises and equipment | (58,404 | ) | | (165,840 | ) | (38,412 | ) | | (16,159 | ) |
NET CASH USED IN INVESTING ACTIVITIES | (309,324 | ) | | (1,249,062 | ) | (979,224 | ) | | (169,177 | ) |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | | | | | | |
Net change in deposits and other customer accounts | (4,284,135 | ) | | 615,980 |
| 1,010,072 |
| | (639,456 | ) |
Net change in short-term borrowings | 1,677,414 |
| | (114,038 | ) | 54,155 |
| | (59,595 | ) |
Net proceeds from long-term borrowings | 26,834,482 |
| | 27,502,180 |
| 11,482,934 |
| | 15,124,445 |
|
Repayments of long-term borrowings | (26,815,449 | ) | | (24,933,677 | ) | (11,751,288 | ) | | (15,525,950 | ) |
Proceeds from Federal Home Loan Bank ("FHLB") advances (with terms greater than 3 months) | 1,000,000 |
| | 3,050,000 |
| |
Repayments of FHLB advances (with terms greater than 3 months) | (2,850,000 | ) | | (7,913,445 | ) | (450,000 | ) | | (1,600,000 | ) |
Net change in advance payments by borrowers for taxes and insurance | 14,040 |
| | 21,790 |
| 49,767 |
| | 47,893 |
|
Cash dividends paid to preferred stockholders | (7,300 | ) | | (7,829 | ) | (3,650 | ) | | (3,650 | ) |
Dividends paid on common stock | | (5,000 | ) | | — |
|
Dividends paid to noncontrolling interest | | (5,748 | ) | | — |
|
Proceeds from the issuance of common stock | 3,334 |
| | 1,654 |
| 1,947 |
| | 2,473 |
|
Capital contribution from shareholder | 9,000 |
| | — |
| 5,741 |
| | 9,000 |
|
Redemption of preferred stock | — |
| | (75,000 | ) | |
NET CASH USED IN FINANCING ACTIVITIES | (4,418,614 | ) | | (1,852,385 | ) | |
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES | | 388,930 |
| | (2,644,840 | ) |
| | | | | | |
NET DECREASE IN CASH AND CASH EQUIVALENTS | (2,496,180 | ) | | (1,585,411 | ) | |
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 10,035,859 |
| | 9,447,007 |
| |
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 7,539,679 |
| | $ | 7,861,596 |
| |
| | | | |
NET INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (2) | | 1,372,795 |
| | (1,198,962 | ) |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD (2) | | 10,338,774 |
| | 13,052,807 |
|
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (2) | | $ | 11,711,569 |
| | $ | 11,853,845 |
|
| | | | | | |
NON-CASH TRANSACTIONS | | | | | | |
Loans transferred to other real estate owned | 9,048 |
| | 35,873 |
| |
Loans transferred from held-for-investment to held-for-sale, net | 30,135 |
| | 1,068,447 |
| |
Loans transferred to/(from) other real estate owned | | (25,435 | ) | | (3,717 | ) |
Loans transferred from/(to) held-for-investment ("HFI")(from)/to held-for-sale, net ("HFS") | | 700,160 |
| | (18,992 | ) |
Unsettled purchases of investment securities | 289,569 |
| | — |
| — |
| | 19,284 |
|
Unsettled sales of investment securities | 308,819 |
| | — |
| |
Residential loan securitizations | 13,641 |
| | 13,691 |
| 1,633 |
| | 9,272 |
|
Unsettled clean-up calls | (74,405 | ) | | — |
| |
AFS investment securities transferred to held to maturity investment securities | | 1,167,189 |
| | — |
|
(1) March 31, 2017 cash flow activity has been updated for the operating lease cash flow classification correction. Refer to Note 1 - Basis of Presentation and Accounting Policies for additional information.
(2) The beginning, ending and net change balances for the periods ended March 31, 2018 and March 31, 2017 include restricted cash balances of $3.8 billion, $3.8 billion, and $7.8 million; and $3.0 billion, $3.3 billion, and $0.3 billion, respectively.
See accompanying notes to unaudited Condensed Consolidated Financial Statements.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Introduction
Santander Holdings USA, Inc. ("SHUSA" or "the Company") is the parent company (the "Parent Company") of Santander Bank, National Association, (the "Bank" or "SBNA"), a national banking association; Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SC"), a consumer finance company focused on vehicle finance; Santander BanCorp (together with its subsidiaries, "Santander BanCorp"), a financial holding company headquartered in Puerto Rico that offers a full range of financial services through its wholly-owned banking subsidiary, Banco Santander Puerto Rico;Rico ("BSPR"); Santander Securities LLC ("SSLLC"), a broker-dealer headquartered in Boston, Massachusetts; Banco Santander International ("BSI"), an Edge Act corporation located in Miami, Florida, that offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; and Santander Investment Securities Inc. ("SIS"), a registered broker-dealer located in New York providing services in investment banking, institutional sales, and trading and offering research reports of Latin American and European equity and fixed income securities; as well as several other subsidiaries. SHUSA is headquartered in Boston and the Bank's mainhome office is in Wilmington, Delaware. SHUSA is a wholly-owned subsidiary of Banco Santander, S.A. ("Santander"). The Parent Company's two largest subsidiaries by asset size and revenue are the Bank and SC.
The Bank’s primary business consists of attracting deposits and providing other retail banking services through its network of retail branches, and originating small business loans, middle market, large and global commercial loans, multifamily loans, residential mortgage loans, home equity loans and lines of credit, and auto and other consumer loans throughout the Mid-Atlantic and Northeastern areas of the United States, focused throughout Pennsylvania, New Jersey, New York, New Hampshire, Massachusetts, Connecticut, Rhode Island, and Delaware. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios.
SC is a specialized consumer finance company focused on vehicle finance and third-party servicing. SC's primary business is the indirect origination and securitization of retail installment contracts ("RICs") principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to subprime retail consumers.
In conjunction with a ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC ("FCA") that became effective May 1, 2013 (the "Chrysler Agreement"), SC offers a full spectrum of auto financing products and services to FCA customers and dealers under the Chrysler Capital brand. These products and services include consumer RICs and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. Refer to Note 1416 for additional details.
As of June 30, 2017,March 31, 2018, SC was owned approximately 58.7%68.0% by SHUSA and 41.3%32.0% by noncontrollingother shareholders. During 2017, SHUSA increased its ownership in SC; refer to additional details in Note 21 of the Company's Annual Report on Form 10-K as of December 31, 2017. Common shares of SC ("SC Common Stock") are listed on the New York Stock Exchange (the "NYSE") under the trading symbol "SC."
Intermediate Holding Company ("IHC")
On February 18, 2014, the Board of Governors of the Federal Reserve System (the "Federal Reserve") issued the final rule implementing certain of the enhanced prudential standards mandated by Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "DFA")(the “Final Rule") to strengthen regulatory oversight of foreign banking organizations ("FBOs"). Under the Final Rule, FBOs with over $50 billion of U.S. non-branch assets, including Santander, were required to consolidate U.S. subsidiary activities under an IHC. Due to its U.S. non-branch total consolidated asset size, Santander is subject to the Final Rule. As a result of this rule, Santander transferred substantially all of its equity interests in U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. These subsidiaries included Santander BanCorp, BSI, SIS and SSLLC, as well as several other subsidiaries. Additionally, effective July 1, 2017, Santander transferred Santander Financial Services, Inc. ("SFS") to the IHC. Refer to Note 18 for additional details of this transfer.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Basis of Presentation
These Condensed Consolidated Financial Statements include the assets, liabilities, revenues and expenses accounts of the Company and its consolidated subsidiaries, including the Bank, SC, and certain special purpose financing trusts utilized in financing transactions that are considered VIEs. The Company generally consolidates VIEs for which it is deemed to be the primary beneficiary and generally consolidates voting interest entities ("VOEs") in which the Company has a controlling financial interest. The CondensedAll significant intercompany balances and transactions have been eliminated in consolidation. These Consolidated Financial Statements have been prepared by the Company pursuant to Securities and Exchange Commission ("SEC") regulations. 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, inIn the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments of a normal and recurring nature necessary for a fair statement of the Condensed Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Income, Statements of Stockholder's Equity and Statements of Cash Flows ("SCF") for the periods indicated, and contain adequate disclosure for the fair statement of this interim financial information.
CorrectionCorrections to Previously Reported Amounts
We have made certain corrections to previously disclosed amounts to correct for errors related to the classification of Deferred Taxcash flows from the sale of automobiles returned to the Company at the end of a lease term.
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Operating Lease Cash Flow Classification
Beginning December 31, 2015June 30, 2014 through March 31,September 30, 2017, net deferred tax assets and net deferred tax liabilitiescash flows from the sale of entities filing separate U.S. Federal tax returnsautomobiles returned to the Company at the end of a lease term were improperly offsetincorrectly recorded in the Company’s Consolidated Balance Sheet. As a result,SCF, resulting in an overstatement of cash flows from investing activities (Proceeds from the Company understated Deferred Tax Assets, Total Assets, Deferred Tax Liabilitiessale and Total Liabilities by $981.7 million, $989.8 million, $791.2 million, $756.1 million, $743.0 million,termination of operating leases) and $804.5an understatement of cash flows from operating activities (Depreciation, amortization and accretion) in the amount of $149.9 million for the periodsthree-months ended March 31, 2017, December 31, 2016, September 30, 2016, June 30, 2016, March 31, 2016,2017. There was no net impact to cash provided by financing activities. The misclassification errors did not impact the net change in cash and December 31, 2015, respectively.
The Company has determined that the impact of the misclassification of deferred tax balances in the Consolidated Balance Sheets for the periods ended March 31, 2017, December 31, 2016, September 30, 2016, June 30, 2016, March 31, 2016,cash equivalents, total cash and December 31, 2015 and the corresponding impact of an overstatement of previously disclosed capital ratios ranging from 8 bps to 17 bps are immaterial for all periods.
cash equivalents, net income, or any other operating measure. There was no impact to the Company’sCompany's Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Other Comprehensive Income, or Consolidated Statements of Equity or Consolidated Statement of Cash Flows for any period.
period as a result of the Consolidated SCF error. Management has evaluated the errors and determined they are immaterial to previously issued financial statements. The Company has corrected the balancesbalance described above as of Decemberfor the three-months ended March 31, 20162017 in its Consolidated Balance SheetSCF included herein. In future filings, the Company will correct the deferred tax classification balances and capital ratioConsolidated SCF disclosures for the comparative periods described above when presented.
Significant Accounting Policies
Management has identified (i) accounting for consolidation, (ii) business combinations, (iii) the allowance for loan losses for originated and purchased loans and the reserve for unfunded lending commitments, (iv) loan modifications(ii) valuation of automotive leases and troubled debt restructurings (“TDRs”), (v)residuals, (iii) accretion of discounts and subvention on RICs, (iv) goodwill, (vi) derivativesfair value of financial instruments, and hedging activities, and (vii)(v) income taxes as the Company's significant accounting policies and estimates, in that they are important to the portrayal of the Company's financial condition, results of operations and cash flows and the accounting estimates related thereto require management's most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. These Condensed Consolidated Financial Statements should be read in conjunction with the Company's December 31, 2016 Annual Report on Form 10-K.10-K for the year ended December 31, 2017.
As of June 30, 2017,March 31, 2018, with the exception of the items noted in the section captioned "Recently Adopted Accounting Policies"Standards" below, there have been no significant changes to the Company's accounting policies as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2016.2017.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Recently Adopted Accounting PoliciesStandards
Since January 1, 2017,2018, the Company adopted the following Financial Accounting Standards Board ("FASB") Accounting Standards Updates ("(“ASUs"):
ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as amended. This ASU requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It includes a five-step process to assist an entity in achieving the main principles of revenue recognition under ASC 606. Because the ASU does not apply to revenue associated with leases and financial instruments (including loans, securities, and derivatives), it did not have a material impact on the elements of the Company's Consolidated Statements of Operations most closely associated with leases and financial instruments (such as interest income, interest expense and securities gains and losses).
The Company adopted this ASU as of January 1, 2018 using the modified retrospective method of transition, resulting in an immaterial cumulative-effect adjustment recorded to opening retained earnings for the current period. The adoption of this ASU did not result in material changes in the timing of the Company's revenue recognition, but requires gross presentation of certain costs previously offset against revenue. This change in presentation is reflected in the current period and will increase both noninterest revenue and noninterest expense for the Company. The increase is predominantly associated with certain distribution costs on wealth management products (historically offset against Miscellaneous income), with the remainder of the increase associated with certain underwriting service costs (historically offset against Miscellaneous income). Refer to Note 15 for additional details. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue recognition standard, while prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting.
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
The cumulative-effect of the changes made to our January 1, 2018 Condensed Consolidated Balance Sheet for the adoption of the new revenue recognition standard were as follows:
|
| | | | | | | | | | | | |
(in thousands) | | Balance at December 31, 2017 | | Adjustments | | Balance at January 1, 2018 |
Assets - LHFI | | $ | 80,740,852 |
| | $ | 5,514 |
| | $ | 80,746,366 |
|
Other assets | | 3,632,427 |
| | (3,592 | ) | | 3,628,835 |
|
Total Assets | | 128,294,030 |
| | 1,922 |
| | 128,295,952 |
|
| | | | | | |
Liabilities - Other liabilities | | 799,403 |
| | (1,378 | ) | | 798,025 |
|
Total Liabilities | | 104,588,399 |
| | (1,378 | ) | | 104,587,021 |
|
| | | | | | |
Stockholders' Equity - Retained earnings | | 3,462,674 |
| | 3,300 |
| | 3,465,974 |
|
Total Stockholders' Equity | | 23,705,631 |
| | 3,300 |
| | 23,708,931 |
|
The following discloses the impact on the Company's Condensed Balance Sheet at March 31, 2018 and the Condensed Statement of Operations for the three-months ended March 31, 2018 for the adoption of this new accounting standard:
|
| | | | | | | | |
| | March 31, 2018 |
(in thousands) | | As Reported | | Balance Without Adoption |
Assets - LHFI | | $ | 80,118,328 |
| | $ | 80,113,022 |
|
Other assets | | 3,994,748 |
| | 3,998,267 |
|
Total assets | | 129,227,891 |
| | 129,226,104 |
|
| | | | |
Liabilities - Other liabilities | | 996,685 |
| | 998,063 |
|
Total Liabilities | | 105,384,810 |
| | 105,386,188 |
|
| | | | |
Stockholders' Equity - Retained earnings | | 3,685,111 |
| | 3,681,946 |
|
Total Stockholders' Equity | | 23,843,081 |
| | 23,839,916 |
|
|
| | | | | | | | |
| | Three-Month Period Ended March 31, 2018 |
(in thousands) | | As Reported | | Balance Without Adoption |
Non-interest income | | | | |
Consumer and commercial fees | | $ | 138,561 |
| | $ | 137,893 |
|
Miscellaneous income/(loss) | | 124,570 |
| | 118,882 |
|
Total non-interest income | | 803,364 |
| | 797,008 |
|
General and administrative expense | | | | |
Technology, outside service, and marketing expense | | 152,282 |
| | 150,111 |
|
Loan expense | | 96,814 |
| | 99,193 |
|
Other administrative expenses | | 103,554 |
| | 96,782 |
|
Total general and administrative expenses | | 1,405,662 |
| | 1,399,098 |
|
Income before income tax provision | | 353,256 |
| | 353,464 |
|
Income tax provision | | 95,321 |
| | 95,394 |
|
Net income | | $ | 257,935 |
| | $ | 258,070 |
|
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
ASU 2016-05, 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, as amended. This new guidance amends the presentation and accounting for certain financial instruments, including liabilities measured at fair value under the FVO and equity investments. The guidance also updates fair value presentation and disclosure requirements for financial instruments measured at amortized cost. The Company adopted this standard on January 1, 2018, and it did not have a material impact on the Company's financial position or results of operations. As a result of the adoption of this standard, the Company reclassified approximately $10.0 million of equity securities from Investments AFS to Other Investments on January 1, 2018. Future changes in the fair value of the Company's equity securities will be recognized in the Condensed Consolidated Statements of Operations rather than Other comprehensive Income.
ASU 2017-12, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing HedgeTargeted Improvements to Accounting Relationships. for Hedging Activities. This new guidance clarifies that aamends the hedge accounting model to enable entities to better portray their risk management activities in their financial statements. The amendments expand an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness, and generally requires the entire change in the counterparties to a derivative contract (i.e., a novation), in and of itself does not require the de-designationfair value of a hedging relationship. An entity will, however, still needinstrument to evaluate whether itbe presented in the same income statement line in which the earnings effect of the hedged item is probable thatreported. The new guidance is effective for public companies for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company adopted this standard in the counterparty will perform underfirst quarter of 2018. It did not have a material impact on the contract as partopening balance of its ongoing effectiveness assessmentretained earnings for hedge accounting.the cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness. Refer to Note 12 for further discussion of the Company's derivatives.
ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cut and Jobs Act of 2017 (the “TCJA"). As a result of adoption of this ASU in the first quarter of 2018, the Company reclassified $39.1 million from accumulated other comprehensive income with an offsetting credit to retained earnings.
Cumulative net impact to opening Retained earnings
As a result of the adoption of the new accounting standards outlined above, the Company recorded a cumulative net increase to opening Retained earnings of $42.0 million. Those impacts were attributed to the following ASUs adopted during the period:
|
| | | | |
| | Impact to Retained earnings |
| | (in thousands) |
| | |
Adoption of ASU 2014-09, Revenue Recognition | | $ | 3,300 |
|
Adoption of ASU 2016-1, Financial Instruments | | (418 | ) |
Adoption of ASU 2018-02, Statement of Comprehensive Income | | 39,094 |
|
Cumulative-effect adjustment upon adoption of new accounting standards | | $ | 41,976 |
|
Other adjustments at subsidiary | | 5,573 |
|
Net impact to opening Retained earnings | | $ | 47,549 |
|
The adoption of the following ASUs did not have an impact on the Company's financial position or results of operations.operations:
ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
ASU 2016-06,2016-16, Derivatives and HedgingIncome Taxes (Topic 815)740): Contingent Put and Call Options in Debt Instruments. The Company adopted this ASU on a modified retrospective basis. This 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 analysisIntra-Entity Transfers 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 adoption of this ASU did not have an impact on the Company's financial position or results of operations.Assets Other Than Inventory
ASU 2016-07,2016-18, Investments-Equity Method and Joint VenturesStatement of Cash Flows (Topic 323). This 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 use230): Restricted Cash (A consensus of the equity method of accounting. The adoption of this ASU did not have an impact on the Company’s financial position or results of operations.FASB Emerging Issues Task Force)
ASU 2016-09,2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business
ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
ASU 2017-07, Compensation - StockRetirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
ASU 2017-09, Compensation-Stock Compensation (Topic 718). This new guidance simplifies certain aspects related to income taxes, the Statement: Scope of Cash Flows, and forfeitures when accounting for share-based payment transactions. ASU 2016-09 eliminates the requirement to recognize excess tax benefits in Accumulated Paid In Capital pools, and instead requires companies to record all excess tax benefits and deficiencies at settlement, vesting or expiration in the income statement as provision for income taxes. At adoption of ASU 2016-09 on January 1, 2017, the cumulative-effect for previously unrecognized excess tax benefits totaled $27.1 million net of tax, and was recognized through an increase of $14.8 million to beginning retained earnings and $37.4 million to NCI, offset by a decrease of $26.5 million to common stock and paid in capital. The Company recorded excess tax benefits, net of tax of $194 thousand and $241 thousand in the provision for income taxes rather than as an increase to additional paid-in capital for the three-month and six-month periods ended June 30, 2017, on a prospective basis. Therefore, the prior period presented has not been adjusted. All excess tax benefits along with other income tax cash flows will now be classified as an operating activity rather than financing activities in the Statement of Cash Flows on a prospective basis.Modification Accounting
In addition, the Company changed its accounting policy on forfeitures from previously recognizing forfeitures based on estimating the number of awards expectedASU 2018-05, Income Taxes (Topic 740): Amendments to be forfeitedSEC Paragraphs Pursuant to electing to recognize forfeiture of awards as they occur to simplify the accounting for forfeitures. This resulted in a cumulative adjustment, as a decrease to beginning retained earnings of $1.4 million.SEC Staff Accounting Bulletin No. 118
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
12
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
As required by the adoption of ASU 2016-17, Consolidation (Topic 810), Interest Held Through Related Parties That Are Under Common Control. This2016-18 and ASU amends2014-09, the guidancefollowing additional accounting policy disclosures are required for the nature of cash restrictions, and revenue recognized from contracts with customers from disclosures included in generally accepted accounting principlesour Annual Report on Form 10-K for the year ended December 31, 2017:
Cash, Cash Equivalents, and Restricted Cash
Cash deposited to support securitization transactions, lockbox collections, and related required reserve accounts are recorded in the U.S. ("GAAP")Company's Consolidated Balance Sheets as Restricted cash. Excess cash flows generated by Trusts are added to the restricted cash reserve account, creating additional over-collateralization until the contractual securitization requirement has been reached. Once the targeted reserve requirement is satisfied, additional excess cash flows generated by the Trusts are released to the Company as distributions from the Trusts. Lockbox collections are added to restricted cash and released when transferred to the appropriate warehouse line of credit or trust. The Company also maintains restricted cash primarily related to cash posted as collateral related to derivative agreements, cash restricted for investment purposes and cash advanced for loan purchases.
Revenue Recognized from Contracts with Customers
Depository services
Depository services are performed under an agreement with a customer, and those services include: personal deposit account opening and maintaining, checking service, online banking service, debit card services, etc. Depository service fees related to customer deposits can generally be distinguished between monthly service fees and transactional fees within the single performance obligation of providing depository account services. Monthly account service and maintenance fees are provided over a period of time (usually a month), and revenue is recognized as the Company performs the service (usually at the end of the month). The services for transactional fees are performed at a point in time and revenue is recognized when the transaction occurs.
Commissions and trailer fees
Commission fees are earned from the selling of annuity contracts to customers on related partiesbehalf of insurance companies, acting as the broker for certain equity trading, and sales of interests in mutual funds. The Company elected the expected value method for estimating commission fees, due to the large number of customer contracts with similar characteristics. However, commissions and trailer fees are fully constrained as the Company cannot sufficiently estimate the consideration to which it could be entitled to earn. Commissions are generally associated with point-in-time transactions or agreements that are under common control. Specifically,one year or less. The performance obligation is satisfied immediately and revenue is recognized as the new ASU requires thatCompany performs the service.
Interchange income, net
The Company has entered into agreements with payment networks, in which the Company will issue the payment network's credit card as part of the Company's credit card portfolio. Each time a single decision maker consider indirect interests held bycardholder makes a purchase at a merchant and the transaction is processed, the Company receives an interchange fee in exchange for the authorization and settlement services provided to the payment networks.
The performance obligation for the Company is to provide authorization and settlement services to the payment network when the payment network submits a transaction for authorization. The Company considers the payment network to be the customer, and the Company is acting as a principal when performing the transaction authorization and settlement services. The performance obligation for authorization and settlement services is satisfied at point in time and revenue is recognized on the date when the Company authorizes and routes the payment to the merchant. The expenses paid to payment networks are accounted for as considerations payable to the customer and therefore reduce the transaction price. Therefore, interchange income is recorded net against the expenses paid to the payment network and the cost of rewards programs.
The agreements also contain immaterial fixed consideration related parties under common controlto upfront sign-on bonuses and program development bonuses, which are amortized over the remainder of the agreement's life on a proportionate basis instraight-line basis.
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (continued)
Underwriting service fees
SIS, as a manner consistent with its evaluationregistered broker-dealer, performs underwriting services by raising investment capital from investors on behalf of indirect interests held through other related parties. The adoption of this ASU did notcorporations that are issuing securities. Underwriting services have an impactone performance obligation, which is satisfied on the Company's financial positionday SIS purchases the securities.
Underwriting services include multiple parties in delivering the performance obligation. The Company has evaluated whether it is the principal or resultsagent when we provide underwriting services. The Company acts as the principal when performing underwriting services, and recognizes fees on a gross basis. Revenue is recorded as the difference between the price the Company pays the issuer of operations.the securities and the public offering price, and expenses are recorded as the proportionate share of the underwriting costs incurred by SIS. The Company is the principal because we obtain control of the services provided by third-party vendors and combine them with other services as part of delivering on the underwriting service.
Asset and wealth management fees
Asset and wealth management fees includes fee income generated from discretionary investment management and non-discretionary investment advisory contracts with customers. Discretionary investment management fees are earned when the Company performs the administration and management of a customer’s account. The transaction price includes variable consideration, however there is uncertainty associated with accurately estimating revenue to be earned in the future. The Company earns and recognizes investment management fees on a quarterly basis based on the average assets under management.
Non-discretionary investment advisory fees are earned when the Company provides investment advisory services to customers, such as recommending the rebalancing or restructuring of the securities in the Customer’s account. The transaction price for investment advisory fees includes both fixed consideration, in the form of a minimum annual fee, and variable consideration dependent on the average assets under management, calculated similarly to investment management fees above. The Company earns investment advisory fees on a quarterly basis based on the minimum annual fee and the average assets under management.
NOTE 2. RECENT ACCOUNTING DEVELOPMENTS
In 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 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 determine whether 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. In April 2016, the FASB also issued ASU 2016-10, which clarifies the implementation guidance on identifying promised goods or services and on determining whether an entity's promise to grant a license with either a right to use the entity's intellectual property (which is satisfied at a point in time) or a right to access the entity's intellectual property (which is satisfied over time). In May 2016, the FASB issued ASU 2016-12, an amendment to ASU 2014-09, which provided practical expedients related to disclosures of remaining performance obligations, as well as other amendments to guidance on transition, collectability, non-cash consideration and the presentation of sales and other similar taxes. In December 2016, the FASB issued ASU 2016-20, a separate update for technical corrections and improvements to Topic 606 and other Topics amended by Update 2014-09, to increase stakeholders’ awareness of the proposals and to expedite improvements to Update 2014-09. 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.
Because the ASU does not apply to revenue associated with leases and financial instruments (including loans, securities, and derivatives), the Company does not expect the new guidance to have a material impact on the elements of its Consolidated Statements of Operations most closely associated with leases and financial instruments (such as interest income, interest expense and securities gains and losses). The Company expects to adopt this ASU in the first quarter of 2018 using a modified retrospective approach with a cumulative-effect adjustment to opening retained earnings. The Company’s ongoing implementation efforts include the identification of other revenue streams that are within the scope of the new guidance and reviewing related contracts with customers to determine whether any accounting changes will be required. The timing and classification of certain contract costs presented in the Consolidated Statements of Operations is under evaluation and could change upon adoption. Finally, the Company is evaluating changes that will be required to applicable disclosures.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance, as amended, in this update supersedes the current lease accounting guidance for both lessees and lessors under ASC 840, Leases. The new guidance requires lessees to evaluate whether a lease is a finance lease using criteria similar to what lessees use today to determine whether they have a capital lease. Leases not classified as finance leases are classified as operating leases. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. The lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similarly to today’s guidance for operating leases. The new guidance will require lessors to account for leases using an approach that is substantially similar to the existing guidance for sales-type, direct financing leases and operating leases.guidance. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2018, with earlier adoption permitted. The Company does not intend to early adopt this ASU. Adoption of this amendment must be applied on a modified retrospective approach. The Company is in the process of reviewing our existing property and equipment lease contracts, as well as service contracts that may include embedded leases. Upon adoption, the Company expects to report higher assets and liabilities from recording the present value of the future minimum lease payments of the leases.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This new guidance significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. The standard will replace today’s “incurred loss” approach with an “expected loss” model for instruments measured at amortized cost. For available-for-saleAFS debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the OTTIother-than-temporary impairment (“OTTI') model. ItThe standard also simplifies the accounting model for purchased credit-impaired debt securities and loans. The new guidance will be effective for the Company for the first reporting period beginning after December 15, 2019, with earlier adoption permitted. Adoption of this new guidance can be applied only on a prospective basis as a cumulative-effect adjustment to retained earnings. The Company is currently evaluating the impact of the new guidance on its Consolidated Financial Statements. It is expected that the new model will include different assumptions used in calculating credit losses, such as estimating losses over the estimated life
NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)
of a financial asset, and will consider expected future changes in macroeconomic conditions. The adoption of this ASU may result in an increase to the Company’s allowance for credit losses (“ACL”("ACL"), which will depend upon the nature and characteristics of the Company's portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date. The Company currently does not intend to early adopt this new guidance.
In January 2017, the FASB also issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. It removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. The new rules provide that a goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance will remain largely unchanged. The same one-step impairment test will be applied to goodwill at all reporting units, even those with zero or negative carrying amounts. Entities will be required to disclose the amount of goodwill at reporting units with zero or negative carrying amounts. The revised guidance will be applied prospectively, and is effective for calendar year-end SEC filers in 2020. Early adoption is permitted for impairment tests performed after January 1, 2017. The Company is in the process of evaluating the impacts of the adoption of this ASU.
In addition to those described in detail above, the Company is also in the process of evaluating the following ASUs, and does not expect them to have a material impact on the Company's financial position, results of operations, or disclosures:
ASU 2016-01,2017-06, Financial Instruments - Overall (Subtopic 825-10)Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Recognition and Measurement of Financial Assets and Financial Liabilities.
ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments
ASU 2016-16, Income Taxes (Topic 740), Intra-Entity Transfers of Assets Other Than Inventory
ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (AEmployee Benefit Plan Master Trust Reporting (a consensus of the FASB Emerging Issues Task Force)
ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business
ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)
ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception
NOTE 3. INVESTMENT SECURITIES
Summary of Investment in Debt Securities Summary - Available-for-saleAFS and Held-to-maturityHTM
The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of debt securities available-for-saleAFS at the dates indicated:
|
| | | | | | | | | | | | | | | |
| June 30, 2017 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Loss | | Fair Value |
| (in thousands) |
U.S. Treasury securities | $ | 1,678,867 |
| | $ | 927 |
| | $ | (2,368 | ) | | $ | 1,677,426 |
|
Corporate debt securities | 196,721 |
| | 300 |
| | — |
| | 197,021 |
|
Asset-backed securities (“ABS”) | 751,225 |
| | 13,996 |
| | (1,417 | ) | | 763,804 |
|
Equity securities | 11,879 |
| | — |
| | (547 | ) | | 11,332 |
|
State and municipal securities | 27 |
| | — |
| | — |
| | 27 |
|
Mortgage-backed securities (“MBS”): | | | | | | | |
U.S. government agencies - Residential | 5,477,266 |
| | 6,894 |
| | (52,051 | ) | | 5,432,109 |
|
U.S. government agencies - Commercial | 1,296,178 |
| | 2,734 |
| | (7,129 | ) | | 1,291,783 |
|
Federal Home Loan Mortgage Corporation (“FHLMC”) and Federal National Mortgage Association ("FNMA") - Residential debt securities | 9,115,809 |
| | 12,835 |
| | (125,420 | ) | | 9,003,224 |
|
FHLMC and FNMA - Commercial debt securities | 23,320 |
| | — |
| | (458 | ) | | 22,862 |
|
Non-agency securities | 2 |
| | — |
| | — |
| | 2 |
|
Total investment securities available-for-sale | $ | 18,551,294 |
| | $ | 37,686 |
| | $ | (189,390 | ) | | $ | 18,399,590 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
(in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Loss | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Loss | | Fair Value |
U.S. Treasury securities | | $ | 1,388,611 |
| | $ | 4 |
| | $ | (13,510 | ) | | $ | 1,375,105 |
| | $ | 1,006,219 |
| | $ | — |
| | $ | (8,107 | ) | | $ | 998,112 |
|
Corporate debt securities | | 2,722 |
| | 1 |
| | — |
| | 2,723 |
| | 11,639 |
| | 21 |
| | — |
| | 11,660 |
|
Asset-backed securities (“ABS”) | | 482,770 |
| | 6,341 |
| | (1,879 | ) | | 487,232 |
| | 501,575 |
| | 6,901 |
| | (1,314 | ) | | 507,162 |
|
Equity securities (1) | | — |
| | — |
| | — |
| | — |
| | 11,428 |
| | — |
| | (614 | ) | | 10,814 |
|
State and municipal securities | | 21 |
| | — |
| | — |
| | 21 |
| | 23 |
| | — |
| | — |
| | 23 |
|
Mortgage-backed securities (“MBS”): | | | | | | | | | | | | | | | | |
GNMA - Residential | | 3,999,258 |
| | 5,022 |
| | (99,197 | ) | | 3,905,083 |
| | 4,745,998 |
| | 3,531 |
| | (62,524 | ) | | 4,687,005 |
|
GNMA - Commercial | | 895,577 |
| | 82 |
| | (17,192 | ) | | 878,467 |
| | 1,377,449 |
| | 179 |
| | (19,917 | ) | | 1,357,711 |
|
FHLMC and FNMA - Residential | | 6,879,034 |
| | 417 |
| | (228,635 | ) | | 6,650,816 |
| | 6,958,433 |
| | 1,093 |
| | (141,393 | ) | | 6,818,133 |
|
FHLMC and FNMA - Commercial | | 22,840 |
| | — |
| | (693 | ) | | 22,147 |
| | 23,003 |
| | — |
| | (440 | ) | | 22,563 |
|
Total investments in debt securities AFS | | $ | 13,670,833 |
| | $ | 11,867 |
| | $ | (361,106 | ) | | $ | 13,321,594 |
| | $ | 14,635,767 |
| | $ | 11,725 |
| | $ | (234,309 | ) | | $ | 14,413,183 |
|
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENT SECURITIES (continued)
|
| | | | | | | | | | | | | | | |
| December 31, 2016 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Loss | | Fair Value |
| (in thousands) |
U.S. Treasury securities | $ | 1,857,357 |
| | $ | 1,826 |
| | $ | (2,326 | ) | | $ | 1,856,857 |
|
ABS | 1,196,702 |
| | 16,410 |
| | (2,388 | ) | | 1,210,724 |
|
Equity securities | 11,716 |
| | — |
| | (565 | ) | | 11,151 |
|
State and municipal securities | 30 |
| | — |
| | — |
| | 30 |
|
MBS: | | | | | | | |
U.S. government agencies - Residential | 5,424,412 |
| | 3,253 |
| | (64,537 | ) | | 5,363,128 |
|
U.S. government agencies - Commercial | 948,696 |
| | 1,998 |
| | (8,196 | ) | | 942,498 |
|
FHLMC and FNMA - Residential debt securities | 7,765,003 |
| | 6,712 |
| | (154,858 | ) | | 7,616,857 |
|
FHLMC and FNMA - Commercial debt securities | 23,636 |
| | — |
| | (670 | ) | | 22,966 |
|
Non-agency securities | 14 |
| | — |
| | — |
| | 14 |
|
Total investment securities available-for-sale | $ | 17,227,566 |
| | $ | 30,199 |
| | $ | (233,540 | ) | | $ | 17,024,225 |
|
(1) Reflects the reclassification of the Company's investments in equity securities to Other investments as a result of the adoption of ASU 2016-01 as of January 1, 2018.
The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of debt securities held-to-maturityHTM at the dates indicated:
|
| | | | | | | | | | | | | | | |
| June 30, 2017 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Loss | | Fair Value |
| (in thousands) |
MBS: | | | | | | | |
U.S. government agencies - Residential | $ | 1,575,037 |
| | $ | 1,193 |
| | $ | (27,219 | ) | | $ | 1,549,011 |
|
Total investment securities held-to-maturity | $ | 1,575,037 |
| | $ | 1,193 |
| | $ | (27,219 | ) | | $ | 1,549,011 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
(in thousands) | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Loss | | Fair Value | | Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Loss | | Fair Value |
MBS: | | | | | | | | | | | | | | | | |
GNMA - Residential | | $ | 1,947,672 |
| | $ | — |
| | $ | (62,258 | ) | | $ | 1,885,414 |
| | $ | 1,447,669 |
| | $ | 722 |
| | $ | (26,150 | ) | | $ | 1,422,241 |
|
GNMA - Commercial | | 929,685 |
| | — |
| | (17,401 | ) | | 912,284 |
| | 352,139 |
| | 325 |
| | (767 | ) | | 351,697 |
|
Total investments in debt securities HTM | | $ | 2,877,357 |
| | $ | — |
| | $ | (79,659 | ) | | $ | 2,797,698 |
| | $ | 1,799,808 |
| | $ | 1,047 |
| | $ | (26,917 | ) | | $ | 1,773,938 |
|
|
| | | | | | | | | | | | | | | |
| December 31, 2016 |
| Amortized Cost | | Gross Unrealized Gains | | Gross Unrealized Loss | | Fair Value |
| (in thousands) |
MBS: | | | | | | |
|
U.S. government agencies - Residential | $ | 1,658,644 |
| | $ | 2,195 |
| | $ | (25,426 | ) | | $ | 1,635,413 |
|
Total investment securities held-to-maturity | $ | 1,658,644 |
| | $ | 2,195 |
| | $ | (25,426 | ) | | $ | 1,635,413 |
|
NOTE 3. INVESTMENT SECURITIES (continued)
The Company continuously evaluates its investment strategies in light of changes in the regulatory and market environments that could have an impact on capital and liquidity. Based on this evaluation, it is reasonably possible that the Company may elect to pursue other strategies relative to its investment securities portfolio. During the three-month period ended March 31, 2018, the Company transferred approximately $1.2 billion of MBS from AFS to HTM in conjunction with Santander's capital management strategy.
As of June 30, 2017March 31, 2018 and December 31, 2016,2017, the Company had investmentinvestments in debt securities available-for-saleAFS with an estimated fair value of $6.5$6.1 billion and $7.2$5.9 billion, respectively, pledged as collateral, which was comprised of the following: $3.0$3.1 billion and $3.2$3.0 billion, respectively, were pledged as collateral for the Company's borrowing capacity with the Federal Reserve Bank ("FRB"(the "FRB"); $2.4$2.1 billion and $3.0$2.3 billion, respectively, were pledged to secure public fund deposits; $102.2$225.1 million and $109.7$243.8 million, respectively, were pledged to various independent parties to secure repurchase agreements, support hedging relationships, and for recourse on loan sales; $622.1$347.4 million and $622.0$0.0 million, respectively, were pledged to deposits with clearing organizations; and $332.0$325.6 million and $271.2$387.9 million, respectively, were pledged to secure the Company's customer overnight sweep product.
At June 30, 2017March 31, 2018 and December 31, 2016,2017, the Company had $48.2$44.9 million and $44.8$47.0 million, respectively, of accrued interest related to investment securities which is included in the Accrued interest receivableOther assets line of the Company's Condensed Consolidated Balance Sheet.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENT SECURITIES (continued)Sheets.
Contractual Maturity of Debt Securities
Contractual maturities of the Company’s debt securities available-for-saleAFS at June 30, 2017March 31, 2018 were as follows: |
| | | | | | | |
| Amortized Cost | | Fair Value |
| (in thousands) |
Due within one year | $ | 1,223,057 |
| | $ | 1,222,961 |
|
Due after 1 year but within 5 years | 1,253,062 |
| | 1,265,742 |
|
Due after 5 years but within 10 years | 228,059 |
| | 226,979 |
|
Due after 10 years | 15,835,237 |
| | 15,672,576 |
|
Total | $ | 18,539,415 |
| | $ | 18,388,258 |
|
| | | |
|
| | | | | | | | |
(in thousands) | | Amortized Cost | | Fair Value |
Due within one year | | $ | 540,050 |
| | $ | 539,712 |
|
Due after 1 year but within 5 years | | 1,214,394 |
| | 1,207,322 |
|
Due after 5 years but within 10 years | | 169,152 |
| | 165,500 |
|
Due after 10 years | | 11,747,237 |
| | 11,409,060 |
|
Total | | $ | 13,670,833 |
| | $ | 13,321,594 |
|
Contractual maturities of the Company’s debt securities held-to-maturityHTM at June 30, 2017March 31, 2018 were as follows:
| | | Amortized Cost | | Fair Value | |
| (in thousands) | |
(in thousands) | | | Amortized Cost | | Fair Value |
Due within one year | | | $ | — |
| | $ | — |
|
Due after 1 year but within 5 years | | | — |
| | — |
|
Due after 5 years but within 10 years | | | — |
| | — |
|
Due after 10 years | $ | 1,575,037 |
| | $ | 1,549,011 |
| | $ | 2,877,357 |
| | $ | 2,797,698 |
|
Total | $ | 1,575,037 |
| | $ | 1,549,011 |
| | $ | 2,877,357 |
| | $ | 2,797,698 |
|
| | | | |
Actual maturities may differ from contractual maturities when there is a right to call or prepay obligations with or without call or prepayment penalties.
NOTE 3. INVESTMENT SECURITIES (continued)
Gross Unrealized Loss and Fair Value of Debt Securities Available-for-SaleAFS and Held-to-maturityHTM
The following tables present the aggregate amount of unrealized losses as of June 30, 2017March 31, 2018 and December 31, 20162017 on securities in the Company’s available-for-saleAFS investment portfolios classified according to the amount of time those securities have been in a continuous loss position:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2017 |
| 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 | $ | 1,108,481 |
| | $ | (2,368 | ) | | $ | — |
| | $ | — |
| | $ | 1,108,481 |
| | $ | (2,368 | ) |
ABS | 182,988 |
| | (614 | ) | | 111,071 |
| | (803 | ) | | 294,059 |
| | (1,417 | ) |
Equity securities | 769 |
| | (14 | ) | | 9,839 |
| | (533 | ) | | 10,608 |
| | (547 | ) |
MBS: | | | | | | | | | | | |
U.S. government agencies - Residential | 3,380,422 |
| | (42,644 | ) | | 824,169 |
| | (9,407 | ) | | 4,204,591 |
| | (52,051 | ) |
U.S. government agencies - Commercial | 603,981 |
| | (3,528 | ) | | 88,151 |
| | (3,601 | ) | | 692,132 |
| | (7,129 | ) |
FHLMC and FNMA - Residential debt securities | 4,951,101 |
| | (41,745 | ) | | 1,816,126 |
| | (83,675 | ) | | 6,767,227 |
| | (125,420 | ) |
FHLMC and FNMA - Commercial debt securities | 22,405 |
| | (448 | ) | | 457 |
| | (10 | ) | | 22,862 |
| | (458 | ) |
Total investment securities available-for-sale | $ | 10,250,147 |
| | $ | (91,361 | ) | | $ | 2,849,813 |
| | $ | (98,029 | ) | | $ | 13,099,960 |
| | $ | (189,390 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
| | Less than 12 months | | 12 months or longer | | Less than 12 months | | 12 months or longer |
(in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
U.S. Treasury securities | | $ | 1,097,855 |
| | $ | (8,900 | ) | | $ | 247,265 |
| | $ | (4,610 | ) | | $ | 998,112 |
| | $ | (8,107 | ) | | $ | — |
| | $ | — |
|
Corporate debt securities | | 1,086 |
| | — |
| | 13 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
ABS | | 46,388 |
| | (260 | ) | | 92,232 |
| | (1,619 | ) | | 8,013 |
| | (125 | ) | | 103,559 |
| | (1,189 | ) |
Equity securities (1) | | — |
| | — |
| | — |
| | — |
| | 335 |
| | (2 | ) | | 10,398 |
| | (612 | ) |
MBS: | | | | | | | | | | | | | | | | |
GNMA - Residential | | 1,246,568 |
| | (28,253 | ) | | 1,807,860 |
| | (70,944 | ) | | 1,236,716 |
| | (8,600 | ) | | 2,583,955 |
| | (53,924 | ) |
GNMA - Commercial | | 817,989 |
| | (16,664 | ) | | 34,670 |
| | (528 | ) | | 1,022,452 |
| | (11,492 | ) | | 251,209 |
| | (8,425 | ) |
FHLMC and FNMA - Residential | | 3,703,742 |
| | (81,349 | ) | | 2,846,957 |
| | (147,286 | ) | | 3,429,678 |
| | (32,899 | ) | | 3,017,533 |
| | (108,494 | ) |
FHLMC and FNMA - Commercial | | 6,772 |
| | (238 | ) | | 15,375 |
| | (455 | ) | | 6,948 |
| | (103 | ) | | 15,614 |
| | (337 | ) |
Total investments in debt securities AFS | | $ | 6,920,400 |
| | $ | (135,664 | ) | | $ | 5,044,372 |
| | $ | (225,442 | ) | | $ | 6,702,254 |
| | $ | (61,328 | ) | | $ | 5,982,268 |
| | $ | (172,981 | ) |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENT SECURITIES (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| 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 | $ | 1,016,654 |
| | $ | (2,326 | ) | | $ | — |
| | $ | — |
| | $ | 1,016,654 |
| | $ | (2,326 | ) |
ABS | 76,552 |
| | (1,021 | ) | | 111,758 |
| | (1,367 | ) | | 188,310 |
| | (2,388 | ) |
Equity securities | 770 |
| | (16 | ) | | 9,800 |
| | (549 | ) | | 10,570 |
| | (565 | ) |
MBS: | | | | | | | | | | | |
U.S. government agencies - Residential | 3,831,354 |
| | (46,846 | ) | | 1,027,609 |
| | (17,691 | ) | | 4,858,963 |
| | (64,537 | ) |
U.S. government agencies - Commercial | 532,334 |
| | (4,451 | ) | | 98,918 |
| | (3,745 | ) | | 631,252 |
| | (8,196 | ) |
FHLMC and FNMA - Residential debt securities | 4,740,824 |
| | (58,514 | ) | | 1,981,886 |
| | (96,344 | ) | | 6,722,710 |
| | (154,858 | ) |
FHLMC and FNMA - Commercial debt securities | 22,504 |
| | (659 | ) | | 462 |
| | (11 | ) | | 22,966 |
| | (670 | ) |
Total investment securities available-for-sale | $ | 10,220,992 |
| | $ | (113,833 | ) | | $ | 3,230,433 |
| | $ | (119,707 | ) | | $ | 13,451,425 |
| | $ | (233,540 | ) |
(1) Reflects the reclassification of the Company's investments in equity securities to Other investments as a result of the adoption of ASU 2016-01 as of January 1, 2018.
The following tables present the aggregate amount of unrealized losses as of June 30, 2017March 31, 2018 and December 31, 20162017 on debt securities in the Company’s held-to-maturity investment portfolios classified according to the amount of time those securities have been in a continuous loss position:
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2017 |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | (in thousands) |
MBS: | | | | | | | | | | | | |
U.S. government agencies - Residential | | $ | 1,274,846 |
| | $ | (27,219 | ) | | $ | — |
| | $ | — |
| | $ | 1,274,846 |
| | $ | (27,219 | ) |
Total investment securities held-to-maturity | | $ | 1,274,846 |
| | $ | (27,219 | ) | | $ | — |
| | $ | — |
| | $ | 1,274,846 |
| | $ | (27,219 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | Less than 12 months | | 12 months or longer | | Total |
| | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
| | (in thousands) |
MBS: | | | | | | | | | |
| |
|
U.S. government agencies - Residential | | $ | 1,311,390 |
| | $ | (25,426 | ) | | $ | — |
| | $ | — |
| | $ | 1,311,390 |
| | $ | (25,426 | ) |
Total investment securities held-to-maturity | | $ | 1,311,390 |
| | $ | (25,426 | ) | | $ | — |
| | $ | — |
| | $ | 1,311,390 |
| | $ | (25,426 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
| | Less than 12 months | | 12 months or longer | | Less than 12 months | | 12 months or longer |
(in thousands) | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses | | Fair Value | | Unrealized Losses |
MBS: | | | | | | | | | | | | | | | | |
GNMA - Residential | | $ | 642,688 |
| | $ | (20,624 | ) | | $ | 1,242,725 |
| | $ | (41,634 | ) | | $ | 434,322 |
| | $ | (6,419 | ) | | $ | 739,612 |
| | $ | (19,731 | ) |
GNMA - Commercial | | 624,936 |
| | (13,073 | ) | | 287,348 |
| | (4,328 | ) | | 118,951 |
| | (767 | ) | | — |
| | — |
|
Total investments in debt securities HTM | | $ | 1,267,624 |
| | $ | (33,697 | ) | | $ | 1,530,073 |
| | $ | (45,962 | ) | | $ | 553,273 |
| | $ | (7,186 | ) | | $ | 739,612 |
| | $ | (19,731 | ) |
OTTI
Management evaluates all investment securities in an unrealized loss position for OTTI on a quarterly basis. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. The OTTI assessment is a subjective process requiring the use of judgments and assumptions. During the securities-level assessments, consideration is given to (1) the intent not to sell and probability that the Company will not be required to sell the security before recovery of its cost basis to allow for any anticipated recovery in fair value, (2) the financial condition and near-term prospects of the issuer, as well as company news and current events, and (3) the ability to collect the future expected cash flows. Key assumptions utilized to forecast expected cash flows may include loss severity, expected cumulative loss percentage, cumulative loss percentage to date, weighted average Fair Isaac Corporation ("FICO®"FICO") scores and weighted average loan-to-value ("LTV") ratio, rating or scoring, credit ratings and market spreads, as applicable.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENT SECURITIES (continued)
The Company assesses and recognizes OTTI in accordance with applicable accounting standards. Under these standards, if the Company determines that impairment on its debt securities exists and it has made the decision to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, it recognizes the entire portion of the unrealized loss in earnings. If the Company has not made a decision to sell the security and it does not expect that it will be required to sell the security prior to the recovery of the amortized cost basis but the Company has determined that OTTI exists, it recognizes the credit-related portion of the decline in value of the security in earnings.
The Company did not record any materialrecorded no OTTI in earnings related to its investment securities for the three-month and six-month periods ended June 30,March 31, 2018 and 2017, and recognized $34 thousand and $44 thousand OTTI for the three-month and six-month periods ended June 30, 2016.respectively.
NOTE 3. INVESTMENT SECURITIES (continued)
Management has concluded that the unrealized losses on its debt and equity securities for which it has not recognized OTTI (which were comprised of 560531 individual securities at June 30, 2017)March 31, 2018) are temporary in nature since (1) they reflect the increase in interest rates, which lowers the current fair value of the securities, (2) they are not related to the underlying credit quality of the issuers, (3) the entire contractual principal and interest due on these securities is currently expected to be recoverable, (4) the Company does not intend to sell these investments at a loss and (5) it is more likely than not that the Company will not be required to sell the investments before recovery of the amortized cost basis, which for the Company's debt securities may be at maturity. Accordingly, the Company has concluded that the impairment on these securities is not other-than-temporary.other than temporary.
Gains (Losses) and Proceeds on Sales of Debt Securities
Proceeds from sales of investmentinvestments in debt securities and the realized gross gains and losses from those sales are as follows:
| | | Three-Month Period Ended June 30, | | Six-Month Period Ended June 30, | | Three-Month Period Ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | |
| (in thousands) | | (in thousands) | |
Proceeds from the sales of available-for-sale securities | $ | 1,306,125 |
| | $ | 3,319,455 |
| | $ | 1,306,125 |
| | $ | 6,755,299 |
| |
(in thousands) | | | 2018 | | 2017 |
Proceeds from the sales of debt securities AFS | | | $ | 39,446 |
| | $ | — |
|
| | | | | | | | | | | |
Gross realized gains | $ | 11,125 |
| | $ | 33,622 |
| | $ | 11,125 |
| | $ | 60,328 |
| | $ | — |
| | $ | — |
|
Gross realized losses | — |
| | (2,283 | ) | | — |
| | (2,558 | ) | | (18 | ) | | — |
|
OTTI | — |
| | (34 | ) | | — |
| | (44 | ) | | — |
| | — |
|
Net realized gains (1) | $ | 11,125 |
| | $ | 31,305 |
| | $ | 11,125 |
| | $ | 57,726 |
| |
Net realized gains/(losses) (1) | | | $ | (18 | ) | | $ | — |
|
(1) Excludes the net realized gains/(losses) related to Trading Securities.
| |
(1) | Excludes the net realized gains/(losses) related to investments in debt securities held for trading purposes. |
The Company uses the specific identification method to determine the cost of the securities sold and the gain or loss recognized.
The Company recognized $11.1 million$18.0 thousand for the three-month and six-month periodsperiod ended June 30, 2017,March 31, 2018 in net gainslosses on the sale of AFS investment securities as a result of overall balance sheet and interest rate risk management. The net gainloss realized for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 was primarily comprised of the sale of U.S. Treasury securities with a book value of $739.4 million for a gain of $1.8 million, and the sale of MBS's,MBS, including FHLMC residential debt securities and collateralized mortgage obligations ("CMOs"), with a bookfair value of $555.6 million$319 thousand for a gainloss of $9.3 million.$18 thousand.
The Company recognized $31.3 million and $57.7 million for the three-month and six-month periods ended June 30, 2016 in net gains on the sale of AFS investment securities as a result of overall balance sheet and interest rate risk management. The net gain realizedThere was no significant activity for the three-month period ended June 30, 2016 was primarily comprisedMarch 31, 2017.
Other Investments
Other Investments consisted of the sale of U.S. Treasury securities with a book value of $344.4 million for a gain of $0.3 million, corporate debt securities sold with a book value of $1.4 billion for a gain of $5.9 million, and the sale of MBS's, including FHLMC residential debt securities and CMO's, with a book value of $1.3 billion for a gain of $24.7 million. The net gain realized for the six-month period ended June 30, 2016 was primarily comprised of the sale of state and municipal securities with a book value of $748.0 million for a gain of $19.9 million, the sale of U.S. Treasury securities with a book value of $3.2 billion for a gain of $7.0 million, corporate debt securities sold with a book value of $1.4 billion for a gain of $5.9 million, and the sale of MBS, including FHLMC residential debt securities and CMO's, with a book value of $1.3 billion for a gain of $24.7 million.
following as of:
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 3. INVESTMENT SECURITIES (continued)
Trading Securities
The Company held $10.2 million of trading securities as of June 30, 2017, compared to $1.6 million held at December 31, 2016. Gains and losses on trading securities are recorded within Net gain on sale of investment securities on the Company's Condensed Consolidated Statement of Operations.
Other Investments |
| | | | | | | | |
(in thousands) | March 31, 2018 | | December 31, 2017 |
FHLB of Pittsburgh and Federal Reserve Bank stock | | $ | 500,833 |
| | $ | 516,693 |
|
Low Income Housing Tax Credit investments ("LIHTC") | | 96,899 |
| | 88,170 |
|
Equity Securities not held for trading | | 10,927 |
| | — |
|
CDs with a maturity greater than 90 days | | 153,358 |
| | 54,000 |
|
Trading Securities | | 3,024 |
| | 1 |
|
Total | | $ | 765,041 |
| | $ | 658,864 |
|
Other investments primarily include the Company's investment in the stock of the FHLBFederal Home Loan Bank ("FHLB") of Pittsburgh and the FRB with aggregate carrying amounts of $653.2 million and $680.5 million as of June 30, 2017 and December 31, 2016, respectively.FRB. These stocks do not have readily determinable fair values because their ownership is restricted and they lack a market. The stocks can be sold back only at their par value of $100 per share, and FHLB stock can be sold back only to the FHLB or to another member institution. Accordingly, these stocks are carried at cost. During the three-month and six-month periodsperiod ended June 30, 2017,March 31, 2018, the Company purchased $75.6 million and $88.8$10.2 million of FHLB stock at par respectively, and redeemed $52.6 million and $117.1$25.9 million of FHLB stock at par. There was no gain or loss associated with these redemptions. During the three-month and six-month periodsperiod ended June 30, 2017,March 31, 2018, the Company did not purchase any FRB stock.
Other investments also include $70.0 million and $50.4 million ofincludes low-income housing tax credit ("(“LIHTC") investments, time deposits with a maturity of greater than 90 days held at non-affiliated financial institutions, trading securities, and $10.9 million of equity securities measured at fair value with changes in fair value
NOTE 3. INVESTMENT SECURITIES (continued)
recognized in net income. These consist primarily of Community Reinvestment Act (“CRA") mutual fund investments reclassified as a result of June 30, 2017 andthe first quarter 2018 adoption of ASU 2016-01, discussed further in Note 1. These investments were included in Investments AFS at December 31, 2016, respectively.2017.
TheWith the exception of equity and trading securities which are measured at fair value, the Company evaluates these other investments for impairment based on the ultimate recoverability of the carrying value, rather than by recognizing temporary declines in value.
Realized and Unrealized Gains (Losses) on Equity Securities
|
| | | | | | | | |
| | Three-Month Period Ended March 31, |
(in thousands) | | 2018 | | 2017 |
Net gains/(losses) on equity securities1 | | $ | 47 |
| | $ | (18 | ) |
Less: net gains/(losses) recognized during the period on equity securities sold during the period1 | | — |
| | — |
|
Unrealized gains/(losses) recognized during the reporting period on equity securities still held at the reporting period date1 | | $ | 47 |
| | $ | (18 | ) |
| |
(1) | Changes in the fair value of equity securities were not recognized in earnings prior to the adoption of ASU 2016-01. |
The Company held an immaterial amount of equity securities without readily determinable fair values at the reporting date.
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES
Overall
The Company's loans are reported at their outstanding principal balances net of any unearned income, cumulative charge-offs, unamortized deferred fees and costs and unamortized premiums or discounts. The Company maintains an ACL to provide for losses inherent in its portfolios. Certain loans are pledged as collateral for borrowings, securitizations, or special purpose entities ("(“SPEs"). These loans totaled $52.2$47.3 billion at June 30, 2017March 31, 2018 and $53.5$50.8 billion at December 31, 2016.2017.
Loans that the Company intends to sell are classified as loans-held-for-sale (“LHFS”).LHFS. The LHFS portfolio balance at June 30, 2017March 31, 2018 was $2.5$2.0 billion, compared to $2.6$2.5 billion at December 31, 2016.2017. LHFS in the residential mortgage portfolio are either reported at either estimated fair value (if the fair value option (the "FVO") is elected) or at the lower of cost or fair value. For a discussion on the valuation of LHFS at fair value, see Note 1614 to the Condensed Consolidated Financial Statements. During the third quarter of 2015, the Company determined that it no longer intended to hold certain personal lending assets at SC for investment. The Company adjusted the ACL associated with SC's personal loan portfolio through the provision for credit losses to value the portfolio at the lower of cost or market. Upon transferring the loans to LHFS at fair value, the adjusted credit loss allowance was released as a charge-off. Loan originations and purchasesLoans under SC’s personal lending platform during 2016 have been classified as held for saleHFS and subsequent adjustments to lower of cost or market are recorded through Miscellaneous Income (Expense), net on the Condensed Consolidated Statements of Operations. As of June 30, 2017,March 31, 2018, the carrying value of the personal unsecured held-for-saleHFS portfolio was $971.9 million.$1.0 billion.
Interest on loans is credited to income as it is earned. Loan origination fees and certain direct loan origination costs are deferred and recognized as adjustments to interest income in the Condensed Consolidated Statements of Operations over the contractual life of the loan utilizing the interest methodmethod. Loan origination costs and fees and premiums and discounts on RICs are deferred and recognized in interest income over their estimated lives using estimated prepayment speeds, which are updated on a quarterlymonthly basis. At June 30, 2017March 31, 2018 and December 31, 2016,2017, accrued interest receivable on the Company's loans was $503.2$450.0 million and $554.5$515.9 million, respectively.
During the quarter ended March 31, 2018, the Company sold substantially all of its mortgage warehouse facilities, which had a book value of $499.2 million for net proceeds of $515.8 million. The $16.7 million gain on sale is recognized within Miscellaneous income, net on the Condensed Consolidated Statements of Operations.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Loan and Lease Portfolio Composition
The following presents the composition of the gross loans and leases held-for-investmentHFI by portfolio and by rate type:
| | | June 30, 2017 | | December 31, 2016 | | March 31, 2018 | | December 31, 2017 |
| Amount | | Percent | | Amount | | Percent | |
| (dollars in thousands) | |
(dollars in thousands) | | | Amount | | Percent | | Amount | | Percent |
Commercial LHFI: | | | | | | | | | | | | | | | |
Commercial real estate loans | $ | 9,799,724 |
| | 11.8 | % | | $ | 10,112,043 |
| | 11.8 | % | |
Commercial real estate ("CRE") loans | | | $ | 9,072,529 |
| | 11.3 | % | | $ | 9,279,225 |
| | 11.5 | % |
Commercial and industrial loans | 16,129,649 |
| | 19.4 | % | | 18,812,002 |
| | 21.9 | % | | 13,712,573 |
| | 17.1 | % | | 14,438,311 |
| | 17.9 | % |
Multifamily loans | 8,240,516 |
| | 9.9 | % | | 8,683,680 |
| | 10.1 | % | | 8,081,924 |
| | 10.1 | % | | 8,274,435 |
| | 10.1 | % |
Other commercial(2) | 6,902,989 |
| | 8.4 | % | | 6,832,403 |
| | 8.0 | % | | 7,337,433 |
| | 9.2 | % | | 7,174,739 |
| | 8.9 | % |
Total commercial LHFI | 41,072,878 |
| | 49.5 | % | | 44,440,128 |
| | 51.8 | % | | 38,204,459 |
| | 47.7 | % | | 39,166,710 |
| | 48.4 | % |
Consumer loans secured by real estate: | | | | | | | | | | | | | | | |
Residential mortgages | 8,040,363 |
| | 9.7 | % | | 7,775,272 |
| | 9.1 | % | | 9,198,059 |
| | 11.5 | % | | 8,846,765 |
| | 11.0 | % |
Home equity loans and lines of credit | 5,903,913 |
| | 7.1 | % | | 6,001,192 |
| | 7.0 | % | | 5,788,682 |
| | 7.2 | % | | 5,907,733 |
| | 7.3 | % |
Total consumer loans secured by real estate | 13,944,276 |
| | 16.8 | % | | 13,776,464 |
| | 16.1 | % | | 14,986,741 |
| | 18.7 | % | | 14,754,498 |
| | 18.3 | % |
Consumer loans not secured by real estate: | | | | | | | | | | | | | | | |
RICs and auto loans - originated | 23,466,768 |
| | 28.3 | % | | 22,104,918 |
| | 25.8 | % | | 23,583,727 |
| | 29.4 | % | | 23,081,424 |
| | 28.6 | % |
RICs and auto loans - purchased | 2,554,220 |
| | 3.1 | % | | 3,468,803 |
| | 4.0 | % | | 1,515,086 |
| | 1.9 | % | | 1,834,868 |
| | 2.3 | % |
Personal unsecured loans | 1,229,497 |
| | 1.5 | % | | 1,234,094 |
| | 1.4 | % | | 1,261,238 |
| | 1.6 | % | | 1,285,677 |
| | 1.6 | % |
Other consumer(3) | 689,140 |
| | 0.8 | % | | 795,378 |
| | 0.9 | % | | 567,077 |
| | 0.7 | % | | 617,675 |
| | 0.8 | % |
Total consumer loans | 41,883,901 |
| | 50.5 | % | | 41,379,657 |
| | 48.2 | % | | 41,913,869 |
| | 52.3 | % | | 41,574,142 |
| | 51.6 | % |
Total LHFI(1) | $ | 82,956,779 |
| | 100.0 | % | | $ | 85,819,785 |
| | 100.0 | % | | $ | 80,118,328 |
| | 100.0 | % | | $ | 80,740,852 |
| | 100.0 | % |
Total LHFI: | | | | | | | | | | | | | | | |
Fixed rate | $ | 50,623,536 |
| | 61.0 | % | | $ | 51,752,761 |
| | 60.3 | % | | $ | 51,066,020 |
| | 63.7 | % | | $ | 50,653,790 |
| | 62.7 | % |
Variable rate | 32,333,243 |
| | 39.0 | % | | 34,067,024 |
| | 39.7 | % | | 29,052,308 |
| | 36.3 | % | | 30,087,062 |
| | 37.3 | % |
Total LHFI(1) | $ | 82,956,779 |
| | 100.0 | % | | $ | 85,819,785 |
| | 100.0 | % | | $ | 80,118,328 |
| | 100.0 | % | | $ | 80,740,852 |
| | 100.0 | % |
(1)Total LHFI includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. These items resulted in a net increase in the loan balances of $1.1$1.4 billion and $845.8 million$1.3 billion as of June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.
(2)Other commercial includes commercial equipment vehicle financing ("CEVF") leveraged leases and loans.
(3)Other consumer primarily includes recreational vehicle ("RV") and marine loans.
Portfolio segments and classes
GAAPGenerally accepted accounting principles (“GAAP") requires that entities disclose information about the credit quality of their financing receivables at disaggregated levels, specifically defined as “portfolio segments” and “classes,” based on management’s systematic methodology for determining the ACL. The Company utilizes an alternatesimilar categorization compared to the financial statement categorization of loans to model and calculate the ACL and track the credit quality, delinquency and impairment status of the underlying loan populations. In disaggregating its financing receivables portfolio, the Company’s methodology begins with the commercial and consumer segments.
The commercial segmentation reflects line of business distinctions. The three commercial real estate linesCRE line of business distinctions include “Corporate banking,” which includes commercial and industrial owner-occupied real estate “Middle market real estate,” which represents the portfolio ofand specialized lending for investment real estate, including financingestate. The Company's allowance methodology further classifies loans in this line of business into construction and non-construction loans; however, the methodology for continuing care retirement communitiesdevelopment and “Santander real estate capital”, which is the commercial real estate portfoliodetermination of the specialized lending group.allowance is generally consistent between the two portfolios. "Commercial and industrial" includes non-real estate-related commercial and industrial loans. "Multifamily" represents loans for multifamily residential housing units. “Other commercial” includes loans to global customer relationships in Latin America which are not defined as commercial or consumer for regulatory purposes. The remainder of the portfolio primarily represents the CEVF business.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
The following table reconciles the Company's recorded investment classified by its major portfolio classifications to its commercial loan classifications utilized in its determination of the allowance for loan and lease losses (“ALLL”) and other credit quality disclosures at June 30, 2017 and December 31, 2016, respectively:
|
| | | | | | | | |
Commercial Portfolio Segment(2) | | | | |
Major Loan Classifications(1) | | June 30, 2017 | | December 31, 2016 |
| | (in thousands) |
Commercial LHFI: | | | | |
Commercial real estate: | | | | |
Corporate Banking | | $ | 3,499,075 |
| | $ | 3,693,109 |
|
Middle Market Real Estate | | 5,171,464 |
| | 5,180,572 |
|
Santander Real Estate Capital | | 1,129,185 |
| | 1,238,362 |
|
Total commercial real estate | | 9,799,724 |
| | 10,112,043 |
|
Commercial and industrial (3) | | 16,129,649 |
| | 18,812,002 |
|
Multifamily | | 8,240,516 |
| | 8,683,680 |
|
Other commercial | | 6,902,989 |
| | 6,832,403 |
|
Total commercial LHFI | | $ | 41,072,878 |
| | $ | 44,440,128 |
|
| |
(1) | These represent the Company's loan categories based on SEC Regulation S-X, Article 9. |
| |
(2) | These represent the Company's loan classes used to determine its ALLL. |
| |
(3) | Commercial and industrial loans excluded $160.3 million of LHFS at June 30, 2017 and excluded $121.1 million of LHFS at December 31, 2016. |
The Company's portfolio classes are substantially the same as its financial statement categorization of loans for the consumer loan populations. “Residential mortgages” includes mortgages on residential property, including single family and 1-4 family units. "Home equity loans and lines of credit" include all organic home equity contracts and purchased home equity portfolios. "RIC"RICs and auto loans" includes the Company's direct automobile loan portfolios, but excludes RV and marine RICs. "Personal unsecured loans" includes personal revolving loans and credit cards. “Other consumer” includes an acquired portfolio of marine RICs and RV contracts as well as indirect auto loans.
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
In accordance with the Company's accounting policy when establishing the collective ACL for originated loans, the Company's estimate of losses on recorded investment includes the estimate of the related net unaccreted discount balance that is expected at the time of charge-off, while it considers the entire unaccreted discount for loan portfolios purchased at a discount as available to absorb the credit losses when determining the ACL specific to these portfolios. This accounting policy is not applicable for the purchased loan portfolios acquired with evidence of credit deterioration, on which we elected to apply the FVO.
|
| | | | | | | | |
Consumer Portfolio Segment(2) | | | | |
Major Loan Classifications(1) | | June 30, 2017 | | December 31, 2016 |
| | (in thousands) |
Consumer loans secured by real estate: | | | |
Residential mortgages(3) | | $ | 8,040,363 |
| | $ | 7,775,272 |
|
Home equity loans and lines of credit | | 5,903,913 |
| | 6,001,192 |
|
Total consumer loans secured by real estate | | 13,944,276 |
| | 13,776,464 |
|
Consumer loans not secured by real estate: | | | |
RICs and auto loans - originated (4) | | 23,466,768 |
| | 22,104,918 |
|
RICs and auto loans - purchased (4) | | 2,554,220 |
| | 3,468,803 |
|
Personal unsecured loans(5) | | 1,229,497 |
| | 1,234,094 |
|
Other consumer | | 689,140 |
| | 795,378 |
|
Total consumer LHFI | | $ | 41,883,901 |
| | $ | 41,379,657 |
|
| |
(1) | These represent the Company's loan categories based on the SEC's Regulation S-X, Article 9. |
| |
(2) | These represent the Company's loan classes used to determine its ALLL. |
| |
(3) | Residential mortgages exclude $318.0 million and $462.9 million of LHFS at June 30, 2017 and December 31, 2016, respectively. |
| |
(4) | RIC and auto loans exclude $1.1 billion and $924.7 million of LHFS at June 30, 2017 and December 31, 2016, respectively. |
| |
(5) | Personal unsecured loans exclude $971.9 million and $1.1 billion of LHFS at June 30, 2017 and December 31, 2016, respectively. |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
The RIC and auto loan portfolio is comprised of: (1) RICs originated by SC prior to the first quarter 2014 consolidation and change in control and consolidation of SC (the “Change in Control"), (2) RICs originated by SC after the Change in Control, and (3) auto loans originated by SBNA. The composition of the portfolio segment is as follows:
| | | | June 30, 2017 | | December 31, 2016 | |
| | (in thousands) | |
RICs - Purchased: | | | | |
(in thousands) | | | March 31, 2018 | | December 31, 2017 |
RICs - Purchased HFI: | | | | | |
Unpaid principal balance ("UPB") (1) | | $ | 2,721,653 |
| | $ | 3,765,714 |
| | $ | 1,592,887 |
| | $ | 1,929,548 |
|
UPB - FVO (2) | | 38,851 |
| | 29,481 |
| | 19,773 |
| | 24,926 |
|
Total UPB | | 2,760,504 |
| | 3,795,195 |
| | 1,612,660 |
| | 1,954,474 |
|
Purchase marks (3) | Purchase marks (3) | (206,284 | ) | | (326,392 | ) | | (97,574 | ) | | (119,606 | ) |
Total RICs - Purchased | | 2,554,220 |
| | 3,468,803 |
| |
Total RICs - Purchased HFI | | | 1,515,086 |
| | 1,834,868 |
|
| | | | | | | | |
RICs - Originated: | | | | | |
RICs - Originated HFI: | | | | | |
UPB (1) | | 23,808,638 |
| | 22,527,753 |
| | 23,817,893 |
| | 23,373,202 |
|
Net discount | | (360,355 | ) | | (441,131 | ) | | (272,727 | ) | | (309,920 | ) |
Total RICs - Originated | Total RICs - Originated | 23,448,283 |
| | 22,086,622 |
| | 23,545,166 |
| | 23,063,282 |
|
SBNA auto loans | | 18,485 |
| | 18,296 |
| | 38,561 |
| | 18,142 |
|
Total RICs - originated post change in control | | 23,466,768 |
| | 22,104,918 |
| |
Total RICs and auto loans | | $ | 26,020,988 |
| | $ | 25,573,721 |
| |
Total RICs - originated post Change in Control | | | 23,583,727 |
| | 23,081,424 |
|
Total RICs and auto loans HFI | | | $ | 25,098,813 |
| | $ | 24,916,292 |
|
(1) UPB does not include amounts related to the loan receivables - unsecured and loan receivables from dealers due to the short-term and revolving nature of these receivables.
(2) The Company elected to account for these loans, which were acquired with evidence of credit deterioration, under the FVO.
(3) Includes purchase marks of $8.6 million and $6.7 million related to purchase loan portfolios on which we elected to apply the FVO at June 30, 2017 and December 31, 2016, respectively.
| |
(1) | UPB does not include amounts related to the loan receivables - unsecured and loan receivables from dealers due to the short-term and revolving nature of these receivables. |
| |
(2) | The Company elected to account for these loans, which were acquired with evidence of credit deterioration, under the FVO. |
| |
(3) | Includes purchase marks of $4.4 million and $5.5 million related to purchase loan portfolios on which we elected to apply the FVO at March 31, 2018 and December 31, 2017, respectively. |
During the six monthsthree-month periods ended June 30,March 31, 2018 and 2017, and 2016, the Company originated $3.4$2.0 billion and $4.6$1.6 billion, respectively, in Chrysler Capital loans, which represented 43%46% and 52%42%, respectively, of the Company's total RIC originations. As of June 30, 2017March 31, 2018 and December 31, 2016, SC's2017, the Company's auto RIC portfolio consisted of $7.2$7.0 billion and $7.4$8.2 billion, respectively, of Chrysler Capital loans, which represented 31% and 32%37%, respectively, of SC'sthe Company's auto RIC portfolio.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
21
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
ACL Rollforward by Portfolio Segment
The activity in the ACL by portfolio segment for the three-month period ended March 31, 2018 and six-month periods ended June 30, 2017 and 2016 was as follows:
| | | Three-Month Period Ended June 30, 2017 | | Three-Month Period Ended March 31, 2018 |
| Commercial | | Consumer | | Unallocated | | Total | |
| (in thousands) | |
ALLL, beginning of period | $ | 453,019 |
| | $ | 3,422,821 |
| | $ | 47,023 |
| | $ | 3,922,863 |
| |
Provision for loan and lease losses | 26,687 |
| | 584,998 |
| | — |
| | 611,685 |
| |
Charge-offs | (60,514 | ) | | (1,128,919 | ) | | — |
| | (1,189,433 | ) | |
Recoveries | 9,056 |
| | 599,437 |
| | — |
| | 608,493 |
| |
Charge-offs, net of recoveries | (51,458 | ) | | (529,482 | ) | | — |
| | (580,940 | ) | |
ALLL, end of period | $ | 428,248 |
| | $ | 3,478,337 |
| | $ | 47,023 |
| | $ | 3,953,608 |
| |
| | | | | | | | |
Reserve for unfunded lending commitments, beginning of period | $ | 119,620 |
| | $ | 776 |
| | $ | — |
| | $ | 120,396 |
| |
Release of reserve for unfunded lending commitments | (6,937 | ) | | 20 |
| | — |
| | (6,917 | ) | |
Loss on unfunded lending commitments | (1,668 | ) | | — |
| | — |
| | (1,668 | ) | |
Reserve for unfunded lending commitments, end of period | 111,015 |
| | 796 |
| | — |
| | 111,811 |
| |
Total ACL, end of period | $ | 539,263 |
| | $ | 3,479,133 |
| | $ | 47,023 |
| | $ | 4,065,419 |
| |
| | | | | | | | |
| Six-Month Period Ended June 30, 2017 | |
| Commercial | | Consumer | | Unallocated | | Total | |
| (in thousands) | |
ALLL, beginning of period | $ | 449,835 |
| | $ | 3,317,606 |
| | $ | 47,023 |
| | $ | 3,814,464 |
| |
(in thousands) | | | Commercial | | Consumer | | Unallocated | | Total |
Allowance for loan and lease losses ("ALLL"), beginning of period | | | $ | 443,796 |
| | $ | 3,420,756 |
| | $ | 47,023 |
| | $ | 3,911,575 |
|
Provision for loan and lease losses | 45,465 |
| | 1,303,556 |
| | — |
| | 1,349,021 |
| | 41,232 |
| | 480,548 |
| | — |
| | 521,780 |
|
Charge-offs | (86,687 | ) | | (2,366,199 | ) | | — |
| | (2,452,886 | ) | | (32,960 | ) | | (1,218,936 | ) | | — |
| | (1,251,896 | ) |
Recoveries | 19,635 |
| | 1,223,374 |
| | — |
| | 1,243,009 |
| | 10,006 |
| | 661,744 |
| | — |
| | 671,750 |
|
Charge-offs, net of recoveries | (67,052 | ) | | (1,142,825 | ) | | — |
| | (1,209,877 | ) | | (22,954 | ) | | (557,192 | ) | | — |
| | (580,146 | ) |
ALLL, end of period | $ | 428,248 |
| | $ | 3,478,337 |
| | $ | 47,023 |
| | $ | 3,953,608 |
| | $ | 462,074 |
| | $ | 3,344,112 |
| | $ | 47,023 |
| | $ | 3,853,209 |
|
Reserve for unfunded lending commitments, beginning of period | $ | 121,613 |
| | $ | 806 |
| | $ | — |
| | $ | 122,419 |
| | $ | 108,805 |
| | $ | 306 |
| | $ | — |
| | $ | 109,111 |
|
Release of reserve for unfunded lending commitments | (8,797 | ) | | (10 | ) | | — |
| | (8,807 | ) | |
Loss on unfunded lending commitments | (1,801 | ) | | — |
| | — |
| | (1,801 | ) | |
(Release of)/Provision for reserve for unfunded lending commitments | | | (19,263 | ) | | 17 |
| | — |
| | (19,246 | ) |
Reserve for unfunded lending commitments, end of period | 111,015 |
| | 796 |
| | — |
| | 111,811 |
| | 89,542 |
| | 323 |
| | — |
| | 89,865 |
|
Total ACL, end of period | $ | 539,263 |
| | $ | 3,479,133 |
| | $ | 47,023 |
| | $ | 4,065,419 |
| | $ | 551,616 |
| | $ | 3,344,435 |
| | $ | 47,023 |
| | $ | 3,943,074 |
|
Ending balance, individually evaluated for impairment(1) | $ | 73,946 |
| | $ | 1,636,770 |
| |
|
| | $ | 1,710,716 |
| | $ | 94,993 |
| | $ | 1,628,930 |
| | $ | — |
| | $ | 1,723,923 |
|
Ending balance, collectively evaluated for impairment | 354,302 |
| | 1,841,567 |
| | 47,023 |
| | 2,242,892 |
| | 367,081 |
| | 1,715,182 |
| | 47,023 |
| | 2,129,286 |
|
| | | | | | | | | | | | | | | |
Financing receivables: | | | | | | | | | | | | | | | |
Ending balance | $ | 41,233,130 |
| | $ | 44,227,460 |
| | $ | — |
| | $ | 85,460,590 |
| | $ | 38,400,180 |
| | $ | 43,678,843 |
| | $ | — |
| | $ | 82,079,023 |
|
Ending balance, evaluated under the FVO or lower of cost or fair value | 160,252 |
| | 2,377,177 |
| | — |
| | 2,537,429 |
| | 195,721 |
| | 1,798,347 |
| | — |
| | 1,994,068 |
|
Ending balance, individually evaluated for impairment(1) | 640,255 |
| | 6,202,430 |
| | — |
| | 6,842,685 |
| | 568,557 |
| | 6,315,802 |
| | — |
| | 6,884,359 |
|
Ending balance, collectively evaluated for impairment | 40,432,623 |
| | 35,647,853 |
| | — |
| | 76,080,476 |
| | 37,635,902 |
| | 35,564,694 |
| | — |
| | 73,200,596 |
|
(1) Consists of loans in TDR status.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
| |
(1) | Consists of loans in troubled debt restructuring ("TDR") status. |
| | | Three-Month Period Ended June 30, 2016 | | Three-Month Period Ended March 31, 2017 |
| Commercial | | Consumer | | Unallocated | | Total | |
| (in thousands) | |
ALLL, beginning of period | $ | 557,643 |
| | $ | 2,962,976 |
| | $ | 47,245 |
| | $ | 3,567,864 |
| |
(Release of) / Provision for loan and lease losses | (16,555 | ) | | 646,828 |
| | — |
| | 630,273 |
| |
Charge-offs | (33,604 | ) | | (1,032,129 | ) | | — |
| | (1,065,733 | ) | |
Recoveries | 21,373 |
| | 612,110 |
| | — |
| | 633,483 |
| |
Charge-offs, net of recoveries | (12,231 | ) | | (420,019 | ) | | — |
| | (432,250 | ) | |
ALLL, end of period | $ | 528,857 |
| | $ | 3,189,785 |
| | $ | 47,245 |
| | $ | 3,765,887 |
| |
| | | | | | | | |
Reserve for unfunded lending commitments, beginning of period | $ | 172,828 |
| | $ | 740 |
| | $ | — |
| | $ | 173,568 |
| |
(Release of) / Provision for unfunded lending commitments | (16,509 | ) | | 3 |
| | — |
| | (16,506 | ) | |
Loss on unfunded lending commitments | (166 | ) | | — |
| | — |
| | (166 | ) | |
Reserve for unfunded lending commitments, end of period | 156,153 |
| | 743 |
| | — |
| | 156,896 |
| |
Total ACL, end of period | $ | 685,010 |
| | $ | 3,190,528 |
| | $ | 47,245 |
| | $ | 3,922,783 |
| |
| | | | | | | | |
| Six-Month Period Ended June 30, 2016 | |
| Commercial | | Consumer | | Unallocated | | Total | |
| (in thousands) | |
(in thousands) | | | Commercial | | Consumer | | Unallocated | | Total |
ALLL, beginning of period | $ | 456,812 |
| | $ | 2,742,088 |
| | $ | 47,245 |
| | $ | 3,246,145 |
| | $ | 449,835 |
| | $ | 3,317,606 |
| | $ | 47,023 |
| | $ | 3,814,464 |
|
Provision for loan and lease losses | 101,378 |
| | 1,402,810 |
| | — |
| | 1,504,188 |
| | 18,777 |
| | 718,558 |
| | — |
| | 737,335 |
|
Charge-offs | (76,613 | ) | | (2,174,289 | ) | | — |
| | (2,250,902 | ) | | (26,173 | ) | | (1,237,280 | ) | | — |
| | (1,263,453 | ) |
Recoveries | 47,280 |
| | 1,219,176 |
| | — |
| | 1,266,456 |
| | 10,580 |
| | 623,937 |
| | — |
| | 634,517 |
|
Charge-offs, net of recoveries | (29,333 | ) | | (955,113 | ) | | — |
| | (984,446 | ) | | (15,593 | ) | | (613,343 | ) | | — |
| | (628,936 | ) |
ALLL, end of period | $ | 528,857 |
| | $ | 3,189,785 |
| | $ | 47,245 |
| | $ | 3,765,887 |
| | $ | 453,019 |
| | $ | 3,422,821 |
| | $ | 47,023 |
| | $ | 3,922,863 |
|
| | | | | | | | | | | | | | | |
Reserve for unfunded lending commitments, beginning of period | $ | 148,206 |
| | $ | 814 |
| | $ | — |
| | $ | 149,020 |
| | $ | 121,613 |
| | $ | 806 |
| | $ | — |
| | $ | 122,419 |
|
Provision for / (Release of) unfunded lending commitments | 8,112 |
| | (71 | ) | | — |
| | 8,041 |
| |
(Release of) unfunded lending commitments | | | (1,860 | ) | | (30 | ) | | — |
| | (1,890 | ) |
Loss on unfunded lending commitments | (165 | ) | | — |
| | — |
| | (165 | ) | | (133 | ) | | — |
| | — |
| | (133 | ) |
Reserve for unfunded lending commitments, end of period | 156,153 |
| | 743 |
| | — |
| | 156,896 |
| | 119,620 |
| | 776 |
| | — |
| | 120,396 |
|
Total ACL, end of period | $ | 685,010 |
| | $ | 3,190,528 |
| | $ | 47,245 |
| | $ | 3,922,783 |
| | $ | 572,639 |
| | $ | 3,423,597 |
| | $ | 47,023 |
| | $ | 4,043,259 |
|
Ending balance, individually evaluated for impairment(1) | $ | 146,427 |
| | $ | 1,242,254 |
| | $ | — |
| | $ | 1,388,681 |
| | $ | 99,914 |
| | $ | 1,518,545 |
| | $ | — |
| | $ | 1,618,459 |
|
Ending balance, collectively evaluated for impairment | 382,430 |
| | 1,947,531 |
| | 47,245 |
| | 2,377,206 |
| | 353,105 |
| | 1,904,276 |
| | 47,023 |
| | 2,304,404 |
|
| | | | | | | | | | | | | | | |
Financing receivables: | | | | | | | | | | | | | | | |
Ending balance | $ | 47,236,185 |
| | $ | 44,028,656 |
| | $ | — |
| | $ | 91,264,841 |
| | $ | 42,415,806 |
| | $ | 43,402,053 |
| | $ | — |
| | $ | 85,817,859 |
|
Ending balance, evaluated under the fair value option or lower of cost or fair value(1) | 464,265 |
| | 3,048,680 |
| | — |
| | 3,512,945 |
| |
Ending balance, evaluated under the FVO or lower of cost or fair value(1) | | | 103,834 |
| | 2,008,152 |
| | — |
| | 2,111,986 |
|
Ending balance, individually evaluated for impairment(1) | 784,627 |
| | 5,081,761 |
| | — |
| | 5,866,388 |
| | 675,116 |
| | 6,040,694 |
| | — |
| | 6,715,810 |
|
Ending balance, collectively evaluated for impairment | 45,987,293 |
| | 35,898,215 |
| | — |
| | 81,885,508 |
| | 41,636,856 |
| | 35,353,207 |
| | — |
| | 76,990,063 |
|
| |
(1) | Consists of loans in TDR status. |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
22
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
The following table presents the activity in the allowance for loan losses for the RICs acquired in the Change in Control and those originated by SC subsequent to the Change in Control.
| |
| Three-Month Period Ended |
| Six-Month Period Ended | Three-Month Period Ended |
| June 30, 2017 |
| June 30, 2017 | March 31, 2018 |
| Purchased |
| Originated |
| Total |
| Purchased |
| Originated |
| Total | |
| (in thousands) | |
(in thousands) | | Purchased |
| Originated |
| Total |
ALLL, beginning of period | $ | 495,221 |
| | $ | 2,707,884 |
| | $ | 3,203,105 |
| | $ | 559,092 |
| | $ | 2,538,127 |
| | $ | 3,097,219 |
| $ | 384,167 |
| | $ | 2,779,044 |
| | $ | 3,163,211 |
|
Provision for loan and lease losses | 55,141 |
| | 502,256 |
| | 557,397 |
| | 81,266 |
| | 1,162,779 |
| | 1,244,045 |
| |
(Release of) / Provision for loan and lease losses | | (15,830 | ) | | 487,159 |
| | 471,329 |
|
Charge-offs | (150,143 | ) | | (939,328 | ) | | (1,089,471 | ) | | (338,829 | ) | | (1,947,381 | ) | | (2,286,210 | ) | (105,510 | ) | | (1,078,515 | ) | | (1,184,025 | ) |
Recoveries | 68,452 |
| | 521,854 |
| | 590,306 |
| | 167,142 |
| | 1,039,141 |
| | 1,206,283 |
| 59,899 |
| | 594,952 |
| | 654,851 |
|
Charge-offs, net of recoveries | (81,691 | ) | | (417,474 | ) | | (499,165 | ) | | (171,687 | ) | | (908,240 | ) | | (1,079,927 | ) | (45,611 | ) | | (483,563 | ) | | (529,174 | ) |
ALLL, end of period | $ | 468,671 |
| | $ | 2,792,666 |
| | $ | 3,261,337 |
| | $ | 468,671 |
| | $ | 2,792,666 |
| | $ | 3,261,337 |
| $ | 322,726 |
| | $ | 2,782,640 |
| | $ | 3,105,366 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three-Month Period Ended |
| Six-Month Period Ended |
| June 30, 2016 | | June 30, 2016 |
| Purchased | | Originated | | Total | | Purchased | | Originated | | Total |
| (in thousands) |
ALLL, beginning of period | $ | 589,107 |
| | $ | 2,137,270 |
| | $ | 2,726,377 |
| | $ | 590,807 |
| | $ | 1,891,989 |
| | $ | 2,482,796 |
|
Provision for loan and lease losses | 47,617 |
| | 572,145 |
| | 619,762 |
| | 121,252 |
| | 1,246,565 |
| | 1,367,817 |
|
Charge-offs | (194,169 | ) | | (789,788 | ) | | (983,957 | ) | | (458,961 | ) | | (1,614,868 | ) | | (2,073,829 | ) |
Recoveries | 173,068 |
| | 422,813 |
| | 595,881 |
| | 362,525 |
| | 818,754 |
| | 1,181,279 |
|
Charge-offs, net of recoveries | (21,101 | ) | | (366,975 | ) | | (388,076 | ) | | (96,436 | ) | | (796,114 | ) | | (892,550 | ) |
ALLL, end of period | $ | 615,623 |
| | $ | 2,342,440 |
| | $ | 2,958,063 |
| | $ | 615,623 |
| | $ | 2,342,440 |
| | $ | 2,958,063 |
|
|
| | | | | | | | | | | |
| Three-Month Period Ended |
| March 31, 2017 |
(in thousands) | Purchased | | Originated | | Total |
ALLL, beginning of period | $ | 559,092 |
| | $ | 2,538,127 |
| | $ | 3,097,219 |
|
Provision for loan and lease losses | 26,125 |
| | 660,524 |
| | 686,649 |
|
Charge-offs | (188,686 | ) | | (1,008,053 | ) | | (1,196,739 | ) |
Recoveries | 98,690 |
| | 517,286 |
| | 615,976 |
|
Charge-offs, net of recoveries | (89,996 | ) | | (490,767 | ) | | (580,763 | ) |
ALLL, end of period | $ | 495,221 |
| | $ | 2,707,884 |
| | $ | 3,203,105 |
|
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSRefer to Note 16 for discussion of contingencies and possible losses related to the impact of hurricane activity in regions where the Company has lending activities.
23
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Non-accrual loans by Class of Financing Receivable
The recorded investment in non-accrual loans disaggregated by class of financing receivables and other non-performing assets is summarized as follows:
| | | June 30, 2017 | | December 31, 2016 | |
| (in thousands) | |
(in thousands) | | | March 31, 2018 | | December 31, 2017 |
Non-accrual loans: | | | | | | | |
Commercial: | | | | | | | |
Commercial real estate: | | | | |
Corporate banking | $ | 80,015 |
| | $ | 104,879 |
| |
Middle market commercial real estate | 45,926 |
| | 71,264 |
| |
Santander real estate capital | 416 |
| | 3,077 |
| |
CRE | | | $ | 132,941 |
| | $ | 139,236 |
|
Commercial and industrial | 264,165 |
| | 182,368 |
| | 203,738 |
| | 230,481 |
|
Multifamily | 6,212 |
| | 8,196 |
| | 10,569 |
| | 11,348 |
|
Other commercial | 22,564 |
| | 11,097 |
| | 79,474 |
| | 83,468 |
|
Total commercial loans | 419,298 |
| | 380,881 |
| | 426,722 |
| | 464,533 |
|
Consumer: | | | | | | | |
Residential mortgages | 265,454 |
| | 287,140 |
| | 257,995 |
| | 265,436 |
|
Home equity loans and lines of credit | 118,860 |
| | 120,065 |
| | 131,036 |
| | 134,162 |
|
RICs and auto loans - originated | 1,284,957 |
| | 1,045,587 |
| | 1,644,605 |
| | 1,816,226 |
|
RICs - purchased | 260,759 |
| | 284,486 |
| | 207,328 |
| | 256,617 |
|
Personal unsecured loans | 4,923 |
| | 5,201 |
| | 2,820 |
| | 2,366 |
|
Other consumer | 11,081 |
| | 12,694 |
| | 11,118 |
| | 10,657 |
|
Total consumer loans | 1,946,034 |
| | 1,755,173 |
| | 2,254,902 |
| | 2,485,464 |
|
Total non-accrual loans | 2,365,332 |
| | 2,136,054 |
| | 2,681,624 |
| | 2,949,997 |
|
| | | | | | | |
Other real estate owned ("OREO") | 108,046 |
| | 116,705 |
| | 126,714 |
| | 130,777 |
|
Repossessed vehicles | 161,020 |
| | 173,754 |
| | 171,359 |
| | 210,692 |
|
Foreclosed and other repossessed assets | 1,834 |
| | 3,838 |
| | 1,324 |
| | 2,190 |
|
Total OREO and other repossessed assets | 270,900 |
| | 294,297 |
| | 299,397 |
| | 343,659 |
|
Total non-performing assets | $ | 2,636,232 |
| | $ | 2,430,351 |
| | $ | 2,981,021 |
| | $ | 3,293,656 |
|
Age Analysis of Past Due Loans
The servicing practices for RICs originated after January 1, 2017 changed such that there is an increase in the minimum payment requirements. While this change does impact the measurement of customer delinquencies, we concluded that it does not have a significant impact on the amount or timing of the recognition of credit losses and allowance for loan losses. For reporting of past due loans, a payment of 90% or more of the amount due is considered to meet the contractual requirements. For certain RICs originated prior to January 1, 2017, the Company considers 50% of a single payment due sufficient to qualify as a payment for past due classification purposes. For RICs originated after January 1, 2017, the required minimum payment is 90% of the scheduled payment, regardless of which origination channel through which the receivable was originated through.originated. The Company aggregatespayment following the partial payments in determining whetherpayment must be a full payment, has been missed in computing past due status.
or the account will move into delinquency status at that time.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
24
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
The age of recorded investments in past due loans and accruing loans greater than 90 days or greater past due disaggregated by class of financing receivables is summarized as follows:
| | | As of: | As of: |
| | June 30, 2017 | | March 31, 2018 |
| | 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) | |
(in thousands) | | | 30-89 Days Past Due | | 90 Days or Greater | | Total Past Due | | Current | | Total Financing Receivables(1) | | Recorded Investment > 90 Days and Accruing |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | |
Corporate banking | | $ | 18,090 |
| | $ | 47,148 |
| | $ | 65,238 |
| | $ | 3,433,837 |
| | $ | 3,499,075 |
| | $ | — |
| |
Middle market commercial real estate | | 20,233 |
| | 24,266 |
| | 44,499 |
| | 5,126,965 |
| | 5,171,464 |
| | — |
| |
Santander real estate capital | | 158 |
| | — |
| | 158 |
| | 1,129,027 |
| | 1,129,185 |
| | — |
| |
Commercial and industrial | | 62,088 |
| | 52,334 |
| | 114,422 |
| | 16,175,479 |
| | 16,289,901 |
| | — |
| |
CRE | | | $ | 33,982 |
| | $ | 74,069 |
| | $ | 108,051 |
| | $ | 8,964,478 |
| | $ | 9,072,529 |
| | $ | — |
|
Commercial and industrial (1) | | | 90,510 |
| | 82,703 |
| | 173,213 |
| | 13,735,081 |
| | 13,908,294 |
| | — |
|
Multifamily | | 1,267 |
| | 1,686 |
| | 2,953 |
| | 8,237,563 |
| | 8,240,516 |
| | — |
| | 13,443 |
| | 3,003 |
| | 16,446 |
| | 8,065,478 |
| | 8,081,924 |
| | — |
|
Other commercial | | 35,317 |
| | 4,234 |
| | 39,551 |
| | 6,863,438 |
| | 6,902,989 |
| | — |
| | 48,961 |
| | 3,180 |
| | 52,141 |
| | 7,285,292 |
| | 7,337,433 |
| | — |
|
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgages | | 203,439 |
| | 203,993 |
| | 407,432 |
| | 7,950,945 |
| | 8,358,377 |
| | — |
| | 189,872 |
| | 191,010 |
| | 380,882 |
| | 8,994,194 |
| | 9,375,076 |
| | 15 |
|
Home equity loans and lines of credit | | 30,743 |
| | 76,916 |
| | 107,659 |
| | 5,796,254 |
| | 5,903,913 |
| | — |
| | 47,614 |
| | 87,221 |
| | 134,835 |
| | 5,653,847 |
| | 5,788,682 |
| | — |
|
RICs and auto loans - originated | | 3,203,333 |
| | 280,503 |
| | 3,483,836 |
| | 21,036,567 |
| | 24,520,403 |
| | — |
| | 2,634,364 |
| | 228,811 |
| | 2,863,175 |
| | 21,340,720 |
| | 24,203,895 |
| | — |
|
RICs and auto loans - purchased | | 606,352 |
| | 49,076 |
| | 655,428 |
| | 1,898,792 |
| | 2,554,220 |
| | — |
| | 330,226 |
| | 24,139 |
| | 354,365 |
| | 1,160,721 |
| | 1,515,086 |
| | — |
|
Personal unsecured loans | | 97,850 |
| | 102,811 |
| | 200,661 |
| | 2,000,746 |
| | 2,201,407 |
| | 143,984 |
| | 99,826 |
| | 90,329 |
| | 190,155 |
| | 2,038,872 |
| | 2,229,027 |
| | 81,440 |
|
Other consumer | | 21,765 |
| | 16,525 |
| | 38,290 |
| | 650,850 |
| | 689,140 |
| | — |
| | 20,501 |
| | 13,701 |
| | 34,202 |
| | 532,875 |
| | 567,077 |
| | — |
|
Total | | $ | 4,300,635 |
| | $ | 859,492 |
| | $ | 5,160,127 |
| | $ | 80,300,463 |
| | $ | 85,460,590 |
| | $ | 143,984 |
| | $ | 3,509,299 |
| | $ | 798,166 |
| | $ | 4,307,465 |
| | $ | 77,771,558 |
| | $ | 82,079,023 |
| | $ | 81,455 |
|
| |
(1) | Financing receivables include LHFS.Commercial and industrial loans includes $195.7 million of LHFS at March 31, 2018. |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
| |
(2) | Residential mortgages includes $177.0 million of LHFS at March 31, 2018. |
| |
(3) | RICs and auto loans includes $620.2 million of LHFS at March 31, 2018. |
| |
(4) | Personal unsecured loans includes $967.8 million of LHFS at March 31, 2018. |
| | | As of | As of |
| | December 31, 2016 | | December 31, 2017 |
| | 30-89 Days Past Due | | Greater Than 90 Days | | Total Past Due | | Current | | Total Financing Receivable(1) | | Recorded Investment > 90 Days and Accruing | |
| (in thousands) | |
(in thousands) | | | 30-89 Days Past Due | | 90 Days or Greater | | Total Past Due | | Current | | Total Financing Receivable(1) | | Recorded Investment > 90 Days and Accruing |
Commercial: | | | | | | | | | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | | | | | |
Corporate banking | | $ | 14,973 |
| | $ | 40,170 |
| | $ | 55,143 |
| | $ | 3,637,966 |
| | $ | 3,693,109 |
| | $ | — |
| |
Middle market commercial real estate | | 6,967 |
| | 57,520 |
| | 64,487 |
| | 5,116,085 |
| | 5,180,572 |
| | — |
| |
Santander real estate capital | | 177 |
| | — |
| | 177 |
| | 1,238,185 |
| | 1,238,362 |
| | — |
| |
CRE | | | $ | 25,174 |
| | $ | 100,524 |
| | $ | 125,698 |
| | $ | 9,153,527 |
| | $ | 9,279,225 |
| | $ | — |
|
Commercial and industrial | | 46,104 |
| | 33,800 |
| | 79,904 |
| | 18,853,163 |
| | 18,933,067 |
| | — |
| | 49,584 |
| | 75,924 |
| | 125,508 |
| | 14,461,981 |
| | 14,587,489 |
| | — |
|
Multifamily | | 7,133 |
| | 2,339 |
| | 9,472 |
| | 8,674,208 |
| | 8,683,680 |
| | — |
| | 3,562 |
| | 2,990 |
| | 6,552 |
| | 8,267,883 |
| | 8,274,435 |
| | — |
|
Other commercial | | 45,379 |
| | 2,590 |
| | 47,969 |
| | 6,784,434 |
| | 6,832,403 |
| | 1 |
| | 34,021 |
| | 3,359 |
| | 37,380 |
| | 7,137,359 |
| | 7,174,739 |
| | — |
|
Consumer: | | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgages | | 230,850 |
| | 224,790 |
| | 455,640 |
| | 7,782,525 |
| | 8,238,165 |
| | — |
| | 217,558 |
| | 210,777 |
| | 428,335 |
| | 8,628,600 |
| | 9,056,935 |
| | — |
|
Home equity loans and lines of credit | | 37,209 |
| | 75,668 |
| | 112,877 |
| | 5,888,315 |
| | 6,001,192 |
| | — |
| | 50,919 |
| | 91,975 |
| | 142,894 |
| | 5,764,839 |
| | 5,907,733 |
| | — |
|
RICs and auto loans - originated | | 3,092,841 |
| | 296,085 |
| | 3,388,926 |
| | 19,640,740 |
| | 23,029,666 |
| | — |
| | 3,405,721 |
| | 327,045 |
| | 3,732,766 |
| | 20,449,706 |
| | 24,182,472 |
| | — |
|
RICs and auto loans - purchased | | 800,993 |
| | 71,273 |
| | 872,266 |
| | 2,596,537 |
| | 3,468,803 |
| | — |
| | 452,235 |
| | 40,516 |
| | 492,751 |
| | 1,342,117 |
| | 1,834,868 |
| | — |
|
Personal unsecured loans | | 89,524 |
| | 103,698 |
| | 193,222 |
| | 2,118,474 |
| | 2,311,696 |
| | 93,845 |
| | 85,394 |
| | 105,054 |
| | 190,448 |
| | 2,157,319 |
| | 2,347,767 |
| | 96,461 |
|
Other consumer | | 31,980 |
| | 20,386 |
| | 52,366 |
| | 743,012 |
| | 795,378 |
| | — |
| | 24,879 |
| | 14,220 |
| | 39,099 |
| | 578,576 |
| | 617,675 |
| | — |
|
Total | | $ | 4,404,130 |
| | $ | 928,319 |
| | $ | 5,332,449 |
| | $ | 83,073,644 |
| | $ | 88,406,093 |
| | $ | 93,846 |
| | $ | 4,349,047 |
| | $ | 972,384 |
| | $ | 5,321,431 |
| | $ | 77,941,907 |
| | $ | 83,263,338 |
| | $ | 96,461 |
|
| |
(1) | Financing receivables include LHFS.Commercial and industrial loans included$149.2 million of LHFS at December 31, 2017. |
| |
(2) | Residential mortgages included $210.2 million of LHFS at December 31, 2017, |
| |
(3) | RICs and auto loans included $1.1 billion of LHFS at December 31, 2017. |
| |
(4) | Personal unsecured loans included $1.1 billion of LHFS at December 31, 2017. |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
25
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Impaired Loans by Class of Financing Receivable
Impaired loans are generally defined as all TDRs plus commercial non-accrual loans in excess of $1.0 million.
Impaired loans disaggregated by class of financing receivables are summarized as follows:
| | | | June 30, 2017 | | March 31, 2018 |
| | Recorded Investment(1) | | Unpaid Principal Balance | | Related Specific Reserves | | Average Recorded Investment | |
| | (in thousands) | |
(in thousands) | | | Recorded Investment(1) | | UPB | | Related Specific Reserves | | Average Recorded Investment |
With no related allowance recorded: | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | |
Corporate banking | | $ | 81,215 |
| | $ | 88,435 |
| | $ | — |
| | $ | 85,115 |
| |
Middle market commercial real estate | | 50,054 |
| | 73,141 |
| | — |
| | 55,070 |
| |
Santander real estate capital | | — |
| | — |
| | — |
| | 1,309 |
| |
CRE | | | $ | 125,669 |
| | $ | 151,164 |
| | $ | — |
| | $ | 126,039 |
|
Commercial and industrial | | 57,213 |
| | 61,674 |
| | — |
| | 62,674 |
| | 51,175 |
| | 53,140 |
| | — |
| | 66,858 |
|
Multifamily | | 2,162 |
| | 3,129 |
| | — |
| | 6,266 |
| | 11,929 |
| | 11,929 |
| | — |
| | 10,908 |
|
Other commercial | | 34,820 |
| | 34,820 |
| | — |
| | 17,929 |
| | 1,877 |
| | 1,877 |
| | — |
| | 1,322 |
|
Consumer: | | | | | | | | | | | | | | | | |
Residential mortgages | | 163,943 |
| | 212,521 |
| | — |
| | 169,507 |
| | 147,333 |
| | 198,200 |
| | — |
| | 127,327 |
|
Home equity loans and lines of credit | | 45,506 |
| | 45,506 |
| | — |
| | 47,189 |
| | 53,101 |
| | 55,368 |
| | — |
| | 52,749 |
|
RICs and auto loans - originated | | — |
| | — |
| | — |
| | — |
| | 11 |
| | 11 |
| | — |
| | 6 |
|
RICs and auto loans - purchased | | 23,343 |
| | 29,925 |
| | — |
| | 28,858 |
| | 13,252 |
| | 17,010 |
| | — |
| | 14,722 |
|
Personal unsecured loans(2) | | 28,604 |
| | 28,604 |
| | — |
| | 27,306 |
| | 31,972 |
| | 31,972 |
| | — |
| | 31,482 |
|
Other consumer | | 20,425 |
| | 24,780 |
| | — |
| | 19,880 |
| | 8,559 |
| | 12,183 |
| | — |
| | 9,058 |
|
With an allowance recorded: | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | |
Corporate banking | | 70,464 |
| | 81,293 |
| | 15,407 |
| | 75,452 |
| |
Middle market commercial real estate | | 22,956 |
| | 30,696 |
| | 6,301 |
| | 36,613 |
| |
Santander real estate capital | | 8,467 |
| | 8,467 |
| | 1,176 |
| | 8,529 |
| |
CRE | | | 99,787 |
| | 112,480 |
| | 15,976 |
| | 98,734 |
|
Commercial and industrial | | 221,578 |
| | 250,452 |
| | 47,474 |
| | 219,078 |
| | 184,297 |
| | 185,115 |
| | 55,322 |
| | 180,533 |
|
Multifamily | | 6,920 |
| | 6,920 |
| | 1,074 |
| | 4,925 |
| | 4,791 |
| | 4,791 |
| | 19 |
| | 5,496 |
|
Other commercial | | 18,714 |
| | 18,733 |
| | 2,514 |
| | 12,966 |
| | 73,696 |
| | 73,696 |
| | 23,676 |
| | 75,704 |
|
Consumer: | | | | | | | | | | | | | | | | |
Residential mortgages | | 286,731 |
| | 326,075 |
| | 41,396 |
| | 285,681 |
| | 279,472 |
| | 319,018 |
| | 38,586 |
| | 300,782 |
|
Home equity loans and lines of credit | | 50,348 |
| | 62,974 |
| | 1,838 |
| | 50,105 |
| | 64,004 |
| | 76,156 |
| | 5,078 |
| | 64,416 |
|
RICs and auto loans - originated | | 4,072,892 |
| | 4,131,141 |
| | 1,176,416 |
| | 3,672,104 |
| | 4,736,587 |
| | 4,787,816 |
| | 1,281,642 |
| | 4,762,443 |
|
RICs and auto loans - purchased | | 1,481,121 |
| | 1,673,905 |
| | 407,911 |
| | 1,668,535 |
| | 1,003,764 |
| | 1,134,415 |
| | 294,669 |
| | 1,085,120 |
|
Personal unsecured loans | | 17,293 |
| | 17,494 |
| | 6,971 |
| | 17,076 |
| | 16,590 |
| | 16,842 |
| | 6,934 |
| | 16,534 |
|
Other consumer | | 12,224 |
| | 16,196 |
| | 2,238 |
| | 12,659 |
| | 10,792 |
| | 14,446 |
| | 2,021 |
| | 11,192 |
|
Total: | | | | | | | | | | | | | | | | |
Commercial | | $ | 574,563 |
| | $ | 657,760 |
| | $ | 73,946 |
| | $ | 585,926 |
| | $ | 553,221 |
| | $ | 594,192 |
| | $ | 94,993 |
| | $ | 565,594 |
|
Consumer | | 6,202,430 |
| | 6,569,121 |
| | 1,636,770 |
| | 5,998,900 |
| | 6,365,437 |
| | 6,663,437 |
| | 1,628,930 |
| | 6,475,831 |
|
Total | | $ | 6,776,993 |
| | $ | 7,226,881 |
| | $ | 1,710,716 |
| | $ | 6,584,826 |
| | $ | 6,918,658 |
| | $ | 7,257,629 |
| | $ | 1,723,923 |
| | $ | 7,041,425 |
|
| |
(1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts, as well as purchase accounting adjustments. |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
26
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
The Company recognized interest income, not including the impact of purchase accounting adjustments, of $437.9$261.2 million for the six-monththree-month period ended June 30, 2017March 31, 2018 on approximately $5.65.8 billion of TDRs that were in performing status as of June 30, 2017March 31, 2018.
| | | | December 31, 2016 | | December 31, 2017 |
| | Recorded Investment(1) | | Unpaid Principal Balance | | Related Specific Reserves | | Average Recorded Investment | |
| | (in thousands) | |
(in thousands) | | | Recorded Investment(1) | | UPB | | Related Specific Reserves | | Average Recorded Investment |
With no related allowance recorded: | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | |
Commercial real estate: | | | | | | | | | |
Corporate banking | | $ | 89,014 |
| | $ | 106,212 |
| | $ | — |
| | $ | 93,495 |
| |
Middle market commercial real estate | | 60,086 |
| | 83,173 |
| | — |
| | 69,206 |
| |
Santander real estate capital | | 2,618 |
| | 2,618 |
| | — |
| | 2,717 |
| |
CRE | | | $ | 126,406 |
| | $ | 174,842 |
| | $ | — |
| | $ | 139,063 |
|
Commercial and industrial | | 68,135 |
| | 74,034 |
| | — |
| | 40,163 |
| | 82,541 |
| | 96,324 |
| | — |
| | 75,338 |
|
Multifamily | | 10,370 |
| | 11,127 |
| | — |
| | 9,919 |
| | 9,887 |
| | 10,838 |
| | — |
| | 10,129 |
|
Other commercial | | 1,038 |
| | 1,038 |
| | — |
| | 639 |
| | 767 |
| | 911 |
| | — |
| | 903 |
|
Consumer: | | | | | | | | | | | | | | | | |
Residential mortgages | | 175,070 |
| | 222,142 |
| | — |
| | 160,373 |
| | 107,320 |
| | 128,458 |
| | — |
| | 141,195 |
|
Home equity loans and lines of credit | | 48,872 |
| | 48,872 |
| | — |
| | 39,976 |
| | 52,397 |
| | 54,421 |
| | — |
| | 50,635 |
|
RICs and auto loans - originated | | — |
| | — |
| | — |
| | 8 |
| |
RICs and auto loans - purchased | | 34,373 |
| | 44,296 |
| | — |
| | 55,036 |
| | 16,192 |
| | 20,783 |
| | — |
| | 25,283 |
|
Personal unsecured loans(2) | | 26,008 |
| | 26,008 |
| | — |
| | 19,437 |
| | 30,992 |
| | 30,992 |
| | — |
| | 28,500 |
|
Other consumer | | 19,335 |
| | 23,864 |
| | — |
| | 15,915 |
| | 9,557 |
| | 13,055 |
| | — |
| | 14,446 |
|
With an allowance recorded: | | | | | | | | | | | | | | | | |
Commercial: | | | | | | | | | | | | | | | | |
Corporate banking | | 80,440 |
| | 85,309 |
| | 21,202 |
| | 71,667 |
| |
Middle market commercial real estate | | 50,270 |
| | 66,059 |
| | 12,575 |
| | 44,158 |
| |
Santander real estate capital | | 8,591 |
| | 8,591 |
| | 890 |
| | 4,623 |
| |
CRE | | | 97,680 |
| | 117,730 |
| | 18,523 |
| | 118,492 |
|
Commercial and industrial | | 216,578 |
| | 232,204 |
| | 57,855 |
| | 166,999 |
| | 176,769 |
| | 200,382 |
| | 59,696 |
| | 196,674 |
|
Multifamily | | 2,930 |
| | 2,930 |
| | 876 |
| | 4,292 |
| | 6,201 |
| | 6,201 |
| | 313 |
| | 4,566 |
|
Other commercial | | 7,218 |
| | 7,218 |
| | 5,198 |
| | 5,217 |
| | 77,712 |
| | 77,772 |
| | 23,794 |
| | 42,465 |
|
Consumer: | | | | | | | | | | | | | | | | |
Residential mortgages | | 284,630 |
| | 324,188 |
| | 38,764 |
| | 303,845 |
| | 322,092 |
| | 392,833 |
| | 40,963 |
| | 303,361 |
|
Home equity loans and lines of credit | | 49,862 |
| | 63,775 |
| | 3,467 |
| | 60,855 |
| | 64,827 |
| | 77,435 |
| | 4,770 |
| | 57,345 |
|
RICs and auto loans - originated | | 3,271,316 |
| | 3,332,297 |
| | 997,169 |
| | 2,298,646 |
| | 4,788,299 |
| | 4,847,929 |
| | 1,350,022 |
| | 4,029,808 |
|
RICs and auto loans - purchased | | 1,855,948 |
| | 2,097,520 |
| | 471,687 |
| | 2,155,028 |
| | 1,166,476 |
| | 1,318,306 |
| | 347,663 |
| | 1,511,212 |
|
Personal unsecured loans | | 16,858 |
| | 17,126 |
| | 6,846 |
| | 9,349 |
| | 16,477 |
| | 16,661 |
| | 6,259 |
| | 16,668 |
|
Other consumer | | 13,093 |
| | 17,253 |
| | 2,442 |
| | 15,878 |
| | 11,592 |
| | 15,290 |
| | 2,151 |
| | 12,343 |
|
Total: | | | | | | | | | | | | | | | | |
Commercial | | $ | 597,288 |
| | $ | 680,513 |
| | $ | 98,596 |
| | $ | 513,095 |
| | $ | 577,963 |
| | $ | 685,000 |
| | $ | 102,326 |
| | $ | 587,630 |
|
Consumer | | 5,795,365 |
| | 6,217,341 |
| | 1,520,375 |
| | 5,134,346 |
| | 6,586,221 |
| | 6,916,163 |
| | 1,751,828 |
| | 6,190,796 |
|
Total | | $ | 6,392,653 |
| | $ | 6,897,854 |
| | $ | 1,618,971 |
| | $ | 5,647,441 |
| | $ | 7,164,184 |
| | $ | 7,601,163 |
| | $ | 1,854,154 |
| | $ | 6,778,426 |
|
| |
(1) | Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts, as well as purchase accounting adjustments. |
The Company recognized interest income, not including the impact of purchase accounting adjustments, of $657.5795.4 million for the year ended December 31, 20162017 on approximately $5.2$5.8 billion of TDRs that were in performing status as of December 31, 20162017.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. 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.
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
SPECIAL MENTION. Asset has potential weaknesses that deserve management’s close attention, which, if left uncorrected, may result in deterioration of the repayment prospects for an asset at some future date. Special mention assets are not adversely classified.
SUBSTANDARD. Asset is inadequately protected by the current net worth and paying capacity of the obligor or by the collateral pledged, if any. A well-defined weakness or weaknesses exist that jeopardize the liquidation of the debt. The loans are characterized by the distinct possibility that the Company will sustain some loss if deficiencies are not corrected.
DOUBTFUL. Exhibits the inherent weaknesses of a substandard credit. Additional characteristics exist that make collection or liquidation in full highly questionable and improbable, on the basis of currently known facts, conditions and values. Possibility of loss is extremely high, but because of certain important and reasonable specific pending factors which may work to the advantage and strengthening of the credit, an estimated loss cannot yet be determined.
LOSS. Credit is considered uncollectible and of such little value that it does not warrant consideration as an active asset. There may be some recovery or salvage value, but there is doubt as to whether, how much or when the recovery would occur.
Commercial loan credit quality indicators by class of financing receivables are summarized as follows:
| | | | | | | | | | | | | |
June 30, 2017 | | Corporate banking | | Middle market commercial real estate | | Santander real estate capital | | Commercial and industrial | | Multifamily | | Remaining commercial | | Total(1) | |
March 31, 2018 | | | CRE | | Commercial and industrial | | Multifamily | | Remaining commercial | | Total(1) |
| | (in thousands) | | | | (in thousands) |
Rating: | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 3,112,490 |
| | $ | 4,925,292 |
| | $ | 1,093,153 |
| | $ | 15,134,306 |
| | $ | 8,096,499 |
| | $ | 6,837,304 |
| | $ | 39,199,044 |
| | $ | 8,120,502 |
| | $ | 12,576,220 |
| | $ | 7,900,191 |
| | $ | 7,212,830 |
| | $ | 35,809,743 |
|
Special Mention | | 169,613 |
| | 112,465 |
| | 17,406 |
| | 610,067 |
| | 91,930 |
| | 36,966 |
| | 1,038,447 |
| |
Special mention | | | 617,232 |
| | 831,097 |
| | 135,106 |
| | 43,314 |
| | 1,626,749 |
|
Substandard | | 200,606 |
| | 108,999 |
| | 18,626 |
| | 432,480 |
| | 52,087 |
| | 28,697 |
| | 841,495 |
| | 302,262 |
| | 417,553 |
| | 46,627 |
| | 19,117 |
| | 785,559 |
|
Doubtful | | 16,366 |
| | 24,708 |
| | — |
| | 113,048 |
| | — |
| | 22 |
| | 154,144 |
| | 32,533 |
| | 83,424 |
| | — |
| | 62,172 |
| | 178,129 |
|
Total commercial loans | | $ | 3,499,075 |
| | $ | 5,171,464 |
| | $ | 1,129,185 |
| | $ | 16,289,901 |
| | $ | 8,240,516 |
| | $ | 6,902,989 |
| | $ | 41,233,130 |
| | $ | 9,072,529 |
| | $ | 13,908,294 |
| | $ | 8,081,924 |
| | $ | 7,337,433 |
| | $ | 38,400,180 |
|
| |
(1) | Financing receivables include LHFS. |
| | | | | | | | | | | | | |
December 31, 2016 | | Corporate banking | | Middle market commercial real estate | | Santander real estate capital | | Commercial and industrial | | Multifamily | | Remaining commercial | | Total(1) | |
December 31, 2017 | | | CRE | | Commercial and industrial | | Multifamily | | Remaining commercial | | Total(1) |
| | (in thousands) | | | | (in thousands) |
Rating: | | | | | | | | | | | | | | | | | | | | | | | | |
Pass | | $ | 3,303,428 |
| | $ | 4,843,468 |
| | $ | 1,170,259 |
| | $ | 17,865,871 |
| | $ | 8,515,866 |
| | $ | 6,804,184 |
| | $ | 42,503,076 |
| | $ | 8,281,626 |
| | $ | 13,176,248 |
| | $ | 8,123,727 |
| | $ | 7,059,627 |
| | $ | 36,641,228 |
|
Special Mention | | 144,125 |
| | 136,989 |
| | 44,281 |
| | 541,828 |
| | 120,731 |
| | 10,651 |
| | 998,605 |
| |
Special mention | | | 645,835 |
| | 941,683 |
| | 105,225 |
| | 29,657 |
| | 1,722,400 |
|
Substandard | | 226,206 |
| | 161,962 |
| | 23,822 |
| | 503,185 |
| | 47,083 |
| | 11,932 |
| | 974,190 |
| | 317,510 |
| | 398,325 |
| | 45,483 |
| | 21,747 |
| | 783,065 |
|
Doubtful | | 19,350 |
| | 38,153 |
| | — |
| | 22,183 |
| | — |
| | 5,636 |
| | 85,322 |
| | 34,254 |
| | 71,233 |
| | — |
| | 63,708 |
| | 169,195 |
|
Total commercial loans | | $ | 3,693,109 |
| | $ | 5,180,572 |
| | $ | 1,238,362 |
| | $ | 18,933,067 |
| | $ | 8,683,680 |
| | $ | 6,832,403 |
| | $ | 44,561,193 |
| | $ | 9,279,225 |
| | $ | 14,587,489 |
| | $ | 8,274,435 |
| | $ | 7,174,739 |
| | $ | 39,315,888 |
|
| |
(1) | Financing receivables include LHFS. |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Consumer Lending Asset Quality Indicators-Credit Score
Consumer financing receivables for which either an internal or external credit score is a core component of the allowance model are summarized by credit score as follows:
| | | | June 30, 2017 | | December 31, 2016 | | | | | | | | | |
Credit Score Range(2) | | RICs and auto loans(3) | | Percent | | RICs and auto loans(3) | | Percent | | March 31, 2018 | | December 31, 2017 |
| | (dollars in thousands) | |
(dollars in thousands) | | | RICs and auto loans(3) | | Percent | | RICs and auto loans(3) | | Percent |
No FICO®(1) | | $ | 4,816,480 |
| | 17.8 | % | | $ | 4,154,228 |
| | 15.7 | % | | $ | 4,016,803 |
| | 15.6 | % | | $ | 4,530,238 |
| | 17.4 | % |
<600 | | 14,119,360 |
| | 52.2 | % | | 14,100,215 |
| | 53.2 | % | | 13,532,536 |
| | 52.7 | % | | 13,395,203 |
| | 51.4 | % |
600-639 | | 4,498,433 |
| | 16.6 | % | | 4,597,541 |
| | 17.4 | % | | 4,410,604 |
| | 17.1 | % | | 4,332,278 |
| | 16.7 | % |
>=640 | | 3,640,350 |
| | 13.4 | % | | 3,646,485 |
| | 13.7 | % | | 3,759,038 |
| | 14.6 | % | | 3,759,621 |
| | 14.5 | % |
Total | | $ | 27,074,623 |
| | 100.0 | % | | $ | 26,498,469 |
| | 100.0 | % | | $ | 25,718,981 |
| | 100.0 | % | | $ | 26,017,340 |
| | 100.0 | % |
(1) Consists primarily of loans for which credit scores are not considered in the ALLL model.
(2) Credit scores updated quarterly.
(3) RICs and auto loans include $1.1 billion and $924.7 million of LHFS at June 30, 2017 and December 31, 2016 | |
(1) | Consists primarily of loans for which credit scores are not considered in the ALLL model. |
| |
(2) | Credit scores updated quarterly. |
| |
(3) | RICs and auto loans include $620.2 million and $1.1 billion of LHFS at March 31, 2018 and December 31, 2017, respectively, that do not have an allowance. |
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Consumer Lending Asset Quality Indicators-FICO® and LTV Ratio
For both residential and home equity loans, loss severity assumptions are incorporated in the loan and lease loss reserve models to estimate loan balances that will ultimately charge-off.charge off. These assumptions are based on recent loss experience within various current LTV bands within these portfolios. LTVs are refreshed quarterly by applying Federal Housing Finance Agency Home price index changes at a state-by-state level to the last known appraised value of the property to estimate the current LTV. The Company's ALLL incorporates the refreshed LTV information to update the distribution of defaulted loans by LTV as well as the associated loss given default for each LTV band. Reappraisals on a recurring basis at the individual property level are not considered cost-effective or necessary; however, reappraisals are performed on certain higher risk accounts to support line management activities, default servicing decisions, or when other situations arise for which the Company believes the additional expense is warranted.
Residential mortgage and home equity financing receivables by LTV and FICO® range are summarized as follows:
| | | | Residential Mortgages(1)(3) | | Residential Mortgages(1)(3) |
June 30, 2017 | | N/A(2) | | LTV<=70% | | 70.01-80% | | 80.01-90% | | 90.01-100% | | 100.01-110% | | LTV>110% | | Grand Total | |
FICO® Score | | (dollars in thousands) | |
March 31, 2018 | | | N/A(2) | | LTV<=70% | | 70.01-80% | | 80.01-90% | | 90.01-100% | | 100.01-110% | | LTV>110% | | Grand Total |
FICO Score | | | (dollars in thousands) |
N/A(2) | | $ | 503,884 |
| | $ | 9,246 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 513,130 |
| | $ | 266,671 |
| | $ | 6,616 |
| | $ | 1,208 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 274,495 |
|
<600 | | 24 |
| | 244,023 |
| | 63,803 |
| | 44,661 |
| | 26,295 |
| | 3,963 |
| | 4,295 |
| | 387,064 |
| | 13 |
| | 223,009 |
| | 54,447 |
| | 33,835 |
| | 21,303 |
| | 2,609 |
| | 1,422 |
| | 336,638 |
|
600-639 | | 82 |
| | 154,066 |
| | 46,606 |
| | 39,583 |
| | 35,936 |
| | 3,490 |
| | 6,522 |
| | 286,285 |
| | 44 |
| | 155,786 |
| | 41,930 |
| | 34,643 |
| | 32,438 |
| | 1,229 |
| | 6,283 |
| | 272,353 |
|
640-679 | | 101 |
| | 302,248 |
| | 98,956 |
| | 84,194 |
| | 92,277 |
| | 4,974 |
| | 7,854 |
| | 590,604 |
| | 34 |
| | 319,185 |
| | 97,132 |
| | 89,991 |
| | 90,856 |
| | 2,446 |
| | 2,502 |
| | 602,146 |
|
680-719 | | 116 |
| | 507,565 |
| | 196,166 |
| | 137,355 |
| | 134,964 |
| | 5,947 |
| | 9,113 |
| | 991,226 |
| | 95 |
| | 579,125 |
| | 254,807 |
| | 138,197 |
| | 163,235 |
| | 3,436 |
| | 9,669 |
| | 1,148,564 |
|
720-759 | | 231 |
| | 862,279 |
| | 391,140 |
| | 156,261 |
| | 165,004 |
| | 5,660 |
| | 11,149 |
| | 1,591,724 |
| | 173 |
| | 1,004,260 |
| | 573,335 |
| | 188,949 |
| | 195,187 |
| | 4,819 |
| | 7,740 |
| | 1,974,463 |
|
>=760 | | 345 |
| | 2,619,796 |
| | 934,785 |
| | 243,077 |
| | 175,350 |
| | 9,109 |
| | 15,882 |
| | 3,998,344 |
| | 563 |
| | 3,148,412 |
| | 1,106,980 |
| | 290,938 |
| | 200,107 |
| | 8,371 |
| | 11,046 |
| | 4,766,417 |
|
Grand Total | | $ | 504,783 |
| | $ | 4,699,223 |
| | $ | 1,731,456 |
| | $ | 705,131 |
| | $ | 629,826 |
| | $ | 33,143 |
| | $ | 54,815 |
| | $ | 8,358,377 |
| | $ | 267,593 |
| | $ | 5,436,393 |
| | $ | 2,129,839 |
| | $ | 776,553 |
| | $ | 703,126 |
| | $ | 22,910 |
| | $ | 38,662 |
| | $ | 9,375,076 |
|
(1) Includes LHFS.
(2) Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO® score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO® score is unavailable.
(3) Allowance model considers LTV for financing receivables in first lien position for the Company and combined LTV ("CLTV") for financing receivables in second lien position for the Company.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Home Equity Loans and Lines of Credit(2) |
March 31, 2018 | | N/A(1) | | LTV<=70% | | 70.01-90% | | 90.01-110% | | LTV>110% | | Grand Total |
FICO Score | | (dollars in thousands) |
N/A(1) | | $ | 190,747 |
| | $ | 1,393 |
| | $ | 478 |
| | $ | — |
| | $ | — |
| | $ | 192,618 |
|
<600 | | 7,436 |
| | 195,852 |
| | 69,172 |
| | 19,838 |
| | 7,444 |
| | 299,742 |
|
600-639 | | 4,896 |
| | 150,132 |
| | 56,266 |
| | 7,613 |
| | 6,090 |
| | 224,997 |
|
640-679 | | 4,793 |
| | 279,728 |
| | 123,431 |
| | 17,573 |
| | 10,114 |
| | 435,639 |
|
680-719 | | 6,921 |
| | 506,113 |
| | 245,154 |
| | 21,419 |
| | 16,864 |
| | 796,471 |
|
720-759 | | 7,073 |
| | 719,337 |
| | 325,201 |
| | 31,454 |
| | 14,985 |
| | 1,098,050 |
|
>=760 | | 14,169 |
| | 1,881,952 |
| | 746,823 |
| | 64,040 |
| | 34,181 |
| | 2,741,165 |
|
Grand Total | | $ | 236,035 |
| | $ | 3,734,507 |
| | $ | 1,566,525 |
| | $ | 161,937 |
| | $ | 89,678 |
| | $ | 5,788,682 |
|
| |
(1) | Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable. |
| |
(2) | Allowance model considers LTV for financing receivables in first lien position for the Company and CLTV for financing receivables in second lien position for the Company. |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
29
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
| | | | Home Equity Loans and Lines of Credit(2) | | Residential Mortgages(1)(3) |
June 30, 2017 | | N/A(1) | | LTV<=70% | | 70.01-90% | | 90.01-110% | | LTV>110% | | Grand Total | |
FICO® Score | | (dollars in thousands) | |
December 31, 2017 | | | N/A (2) | | LTV<=70% | | 70.01-80% | | 80.01-90% | | 90.01-100% | | 100.01-110% | | LTV>110% | | Grand Total |
FICO Score | | | (dollars in thousands) |
N/A(1)(2) | | $ | 155,536 |
| | $ | 2,214 |
| | $ | 673 |
| | $ | — |
| | $ | — |
| | $ | 158,423 |
| | $ | 372,116 |
| | $ | 6,759 |
| | $ | 1,214 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 380,089 |
|
<600 | | 9,606 |
| | 156,005 |
| | 61,736 |
| | 13,209 |
| | 10,123 |
| | 250,679 |
| | 21 |
| | 220,737 |
| | 55,108 |
| | 35,617 |
| | 23,834 |
| | 2,505 |
| | 6,020 |
| | 343,842 |
|
600-639 | | 6,507 |
| | 146,336 |
| | 62,370 |
| | 11,778 |
| | 9,779 |
| | 236,770 |
| | 45 |
| | 155,920 |
| | 42,420 |
| | 35,009 |
| | 34,331 |
| | 2,696 |
| | 6,259 |
| | 276,680 |
|
640-679 | | 7,922 |
| | 270,143 |
| | 149,274 |
| | 22,791 |
| | 14,178 |
| | 464,308 |
| | 37 |
| | 320,248 |
| | 94,601 |
| | 90,708 |
| | 86,740 |
| | 3,011 |
| | 2,641 |
| | 597,986 |
|
680-719 | | 8,474 |
| | 458,583 |
| | 278,428 |
| | 37,942 |
| | 20,350 |
| | 803,777 |
| | 98 |
| | 554,058 |
| | 236,602 |
| | 136,980 |
| | 147,754 |
| | 3,955 |
| | 10,317 |
| | 1,089,764 |
|
720-759 | | 8,372 |
| | 670,095 |
| | 386,346 |
| | 42,000 |
| | 23,534 |
| | 1,130,347 |
| | 92 |
| | 952,532 |
| | 480,900 |
| | 178,876 |
| | 183,527 |
| | 4,760 |
| | 8,600 |
| | 1,809,287 |
|
>=760 | | 18,813 |
| | 1,793,254 |
| | 910,447 |
| | 88,570 |
| | 48,525 |
| | 2,859,609 |
| | 588 |
| | 3,019,514 |
| | 1,066,919 |
| | 263,541 |
| | 187,713 |
| | 8,418 |
| | 12,594 |
| | 4,559,287 |
|
Grand Total | | $ | 215,230 |
| | $ | 3,496,630 |
| | $ | 1,849,274 |
| | $ | 216,290 |
| | $ | 126,489 |
| | $ | 5,903,913 |
| | $ | 372,997 |
| | $ | 5,229,768 |
| | $ | 1,977,764 |
| | $ | 740,731 |
| | $ | 663,899 |
| | $ | 25,345 |
| | $ | 46,431 |
| | $ | 9,056,935 |
|
(1) Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO® score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO® score is unavailable.
(2) Allowance model considers LTV for financing receivables in first lien position for the Company and CLTV for financing receivables in second lien position for the Company.
| |
(2) | Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable. |
| |
(3) | Allowance model considers LTV for financing receivables in first lien position for the Company and CLTV for financing receivables in second lien position for the Company. |
| | | | Residential Mortgages(1)(3) | | Home Equity Loans and Lines of Credit(2) |
December 31, 2016 | | N/A (2) | | LTV<=70% | | 70.01-80% | | 80.01-90% | | 90.01-100% | | 100.01-110% | | LTV>110% | | Grand Total | |
FICO® Score | | (dollars in thousands) | |
December 31, 2017 | | | N/A(1) | | LTV<=70% | | 70.01-90% | | 90.01-110% | | LTV>110% | | Grand Total |
FICO Score | | | (dollars in thousands) |
N/A(2)(1) | | $ | 696,730 |
| | $ | 102,911 |
| | $ | 4,635 |
| | $ | 2,327 |
| | $ | 196 |
| | $ | 150 |
| | $ | — |
| | $ | 806,949 |
| | $ | 154,690 |
| | $ | 536 |
| | $ | 238 |
| | $ | — |
| | $ | — |
| | $ | 155,464 |
|
<600 | | 80 |
| | 228,794 |
| | 70,793 |
| | 49,253 |
| | 30,720 |
| | 6,622 |
| | 5,885 |
| | 392,147 |
| | 8,064 |
| | 190,657 |
| | 64,554 |
| | 16,634 |
| | 22,954 |
| | 302,863 |
|
600-639 | | 147 |
| | 152,728 |
| | 48,006 |
| | 42,443 |
| | 42,356 |
| | 4,538 |
| | 6,675 |
| | 296,893 |
| | 6,276 |
| | 158,461 |
| | 61,250 |
| | 9,236 |
| | 9,102 |
| | 244,325 |
|
640-679 | | 98 |
| | 283,054 |
| | 101,495 |
| | 81,669 |
| | 93,552 |
| | 5,287 |
| | 4,189 |
| | 569,344 |
| | 6,745 |
| | 297,003 |
| | 127,347 |
| | 19,465 |
| | 14,058 |
| | 464,618 |
|
680-719 | | 112 |
| | 487,257 |
| | 193,351 |
| | 136,937 |
| | 146,090 |
| | 6,766 |
| | 11,795 |
| | 982,308 |
| | 8,875 |
| | 500,234 |
| | 258,284 |
| | 24,675 |
| | 20,261 |
| | 812,329 |
|
720-759 | | 56 |
| | 767,192 |
| | 348,524 |
| | 163,163 |
| | 178,264 |
| | 8,473 |
| | 16,504 |
| | 1,482,176 |
| | 8,587 |
| | 724,831 |
| | 332,508 |
| | 30,526 |
| | 19,119 |
| | 1,115,571 |
|
>=760 | | 495 |
| | 2,415,542 |
| | 860,582 |
| | 219,014 |
| | 180,841 |
| | 11,134 |
| | 20,740 |
| | 3,708,348 |
| | 17,499 |
| | 1,917,373 |
| | 768,905 |
| | 73,573 |
| | 35,213 |
| | 2,812,563 |
|
Grand Total | | $ | 697,718 |
| | $ | 4,437,478 |
| | $ | 1,627,386 |
| | $ | 694,806 |
| | $ | 672,019 |
| | $ | 42,970 |
| | $ | 65,788 |
| | $ | 8,238,165 |
| | $ | 210,736 |
| | $ | 3,789,095 |
| | $ | 1,613,086 |
| | $ | 174,109 |
| | $ | 120,707 |
| | $ | 5,907,733 |
|
(1) Includes LHFS.
(2) Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO® score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO® score is unavailable.
(3) Allowance model considers LTV for financing receivables in first lien position for the Company and CLTV for financing receivables in second lien position for the Company.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Home Equity Loans and Lines of Credit(2) |
December 31, 2016 | | N/A(1) | | LTV<=70% | | 70.01-90% | | 90.01-110% | | LTV>110% | | Grand Total |
FICO® Score | | (dollars in thousands) |
N/A(1) | | $ | 172,836 |
| | $ | 530 |
| | $ | 157 |
| | $ | — |
| | $ | — |
| | $ | 173,523 |
|
<600 | | 10,198 |
| | 166,702 |
| | 64,446 |
| | 14,474 |
| | 12,684 |
| | 268,504 |
|
600-639 | | 7,323 |
| | 143,666 |
| | 68,415 |
| | 16,680 |
| | 8,873 |
| | 244,957 |
|
640-679 | | 10,225 |
| | 278,913 |
| | 139,940 |
| | 27,823 |
| | 14,127 |
| | 471,028 |
|
680-719 | | 11,507 |
| | 461,285 |
| | 271,264 |
| | 39,668 |
| | 25,158 |
| | 808,882 |
|
720-759 | | 12,640 |
| | 662,217 |
| | 383,186 |
| | 45,496 |
| | 28,608 |
| | 1,132,147 |
|
>=760 | | 25,425 |
| | 1,814,060 |
| | 919,295 |
| | 94,522 |
| | 48,849 |
| | 2,902,151 |
|
Grand Total | | $ | 250,154 |
| | $ | 3,527,373 |
| | $ | 1,846,703 |
| | $ | 238,663 |
| | $ | 138,299 |
| | $ | 6,001,192 |
|
(1) Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO® score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO® score is unavailable.
(2) Allowance model considers LTV for financing receivables in first lien position for the Company and CLTV for financing receivables in second lien position for the Company.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
| |
(1) | Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable. |
| |
(2) | Allowance model considers LTV for financing receivables in first lien position for the Company and CLTV for financing receivables in second lien position for the Company. |
TDR Loans
The following table summarizes the Company’s performing and non-performing TDRs at the dates indicated:
| | | June 30, 2017 | | December 31, 2016 | |
| (in thousands) | |
(in thousands) | | | March 31, 2018 | | December 31, 2017 |
Performing | $ | 5,554,025 |
| | $ | 5,169,788 |
| | $ | 5,811,401 |
| | $ | 5,824,304 |
|
Non-performing | 967,453 |
| | 937,127 |
| | 785,958 |
| | 982,868 |
|
Total | $ | 6,521,478 |
| | $ | 6,106,915 |
| | $ | 6,597,359 |
| | $ | 6,807,172 |
|
Commercial Loan TDRs
All of the Company’s commercial loan modifications are based on the circumstances of the individual customer, including specific customers' complete relationships with the Company. Loan terms are modified to meet each borrower’s specific circumstances at a point in time and may allow for modifications such as term extensions and interest rate reductions, etc.reductions. Modifications for commercial loan TDRs generally, although not always, result in bifurcation of the original loan into A and B notes. The A note is restructured to allow for upgraded risk rating and return to accrual status after a sustained period of payment performance has been achieved (typically six months for monthly payment schedules). The B note, if any, is structured as a deficiency note; the balance is charged off but the debt is usually not forgiven. Commercial TDRs are generally placed on non-accrual status until the Company believes repayment under the revised terms is reasonably assured and a sustained period of repayment performance has been achieved (typically six months for a monthly amortizing loan). TDRs are subject to analysis for specific reserves by either calculating the present value of expected future cash flows or, if collateral-dependent, calculating the fair value of the collateral less its estimated cost to sell. The TDR classification will remain on the loan until it is paid in full or liquidated.
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Consumer Loan TDRs
The primary modification program for the Company’s residential mortgage and home equity portfolios is a proprietary program designed to keep customers in their homes and, when appropriate, prevent them from entering into foreclosure. The program is available to all customers facing a financial hardship regardless of their delinquency status. The main goal of the modification program is to review the customer’s entire financial condition to ensure that the proposed modified payment solution is affordable according to a specific debt-to-income ("(“DTI") ratio range. The main modification benefits of the program allow for term extensions, interest rate reductions, and/or deferment of principal. The Company reviews each customer on a case-by-case basis to determine which benefit or combination of benefits will be offered to achieve the target DTI range.
For the Company’s other consumer portfolios, including RICs and auto loans, the terms of the modifications generally include one or a combination of: a reduction of the stated interest rate of the loan to a rate of interest lower than the current market rate for new debt with similar risk, an extension of the maturity date or principal forgiveness.
Consumer TDRs excluding RICs are generally placed on non-accrual status until the Company believes repayment under the revised terms is reasonably assured and a sustained period of repayment performance has been achieved (typically six months for a monthly amortizing loan). Any loan that has remained current for the six months immediately prior to modification will remain on accrual status after the modification is implemented. RIC TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured, and considered for return to accrual when a sustained period of repayment performance has been achieved. The TDR classification will remain on the loan until it is paid in full or liquidated.
In addition to loans identified as TDRs above, the guidance also requires loans discharged under Chapter 7 bankruptcy proceedings to be considered TDRs and collateral-dependent, regardless of delinquency status. TDRs that are collateral-dependent loans must be written down to the fair market value of the collateral, less costs to sell and classified as non-accrual/non-performing loans (“NPLs") for the remaining life of the loan.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
TDR Impact to ALLL
The ALLL is established to recognize losses inherent in funded loans intended to be held for investmentHFI that are probable and can be reasonably estimated. Prior to loans being placed in TDR status, the Company generally measures its allowance under a loss contingency methodology in which consumer loans with similar risk characteristics are pooled and loss experience information is monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV and credit scores.
Upon TDR modification, the Company generally measures impairment based on a present value of expected future cash flows methodology considering all available evidence, by discounting expected future cash flows using the original effective interest rate or fair value of collateral less costs to sell. The amount of the required ALLL is equal to the difference between the loan’s impaired value and the recorded investment.
When aRIC TDRs that subsequently default continue to have impairment measured based on the difference between the recorded investment of the RIC and the present value of expected cash flows. For the Company's other consumer TDR subsequentlyportfolios, impairment on subsequent defaults the Companyis generally measures impairmentmeasured based on the fair value of the collateral, if applicable, less its estimated cost to sell.
Typically, commercial loans whose terms are modified in a TDR will have been identified as impaired prior to modification and accounted for generally using a present value of expected future cash flows methodology, unless the loan is considered collateral-dependent. Loans considered collateral-dependent are measured for impairment based on their fair values of collateral less estimated cost to sell. Accordingly, upon TDR modification or if a TDR modification subsequently defaults, the allowance methodology remains unchanged.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
31
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
Financial Impact and TDRs by Concession Type
The following tables detail the activity of TDRs for the three-month period ended March 31, 2018 and six-month periods ended June 30, 2017, and June 30, 2016, respectively:
| | | Three-Month Period Ended June 30, 2017 | Three-Month Period Ended March 31, 2018 |
| Number of Contracts | | Pre-TDR Recorded Investment(1) | | Term Extension | Rate Reduction | Principal Forbearance | Other(4) | Post-TDR Recorded Investment(2) | Number of Contracts | | Pre-TDR Recorded Investment(1) | | Term Extension | Principal Forbearance | Other(4) | | Post-TDR Recorded Investment(2) |
| (dollars in thousands) | (dollars in thousands) |
Commercial: | | | | | | | | |
Commercial real estate: | | | | | | |
Corporate Banking | 30 |
| | $ | 109,343 |
| | $ | (13,674 | ) | $ | 127 |
| $ | (13,482 | ) | $ | (669 | ) | $ | 81,645 |
| |
Middle market commercial real estate | 1 |
| | 19,979 |
| | (595 | ) | — |
| — |
| — |
| 19,384 |
| |
CRE | | 27 |
| | $ | 34,507 |
| | $ | (11 | ) | $ | (30 | ) | $ | (1,101 | ) | | $ | 33,365 |
|
Commercial and industrial | 145 |
| | 4,373 |
| | (3 | ) | — |
| — |
| (4 | ) | 4,366 |
| 80 |
| | 3,725 |
| | (4 | ) | — |
| (131 | ) | | 3,590 |
|
Consumer: | | | | |
| |
| | | | | | | | |
Residential mortgages(3) | 60 |
| | 12,981 |
| | 6 |
| — |
| — |
| 116 |
| 13,103 |
| 61 |
| | 9,927 |
| | — |
| — |
| (720 | ) | | 9,207 |
|
Home equity loans and lines of credit | 17 |
| | 1,411 |
| | — |
| — |
| — |
| 417 |
| 1,828 |
| 94 |
| | 6,104 |
| | — |
| — |
| (232 | ) | | 5,872 |
|
RICs and auto loans - originated | 45,843 |
| | 797,572 |
| | (787 | ) | — |
| — |
| (40 | ) | 796,745 |
| 32,787 |
| | 562,736 |
| | (1,175 | ) | — |
| (73 | ) | | 561,488 |
|
RICs - purchased | 24 |
| | 101 |
| | (1 | ) | — |
| — |
| — |
| 100 |
| 1,895 |
| | 14,217 |
| | (316 | ) | — |
| (2 | ) | | 13,899 |
|
Personal unsecured loans | 3,572 |
| | 6,038 |
| | — |
| — |
| — |
| (68 | ) | 5,970 |
| 4,833 |
| | 7,860 |
| | — |
| — |
| (98 | ) | | 7,762 |
|
Other consumer | 48 |
| | 1,421 |
| | — |
| — |
| — |
| 1 |
| 1,422 |
| 13 |
| | 136 |
| | (1 | ) | — |
| (4 | ) | | 131 |
|
Total | 49,740 |
| | $ | 953,219 |
| | $ | (15,054 | ) | $ | 127 |
| $ | (13,482 | ) | $ | (247 | ) | $ | 924,563 |
| 39,790 |
| | $ | 639,212 |
| | $ | (1,507 | ) | $ | (30 | ) | $ | (2,361 | ) | | $ | 635,314 |
|
| | | | | | |
| Six-Month Period Ended June 30, 2017 | |
| Number of Contracts | | Pre-TDR Recorded Investment(1) | | Term Extension | Rate Reduction | Principal Forbearance | Other(4) | Post-TDR Recorded Investment(2) | |
| (dollars in thousands) | |
Commercial: | | | | | | |
Commercial real estate: | | | | | | |
Corporate Banking | 54 |
| | $ | 139,344 |
| | $ | (13,676 | ) | $ | 127 |
| $ | (13,481 | ) | $ | (329 | ) | $ | 111,985 |
| |
Middle market commercial real estate | 1 |
| | 19,979 |
| | (595 | ) | — |
| — |
| — |
| 19,384 |
| |
Commercial and industrial | 387 |
| | 12,407 |
| | (7 | ) | — |
| — |
| (4 | ) | 12,396 |
| |
Consumer: | | | | | | |
Residential mortgages(3) | 149 |
| | 28,974 |
| | 6 |
| 133 |
| — |
| (200 | ) | 28,913 |
| |
Home equity loans and lines of credit | 36 |
| | 2,843 |
| | — |
| — |
| — |
| 538 |
| 3,381 |
| |
RICs and auto loans - originated | 96,753 |
| | 1,704,171 |
| | (1,721 | ) | — |
| — |
| (147 | ) | 1,702,303 |
| |
RICs - purchased | 79 |
| | 390 |
| | (6 | ) | | — |
| (2 | ) | 382 |
| |
Personal unsecured loans | 7,890 |
| | 13,140 |
| | — |
| — |
| — |
| (113 | ) | 13,027 |
| |
Other consumer | 107 |
| | 3,539 |
| | — |
| — |
| — |
| — |
| 3,539 |
| |
Total | 105,456 |
| | $ | 1,924,787 |
| | $ | (15,999 | ) | $ | 260 |
| $ | (13,481 | ) | $ | (257 | ) | $ | 1,895,310 |
| |
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month in which the modification occurred.
(2) Post-TDR modification outstanding recorded investment amount is the month-end balance for the month in which the modification occurred.
(3) The post-TDR modification outstanding recorded investment amounts for residential mortgages exclude interest reserves.
(4) Other modifications may include modifications such as fee waivers, or capitalization of fees.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
| | | Three-Month Period Ended June 30, 2016 | Three-Month Period Ended March 31, 2017 |
| Number of Contracts | | Pre-TDR Recorded Investment(1) | | Term Extension | Capitalized(4) | Principal Forbearance | Other(4) | Post-TDR Recorded Investment(2) | Number of Contracts | | Pre-TDR Recorded Investment(1) | | Term Extension | Principal Forbearance | Other(4) | | Post-TDR Recorded Investment(2) |
| (dollars in thousands) | (dollars in thousands) |
Commercial: | | | | | | |
Commercial real estate: | | | | | | |
Corporate Banking | 36 |
| | $ | 112,030 |
| | $ | (16 | ) | $ | — |
| $ | (15,273 | ) | $ | — |
| $ | 96,741 |
| |
Middle market commercial real estate | 3 |
| | 10,453 |
| | — |
| — |
| — |
| — |
| 10,453 |
| |
Santander real estate capital | 1 |
| | 8,729 |
| | — |
| — |
| — |
| — |
| 8,729 |
| |
CRE | | 24 |
| | $ | 30,001 |
| | $ | (2 | ) | $ | 1 |
| $ | 340 |
| | $ | 30,340 |
|
Commercial and industrial | 341 |
| | 10,959 |
| | (1 | ) | — |
| — |
| — |
| 10,958 |
| 242 |
| | 8,034 |
| | (4 | ) | — |
| — |
| | 8,030 |
|
Consumer: | | | | | | | | | | | | |
Residential mortgages(3) | 88 |
| | 13,374 |
| | (83 | ) | (143 | ) | — |
| — |
| 13,148 |
| 89 |
| | 15,993 |
| | — |
| — |
| (183 | ) | | 15,810 |
|
Home equity loans and lines of credit | 35 |
| | 2,504 |
| | — |
| — |
| — |
| — |
| 2,504 |
| 19 |
| | 1,432 |
| | — |
| — |
| 121 |
| | 1,553 |
|
RICs and auto loans - originated | 38,569 |
| | 710,885 |
| | (164 | ) | — |
| — |
| — |
| 710,721 |
| 50,910 |
| | 906,599 |
| | (934 | ) | — |
| (107 | ) | | 905,558 |
|
RICs - purchased | 10,501 |
| | 122,739 |
| | (544 | ) | — |
| — |
| — |
| 122,195 |
| 55 |
| | 289 |
| | (5 | ) | — |
| (2 | ) | | 282 |
|
Personal unsecured loans | 352 |
| | 2,906 |
| | — |
| — |
| — |
| — |
| 2,906 |
| 17,757 |
| | 24,855 |
| | — |
| — |
| (109 | ) | | 24,746 |
|
Other consumer | 4 |
| | 167 |
| | — |
| — |
| — |
| — |
| 167 |
| 59 |
| | 2,118 |
| | — |
| — |
| (1 | ) | | 2,117 |
|
Total | 49,930 |
| | $ | 994,746 |
| | $ | (808 | ) | $ | (143 | ) | $ | (15,273 | ) | $ | — |
| $ | 978,522 |
| 69,155 |
| | $ | 989,321 |
| | $ | (945 | ) | $ | 1 |
| $ | 59 |
| | $ | 988,436 |
|
| | | | | | |
| | | | | | |
| Six-Month Period Ended June 30, 2016 | |
| Number of Contracts | | Pre-TDR Recorded Investment(1) | | Term Extension | Capitalized(4) | Principal Forbearance | Other(4) | Post-TDR Recorded Investment(2) | |
| (dollars in thousands) | |
Commercial: | | |
Commercial real estate: | | | | | | |
Corporate Banking | 54 |
| | $ | 161,124 |
| | $ | (32 | ) | $ | — |
| $ | (25,856 | ) | $ | (454 | ) | $ | 134,782 |
| |
Middle market commercial real estate | 3 |
| | 10,454 |
| | — |
| — |
| — |
| (68 | ) | 10,386 |
| |
Santander real estate capital | 1 |
| | 8,729 |
| | — |
| — |
| — |
| (18 | ) | 8,711 |
| |
Commercial and industrial | 572 |
| | 18,841 |
| | (2 | ) | — |
| — |
| (22 | ) | 18,817 |
| |
Consumer: | | | | | | |
Residential mortgages(3) | 159 |
| | 25,351 |
| | (1 | ) | — |
| — |
| (164 | ) | 25,186 |
| |
Home equity loans and lines of credit | 102 |
| | 7,043 |
| | 132 |
| — |
| — |
| (286 | ) | 6,889 |
| |
RICs and auto loans - originated | 66,264 |
| | 1,224,951 |
| | (247 | ) | — |
| — |
| (111 | ) | 1,224,593 |
| |
RICs - purchased | 24,845 |
| | 298,707 |
| | (1,142 | ) | | — |
| (41 | ) | 297,524 |
| |
Personal unsecured loans | 17,508 |
| | 25,629 |
| | — |
| — |
| — |
| (186 | ) | 25,443 |
| |
Other consumer | 30 |
| | 1,090 |
| | — |
| — |
| — |
| (179 | ) | 911 |
| |
Total | 109,538 |
| | $ | 1,781,919 |
| | $ | (1,292 | ) | $ | — |
| $ | (25,856 | ) | $ | (1,529 | ) | $ | 1,753,242 |
| |
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month in which the modification occurred.
| |
(2) | Post-TDR modification outstanding recorded investment amount is the month-end balance for the month in which the modification occurred. |
| |
(3) | The post-TDR modification outstanding recorded investment amounts for residential mortgages exclude interest reserves. |
| |
(4) | Other modifications may include modifications such as interest rate reductions, fee waivers, or capitalization of fees. |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
32
NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
TDRs Which Have Subsequently Defaulted
A TDR is generally considered to have subsequently defaulted if, after modification, the loan becomes 90 days past due. For RICs, a TDR is considered to have subsequently defaulted after modification at the earlier of the date of repossession or 120 days past due. The following table details period-end recorded investment balances of TDRs that became TDRs during the past twelve-month period and have subsequently defaulted during the three-month and six-month periods ended June 30,March 31, 2018 and March 31, 2017, and June 30, 2016, respectively.
| | | Three-Month Period Ended June 30, | | Six-Month Period Ended June 30, | Three-Month Period Ended March 31, |
| 2017 | | 2016 | | 2017 | | 2016 | 2018 | | 2017 |
| Number of Contracts | | Recorded Investment(1) | | Number of Contracts | | Recorded Investment(1) | | Number of Contracts | | Recorded Investment(1) | | Number of Contracts | | Recorded Investment(1) | Number of Contracts | | Recorded Investment(1) | | Number of Contracts | | Recorded Investment(1) |
| (dollars in thousands) | | (dollars in thousands) | (dollars in thousands) |
Commercial | | | | | | | | | | | | | | | | | | | | | | |
Middle Market Commercial Real Estate | 3 |
| | 217 |
| | 6 |
| | 4,109 |
| | 5 |
| | 439 |
| | 11 |
| | 4,662 |
| |
CRE | | 2 |
| | $ | 284 |
| | 35 |
| | $ | 7,721 |
|
Commercial and industrial | 45 |
| | 1,699 |
| | 38 |
| | 1,300 |
| | 102 |
| | 3,632 |
| | 94 |
| | 3,402 |
| 52 |
| | 1,520 |
| | 66 |
| | 2,887 |
|
Consumer: | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgages | 67 |
| | 10,306 |
| | 55 |
| | 6,524 |
| | 120 |
| | 15,065 |
| | 121 |
| | 14,004 |
| 64 |
| | 8,868 |
| | 29 |
| | 4,161 |
|
Home equity loans and lines of credit | 2 |
| | 37 |
| | 3 |
| | 155 |
| | 4 |
| | 210 |
| | 8 |
| | 496 |
| 7 |
| | 551 |
| | 2 |
| | 173 |
|
RICs and auto loans | 10,940 |
| | 193,280 |
| | 9,944 |
| | 163,142 |
| | 23,221 |
| | 407,282 |
| | 23,068 |
| | 377,844 |
| 12,022 |
| | 201,669 |
| | 12,281 |
| | 214,002 |
|
Unsecured loans | 1,013 |
| | 2,522 |
| | 1,375 |
| | 2,686 |
| | 1,936 |
| | 4,740 |
| | 3,035 |
| | 5,096 |
| |
Personal Unsecured loans | | 2,324 |
| | 3,243 |
| | 874 |
| | 1,707 |
|
Other consumer | 11 |
| | 158 |
| | 6 |
| | 16 |
| | 22 |
| | 276 |
| | 10 |
| | 47 |
| 1 |
| | 10 |
| | 9 |
| | 105 |
|
Total | 12,081 |
| | $ | 208,219 |
| | 11,427 |
| | $ | 177,932 |
| | 25,410 |
| | $ | 431,644 |
| | 26,347 |
| | $ | 405,551 |
| 14,472 |
| | $ | 216,145 |
| | 13,296 |
| | $ | 230,756 |
|
| |
(1) | The recorded investment represents the period-end balance at June 30, 2017March 31, 2018 and 2016.2017. Does not include Chapter 7 bankruptcy TDRs. |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5. OPERATING LEASE ASSETS, NET
The Company has operating leases which are included in the Company's Condensed Consolidated Balance Sheets as Operating lease assets, net. The leased vehicle portfolio consists primarily of leases originated under the Chrysler Agreement.
Operating lease assets, net consisted of the following as of June 30, 2017March 31, 2018 and December 31, 2016:
2017:
|
| | | | | | | | |
| | June 30, 2017 | | December 31, 2016 |
| | (in thousands) |
Leased vehicles | | $ | 13,748,802 |
| | $ | 13,603,494 |
|
Origination fees and other costs | | 25,015 |
| | 23,141 |
|
Manufacturer subvention payments | | (1,136,325 | ) | | (1,126,323 | ) |
Leased vehicles, gross | | 12,637,492 |
| | 12,500,312 |
|
Less: accumulated depreciation | | (2,789,845 | ) | | (2,811,855 | ) |
Leased vehicles, net | | 9,847,647 |
| | 9,688,457 |
|
| | | | |
Commercial equipment vehicles and aircraft, gross | | 79,065 |
| | 65,401 |
|
Less: accumulated depreciation | | (11,852 | ) | | (6,635 | ) |
Commercial equipment vehicles and aircraft, net | | 67,213 |
| | 58,766 |
|
| | | | |
Total operating lease assets, net | | $ | 9,914,860 |
| | $ | 9,747,223 |
|
Periodically, the Company executes bulk sales of leases originated under the Chrysler Capital program. During the three-month and six-month periods ended June 30, 2017 and June 30, 2016, the Company did not execute any bulk sales of leases originated under the Chrysler Capital program. |
| | | | | | | | |
(in thousands) | | March 31, 2018 | | December 31, 2017 |
Leased vehicles | | $ | 14,777,384 |
| | $ | 14,751,568 |
|
Origination fees and other costs | | 36,563 |
| | 27,246 |
|
Manufacturer subvention payments | | (1,077,250 | ) | | (1,047,113 | ) |
Leased vehicles, gross | | 13,736,697 |
| | 13,731,701 |
|
Less: accumulated depreciation | | (3,075,176 | ) | | (3,333,125 | ) |
Leased vehicles, net | | 10,661,521 |
| | 10,398,576 |
|
| | | | |
Commercial equipment vehicles and aircraft, gross | | 131,316 |
| | 93,981 |
|
Less: accumulated depreciation | | (21,941 | ) | | (18,249 | ) |
Commercial equipment vehicles and aircraft, net | | 109,375 |
| | 75,732 |
|
| | | | |
Total operating lease assets, net | | $ | 10,770,896 |
| | $ | 10,474,308 |
|
The following summarizes the future minimum rental payments due to the Company as lessor under operating leases as of June 30, 2017March 31, 2018 (in thousands):
|
| | | | |
2018 | | $ | 1,393,256 |
|
2019 | | 1,326,920 |
|
2020 | | 647,034 |
|
2021 | | 59,511 |
|
2022 | | 6,754 |
|
Thereafter | | 16,370 |
|
Total | | $ | 3,449,845 |
|
|
| | | | |
| | |
2017 | | $ | 916,891 |
|
2018 | | 1,298,577 |
|
2019 | | 629,872 |
|
2020 | | 87,247 |
|
2021 | | 1,243 |
|
Thereafter | | — |
|
Total | | $ | 2,933,830 |
|
NOTE 5. OPERATING LEASE ASSETS, NET (continued)
Lease income was $540.9 million and $496.0 million for the three-month and six-month periods ended June 30,March 31, 2018 and 2017, was $489.0respectively.
During the three-month periods ended March 31, 2018 and 2017, the Company recognized $53.2 million and $985.1$22.7 million, respectively, comparedof net gains on the sale of operating lease assets that had been returned to $456.9 million and $877.8 million, respectively, for the three-month and six-month periods ended June 30, 2016.Company at the end of the lease term. These amounts are recorded within Miscellaneous income, net in the Company's Condensed Consolidated Statements of Operations.
Lease expense was $424.3 million and $358.8 million for the three-month and six-month periods ended June 30,March 31, 2018 and 2017, was $369.2 million and $728.0 million, respectively, compared to $322.2 million and $615.0 million, respectively, for the three-month and six-month periods ended June 30, 2016.respectively.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6. VARIABLE INTEREST ENTITIES
VIEs
The Company transfers RICs and leased vehiclesvehicle leases into newly formed Trusts that then issue one or more classes of notes payable backed by the collateral. The Company’s continuing involvement with these Trusts is in the form of servicing the assets and, generally, through holding residual interests in the Trusts. The Trusts are considered VIEs under GAAP, and the Company may or may not consolidate these VIEs on the Condensed Consolidated Balance Sheets.Financial Statements.
For further description of the Company'sCompany’s securitization activities, involvement with VIEs and accounting policies regarding consolidation of VIEs, see Note 7 of the 2016its Annual Report on Form 10-K.10-K for 2017.
On-balance sheet VIEs
The assets of consolidated VIEs that are included in the Company's Condensed Consolidated Financial Statements, presented based uponreflecting the legal transfer of the underlying assets in order to reflect legal ownership, that can be used to settle obligations of the consolidated VIEs and the liabilities of these consolidated entities for which creditors (or beneficial interest holders) do not have recourse to our general credit were as follows:
| | | | June 30, 2017 | | December 31, 2016 | |
| | (in thousands) | |
(in thousands) | | | March 31, 2018 | | December 31, 2017 |
Assets | | | | | | | | |
Restricted cash | | $ | 2,241,994 |
| | $ | 2,087,177 |
| | $ | 2,380,619 |
| | $ | 1,995,557 |
|
Loans(1)(2) | | 23,923,927 |
| | 23,568,066 |
| | 22,121,392 |
| | 22,712,864 |
|
Operating lease assets, net | | 9,285,718 |
| | 8,564,628 |
| | 10,612,824 |
| | 10,160,327 |
|
Various other assets | | 658,016 |
| | 686,253 |
| | 810,497 |
| | 733,123 |
|
Total Assets | | $ | 36,109,655 |
| | $ | 34,906,124 |
| | $ | 35,925,332 |
| | $ | 35,601,871 |
|
Liabilities | | | | | | | | |
Notes payable(2) | | $ | 30,378,126 |
| | $ | 31,667,976 |
| | $ | 28,634,362 |
| | $ | 28,469,999 |
|
Various other liabilities | | 121,803 |
| | 91,234 |
| | 193,133 |
| | 197,969 |
|
Total Liabilities | | $ | 30,499,929 |
| | $ | 31,759,210 |
| | $ | 28,827,495 |
| | $ | 28,667,968 |
|
(1) Includes $1.1 billion$453.0 million and $1.0$1.1 billion of RICs held for saleHFS at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.
(2) Reflects the impacts of purchase accounting.
Certain amounts shown above are greater than the amounts shown in the corresponding line items in the accompanying Condensed Consolidated Balance Sheets due to intercompany eliminations between the VIEs and other entities consolidated by the Company. The amounts shown above are also impacted by purchase accounting marks from the Change in Control. For example, for most of its securitizations, the Company retains one or more of the lowest tranches of bonds. Rather than showing investment in bonds as an asset and the associated debt as a liability, these amounts are eliminated in consolidation as required by GAAP.
The Company retains servicing responsibility for receivables transferred to the Trusts and receives a monthly servicing fee on the outstanding principal balance. Supplemental fees, such as late charges, for servicing the receivables are reflected in miscellaneousMiscellaneous income. As of June 30, 2017March 31, 2018 and December 31, 2016,2017, the Company was servicing $27.7$25.4 billion and $27.4$26.1 billion, respectively, of RICs that have been transferred to consolidated Trusts. The remainder of the Company’s RICs remains unpledged.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
34
NOTE 6. VARIABLE INTEREST ENTITIESVIEs (continued)
Below is a summary of the cash flows received from the on-balance sheet Trusts for the periods indicated:
| | | | Three-Month Period Ended June 30, | | Six-Month Period Ended June 30, | | Three-Month Period Ended March 31, |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | (in thousands) | |
(in thousands) | | | 2018 | | 2017 |
Assets securitized | | $ | 4,750,103 |
| | $ | 6,325,637 |
| | $ | 12,396,728 |
| | $ | 9,983,592 |
| | $ | 7,240,944 |
| | $ | 7,646,625 |
|
| | | | | | | | | | | | |
Net proceeds from new securitizations (1) | | $ | 3,485,091 |
| | $ | 5,118,309 |
| | $ | 9,061,892 |
| | $ | 7,820,313 |
| | $ | 3,476,322 |
| | $ | 5,576,801 |
|
Net proceeds from sale of retained bonds | | 157,763 |
| | 128,798 |
| | 273,733 |
| | 128,798 |
| | 211,610 |
| | 115,970 |
|
Cash received for servicing fees (2) | | 215,994 |
| | 200,071 |
| | 424,917 |
| | 394,436 |
| | 215,790 |
| | 208,923 |
|
Net distributions from Trusts (2) | | 729,557 |
| | 761,480 |
| | 1,407,786 |
| | 1,391,206 |
| | 545,152 |
| | 678,229 |
|
Total cash received from Trusts | | $ | 4,588,405 |
| | $ | 6,208,658 |
| | $ | 11,168,328 |
| | $ | 9,734,753 |
| | $ | 4,448,874 |
| | $ | 6,579,923 |
|
(1) Includes additional advances on existing securitizations.
(2) These amounts are not reflected in the accompanying Condensed Consolidated Statements of Cash FlowsSCF because the cash flows are between the VIEs and other entities included in the consolidation.
Off-balance sheet VIEs
During the three-month and six-month periods ended June 30,March 31, 2018 and 2017, the Company sold $536.3$1.5 billion and $700.0 million and $1.2 billion of gross RICs to VIEs in off-balance sheet securitizations for a loss of $3.5$16.9 million and $6.2$2.7 million, respectively. The transaction wastransactions were executed under the new securitization platform-SPAINplatforms with Santander. Santander will holdholds eligible vertical interests in notes and certificates of not less than 5% to comply with the DFADFA's risk retention rules. For the three-month and six-month periods ended June 30, 2016, the Company executed no off-balance sheet securitizations with VIEs in which it has continuing involvement.
As of June 30, 2017March 31, 2018 and December 31, 2016,2017, the Company was servicing $3.0$4.4 billion and $2.7$3.4 billion, respectively, of gross RICs that have been sold in off-balance sheet securitizations and were subject to an optional clean-up call. The portfolio was comprised as follows:
| | | | June 30, 2017 | | December 31, 2016 | |
| (in thousands) | |
(in thousands) | | | March 31, 2018 | | December 31, 2017 |
SPAIN | | $ | 1,080,981 |
| | $ | — |
| | $ | 3,176,238 |
| | $ | 2,024,016 |
|
Total serviced for related parties | | 1,080,981 |
| | — |
| | 3,176,238 |
| | 2,024,016 |
|
| | | | | | | | |
Chrysler Capital securitizations | | 1,931,324 |
| | 2,472,756 |
| | 1,182,457 |
| | 1,404,232 |
|
Other third parties | | — |
| | 268,345 |
| |
Total serviced for third parties | | 1,931,324 |
| | 2,741,101 |
| | 1,182,457 |
| | 1,404,232 |
|
Total serviced for other portfolio | | $ | 3,012,305 |
| | $ | 2,741,101 |
| | $ | 4,358,695 |
| | $ | 3,428,248 |
|
Other than repurchases of sold assets due to standard representations and warranties, the Company has no exposure to loss as a result of its involvement with these VIEs.
A summary of the cash flows received from the off-balance sheet Trusts for the periods indicated is as follows:
| | | | Three-Month Period Ended June 30, | | Six-Month Period Ended June 30, | | Three-Month Period Ended March 31, |
| | 2017 | | 2016 | | 2017 | | 2016 | |
| | (in thousands) | |
Assets securitized (a) | | $ | 536,309 |
| | $ | — |
| | $ | 1,236,331 |
| | $ | — |
| |
(in thousands) | | | 2018 | | 2017 |
Assets securitized (1) | | | $ | 1,475,253 |
| | $ | 700,022 |
|
| | | | | | | | | | | | |
Net proceeds from new securitizations | | $ | 538,478 |
| | $ | — |
| | $ | 1,240,797 |
| | $ | — |
| | $ | 1,474,820 |
| | $ | 702,319 |
|
Cash received for servicing fees | | 11,970 |
| | 13,157 |
| | 13,368 |
| | 28,858 |
| | 8,078 |
| | 1,398 |
|
Total cash received from Trusts | | $ | 550,448 |
| | $ | 13,157 |
| | $ | 1,254,165 |
| | $ | 28,858 |
| | $ | 1,482,898 |
| | $ | 703,717 |
|
(a)(1) Represents the UPB at the time of original securitization.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. GOODWILL AND OTHER INTANGIBLES
Goodwill
The following table presents activity in the Company's goodwill by its reporting units for the six-month period ended June 30, 2017:at March 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Consumer and Business Banking | | Commercial Real Estate | | Commercial Banking | | Global Corporate Banking | | SC | | Santander BanCorp | | Total |
| | (in thousands) |
Goodwill at December 31, 2016 | | $ | 1,880,303 |
| | $ | 870,411 |
| | $ | 542,584 |
| | $ | 131,130 |
| | $ | 1,019,960 |
| | $ | 10,537 |
| | $ | 4,454,925 |
|
Disposals during the period | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Additions during the period | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Re-allocations during the period | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| — |
|
Impairment during the period | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Goodwill at June 30, 2017 | | $ | 1,880,303 |
|
| $ | 870,411 |
|
| $ | 542,584 |
|
| $ | 131,130 |
|
| $ | 1,019,960 |
|
| $ | 10,537 |
|
| $ | 4,454,925 |
|
|
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Consumer and Business Banking | | Commercial Banking | | GCB | | SC | | Total |
Goodwill at March 31, 2018 | | $ | 1,880,304 |
|
| $ | 1,412,995 |
|
| $ | 131,130 |
|
| $ | 1,019,960 |
|
| $ | 4,444,389 |
|
During the first quarter of 2018, the reportable segments (and reporting units) formerly known as Commercial Banking and CRE were combined and presented as Commercial Banking. Refer to Note 18 for further discussion on the change in reportable segments. There were no additions or removals of underlying lines of business in connection with this reporting change. As a result, goodwill assigned to these former reporting units of $542.6 million and $870.4 million, for Commercial Banking and CRE, respectively, have been combined. There were no additions or impairments of goodwill for the three-month period ended March 31, 2018.
There were no additions, impairments, or re-allocations of goodwill for the three-month period ended March 31, 2017.
The Company including its Santander BanCorp subsidiary, conducted its last annual goodwill impairment tests as of October 1, 20162017 using generally accepted valuation methods. After conducting an analysis of the fair value of each reporting unit as of October 1, 2016,2017, the Company determined that nothe full amount of goodwill attributed to Santander BanCorp of $10.5 million was impaired and, as a result, it was written-off, primarily due to the unfavorable economic environment in Puerto Rico and the additional adverse effects of Hurricane Maria. No impairments of goodwill attributed to other reporting units were identified as a result of the annual impairment tests.identified.
Other Intangible Assets
The following table details amounts related to the Company's intangible assets subject to amortization for the dates indicated.
| | | June 30, 2017 | | December 31, 2016 | | March 31, 2018 | | December 31, 2017 |
| Net Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Accumulated Amortization | |
| (in thousands) | |
(in thousands) | | | Net Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Accumulated Amortization |
Intangibles subject to amortization: | | | | | | | | | | | | | | | |
Dealer networks | $ | 446,018 |
| | $ | (133,982 | ) | | $ | 465,625 |
| | $ | (114,375 | ) | | $ | 416,607 |
| | $ | (163,393 | ) | | $ | 426,411 |
| | $ | (153,589 | ) |
Chrysler relationship | 87,500 |
| | (51,250 | ) | | 95,000 |
| | (43,750 | ) | | 76,250 |
| | (62,500 | ) | | 80,000 |
| | (58,750 | ) |
Core deposit intangibles | — |
| | — |
| | — |
| | (295,842 | ) | |
Trade name | 16,500 |
| | (1,500 | ) | | 17,100 |
| | (900 | ) | | 15,600 |
| | (2,400 | ) | | 15,900 |
| | (2,100 | ) |
Other intangibles | 16,311 |
| | (53,220 | ) | | 19,519 |
| | (98,492 | ) | | 12,011 |
| | (57,311 | ) | | 13,442 |
| | (56,021 | ) |
Total intangibles subject to amortization | $ | 566,329 |
| | $ | (239,952 | ) | | $ | 597,244 |
| | $ | (553,359 | ) | | $ | 520,468 |
| | $ | (285,604 | ) | | $ | 535,753 |
| | $ | (270,460 | ) |
At June 30, 2017March 31, 2018 and December 31, 2016,2017, the Company did not have any intangibles, other than goodwill, that were not subject to amortization.
Amortization expense on intangible assets was $15.4$15.3 million and $30.9 million and $17.8 million and $35.7$15.5 million for the three-month and six-month periods ended June 30,March 31, 2018 and March 31, 2017, and June 30, 2016, respectively.
During 2016, the Company's core deposit intangibles and purchased credit card relationship intangibles associated with its 2006 acquisitions, which were amortized straight-line over a period of ten years, became fully amortized. During 2016, $48.5 million of the Company's customer relationships associated with BSI became fully amortized.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7. GOODWILL AND OTHER INTANGIBLES (continued)
The estimated aggregate amortization expense related to intangibles, excluding any impairment charges, for each of the five succeeding calendar years ending December 31 is:
| | Year | | Calendar Year Amount | | Recorded To Date | | Remaining Amount To Record | | Calendar Year Amount | | Recorded To Date | | Remaining Amount To Record |
| | (in thousands) | | (in thousands) |
2017 | | $ | 61,491 |
| | $ | 30,915 |
| | $ | 30,576 |
| |
2018 | | 60,644 |
| | — |
| | 60,644 |
| | $ | 60,644 |
| | $ | 15,288 |
| | $ | 45,356 |
|
2019 | | 58,975 |
| | — |
| | 58,975 |
| | 58,975 |
| | — |
| | 58,975 |
|
2020 | | 58,642 |
| | — |
| | 58,642 |
| | 58,642 |
| | — |
| | 58,642 |
|
2021 | | 55,603 |
| | — |
| | 55,603 |
| | 39,889 |
| | — |
| | 39,889 |
|
2022 | | | 39,889 |
| | — |
| | 39,889 |
|
Thereafter | | 301,889 |
| | — |
| | 301,889 |
| | 277,717 |
| | — |
| | 277,717 |
|
NOTE 8. OTHER ASSETS
The following is a detail of items that comprise other assets at June 30, 2017March 31, 2018 and December 31, 20162017:
| | | | June 30, 2017 | | December 31, 2016 | |
| | (in thousands) | |
(in thousands) | | | March 31, 2018 | | December 31, 2017 |
Income tax receivables | | $ | 310,213 |
| | $ | 294,796 |
| | $ | 293,072 |
| | $ | 292,220 |
|
Derivative assets at fair value | | 406,564 |
| | 413,779 |
| | 581,076 |
| | 448,977 |
|
Other repossessed assets | | 162,854 |
| | 177,592 |
| | 172,683 |
| | 212,882 |
|
MSRs | | 149,645 |
| | 150,343 |
| | 163,148 |
| | 149,197 |
|
Prepaid expenses | | 148,169 |
| | 172,559 |
| | 178,920 |
| | 172,547 |
|
OREO | | 108,046 |
| | 116,705 |
| | 126,714 |
| | 130,777 |
|
Deferred tax asset, net | | 962,839 |
| | 989,767 |
| | 799,423 |
| | 771,652 |
|
Accrued interest receivable | | | 496,144 |
| | 563,607 |
|
Equity method investments | | | 198,923 |
| | 194,434 |
|
Miscellaneous assets and receivables | | 1,059,521 |
| | 567,327 |
| | 984,645 |
| | 696,134 |
|
Total other assets | | $ | 3,307,851 |
| | $ | 2,882,868 |
| | $ | 3,994,748 |
| | $ | 3,632,427 |
|
Income tax receivables
Income tax receivables consists primarily of accrued federal tax receivables.
Derivative assets at fair value
Derivative assets at fair value represent the net amount of derivatives presented in the Condensed Consolidated Financial Statements, including the impact of amounts offsetting recognized assets. Refer to the offsetting of financial assets table in Note 1112 to these Condensed Consolidated Financial Statements for the detail of these amounts.
MSRs
Residential real estate
The Company maintains an MSR asset for sold residential real estate loans serviced for others. At June 30, 2017March 31, 2018 and December 31, 2016,2017, the balance of these loans serviced for others accounted for at fair value was $15.314.8 billion and $15.4$14.9 billion, respectively. The Company accounts for a majority of its residential MSRs using the FVO. Changes in fair value are recorded through the Mortgage banking income,Miscellaneous Income, net line ofon the Condensed Consolidated Statements of Operations. The fair value of the MSRs at June 30, 2017March 31, 2018 and December 31, 2016 was2017 were $146.1160.1 million and $146.6146.0 million, respectively. See further discussion on the valuation of the MSRs in Note 16.14. As deemed appropriate, the Company economically hedges MSRs using interest rate swaps and forward contracts to purchase MBS. See further discussion on these derivative activities in Note 1112 to these Condensed Consolidated Financial Statements. The remainder of MSRs not accounted for using the FVO are accounted for at lower of cost or market.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8. OTHER ASSETS (continued)
For the three-month period ended March 31, 2018 and six-month periods ended June 30,March 31, 2017, the Company recorded net changes in the fair value of MSRs due to valuation totaling $(1.2)$15.0 million and $0.3$1.5 million, respectively, compared to $(11.5) million and $(25.8) million for the corresponding periods in 2016.respectively.
The following table presents a summary of activity for the Company's residential MSRs that are included in the Condensed Consolidated Balance Sheets.
| | | Three-Month Period Ended | | Six-Month Period Ended | | Three-Month Period Ended |
| June 30, 2017 | | June 30, 2016 | | June 30, 2017 | | June 30, 2016 | |
| (in thousands) | |
(in thousands) | | | March 31, 2018 | | March 31, 2017 |
Fair value at beginning of period(1) | $ | 149,455 |
| | $ | 130,742 |
| | $ | 146,589 |
| | $ | 147,233 |
| | $ | 145,993 |
| | $ | 146,589 |
|
Mortgage servicing assets recognized | 2,866 |
| | 4,801 |
| | 8,597 |
| | 8,392 |
| | 2,755 |
| | 5,730 |
|
Principal reductions | (5,037 | ) | | (6,283 | ) | | (9,358 | ) | | (12,009 | ) | | (3,661 | ) | | (4,321 | ) |
Change in fair value due to valuation assumptions | (1,193 | ) | | (11,468 | ) | | 263 |
| | (25,824 | ) | | 15,043 |
| | 1,457 |
|
Fair value at end of period(1) | $ | 146,091 |
| | $ | 117,792 |
| | $ | 146,091 |
| | $ | 117,792 |
| | $ | 160,130 |
| | $ | 149,455 |
|
(1) The Company had total MSRs of $149.6 million and $150.3 million as of June 30, 2017, and December 31, 2016, respectively. The Company has elected to account for the majority of its MSR balance using the fair value option, | |
(1) | The Company had total MSRs of $163.1 million and $149.2 million as of March 31, 2018 andDecember 31, 2017, respectively. The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or market and are not presented within this table. |
NOTE 8. OTHER ASSETS (continued)
Fee income and gain on sale of mortgage loans
Included in Mortgage banking income,Miscellaneous Income, net on the Condensed Consolidated Statements of Operations was mortgage servicing fee income of $10.5$10.2 million and $21.1$10.6 million for the three-month and six-month periods ended June 30,March 31, 2018 and 2017, respectively, compared to $10.8 million and $21.6 million for the corresponding periods in 2016.respectively. The Company had gains on sales of mortgage loans included in Mortgage banking income,Miscellaneous Income, net on the Condensed Consolidated Statements of Operations of $1.3$6.2 million and $5.7$4.4 million for the three-month and six-month periods ended June 30,March 31, 2018 and 2017, respectively, compared to $7.0 million and $10.5 million for the corresponding periods in 2016.respectively.
Other repossessed assets and OREO
Other repossessed assets primarily consist of SC's vehicleleased assets that have been terminated and are included as grounded inventory, which is obtained through repossession. OREO consists primarily of the Bank'sCompany's foreclosed properties.
Deferred tax assets, net
The Company recorded $962.8$799.4 million of deferred tax assets, net as of June 30, 2017,March 31, 2018, compared to $989.8$771.7 million at December 31, 2016.2017.
Equity method investments
The Company makes certain equity investments in various limited partnerships, some of which are considered VIEs, that invest in and lend to qualified community development entities, such as renewable energy investments, through the New Market Tax Credits ("NMTC") and CRA programs. The Company acts only in a limited partner capacity in connection with these partnerships, so the Company has determined that it is not the primary beneficiary of the partnerships because it does not have the power to direct the activities of the partnerships that most significantly impact the partnerships' economic performance.
Miscellaneous assets and receivables
Miscellaneous assets and receivables includes subvention receivables in connection with the Chrysler Agreement, investment and capital market receivables, derivatives trading receivables and unapplied payments. The secondfirst quarter increase is due to a receivable for trade date sale of $308.4 million at SBNA,increases in subvention receivables and $217.4 million related to a receivabledue from customers and brokers associated with unsettled security tradesothers, primarily at SIS, offset by a decreasedecreases in subventioninvestment receivables of $55.3 million as of June 30, 2017.and wire transfer clearing.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9. DEPOSITS AND OTHER CUSTOMER ACCOUNTS
Deposits and other customer accounts are summarized as follows:
| | | June 30, 2017 | | December 31, 2016 | | March 31, 2018 | | December 31, 2017 |
| Balance | | Percent of total deposits | | Balance | | Percent of total deposits | |
| (in thousands) | |
(dollars in thousands) | | | Balance | | Percent of total deposits | | Balance | | Percent of total deposits |
Interest-bearing demand deposits | $ | 9,144,181 |
| | 14.5 | % | | $ | 11,284,881 |
| | 16.8 | % | | $ | 8,246,120 |
| | 13.3 | % | | $ | 8,784,597 |
| | 14.4 | % |
Non-interest-bearing demand deposits | 15,956,655 |
| | 25.3 | % | | 15,413,609 |
| | 22.9 | % | | 15,603,797 |
| | 25.2 | % | | 15,402,235 |
| | 25.3 | % |
Savings | 5,959,727 |
| | 9.5 | % | | 5,988,852 |
| | 8.9 | % | | 6,123,217 |
| | 9.9 | % | | 5,903,897 |
| | 9.7 | % |
Customer repurchase accounts | 801,178 |
| | 1.3 | % | | 868,544 |
| | 1.3 | % | | 577,161 |
| | 1.0 | % | | 802,119 |
| | 1.4 | % |
Money market | 24,607,638 |
| | 39.1 | % | | 24,511,906 |
| | 36.5 | % | | 25,726,743 |
| | 41.6 | % | | 24,530,661 |
| | 40.3 | % |
Certificates of deposit ("CDs") | 6,487,176 |
| | 10.3 | % | | 9,172,898 |
| | 13.6 | % | |
CDs | | | 5,564,137 |
| | 9.0 | % | | 5,407,594 |
| | 8.9 | % |
Total Deposits (1) | $ | 62,956,555 |
| | 100.0 | % | | $ | 67,240,690 |
| | 100.0 | % | | $ | 61,841,175 |
| | 100.0 | % | | $ | 60,831,103 |
| | 100.0 | % |
(1) Includes foreign deposits, as defined by the FRB, of $10.0 billion and $10.7 billion at June 30, 2017 and December 31, 2016, respectively.
| |
(1) | Includes foreign deposits, as defined by the FRB, of $9.0 billion and $9.1 billion at March 31, 2018 and December 31, 2017, respectively. |
Deposits collateralized by investment securities, loans, and other financial instruments totaled $2.4$2.1 billion and $3.0$2.3 billion at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.
Demand deposit overdrafts that have been reclassified as loan balances were $28.9$155.7 million and $42.3$38.9 million at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.
At March 31, 2018 and December 31, 2017, the Company had $1.4 billion and $1.3 billion of CDs greater than $250 thousand.
NOTE 10. BORROWINGS
Total borrowings and other debt obligations at June 30, 2017March 31, 2018 were $43.4$38.4 billion, compared to $43.5$39.0 billion at December 31, 2016.2017. The Company's debt agreements impose certain limitations on dividends other payments and transactions. The Company is currently in compliance with these limitations.
Periodically, as part of the Company's wholesale funding management, it opportunistically repurchases outstanding borrowings in the open market and subsequently retires the obligations.
During the second quarter of 2017, theBank
The Bank repurchased $14.2 million of its real estate investment trust ("REIT") preferred debt. During the first quarter of 2017, the Bank repurchased $881.0 million of its 2.00% senior notes due 2018had no new securities issuances and senior floating rate notes due 2018. The Company recorded loss on debt extinguishment related to these debt repurchases and early repayments of $4.0 million and $10.7 million for the three and six-month period ended June 30, 2017, respectively. The Company did not repurchase any outstanding borrowings in the open market during the three or six-monththree-month period ended June 30, 2016.March 31, 2018.
SHUSA
During the first quarter of 2017,2018, the Company issued $1.0 billion in aggregate principal amount of its 3.70% senior notes due March 2022. The proceeds of these notes were primarily used to fund loans to the Company's U.S. subsidiaries.
During the second quarter of 2017, the Company issued $759.7 million in aggregate principal amount of its senior floating rate notes in two separate private offerings. These notes have a floating rate equal to the three-month London Interbank Offered Rate (“LIBOR") plus 100 basis points.The proceeds of these notes will be used for general corporate purposes.
On July 10, 2017, the Company issued $1.24 billion in aggregate principal amount of its senior notes, comprised of $440.0 million of 3.7% senior notes due March 2022 and $800.0 million of 4.4% senior notes due May 2027. On July 17, 2017, the Company redeemed $255.4repurchased $63.2 million of its 3.45% senior notes due in August 2018.2018 and $336.8 million of its 2.70% senior notes due 2019.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. BORROWINGS (continued)The Company recorded loss on debt extinguishment related to debt repurchases and early repayments at SHUSA and the Bank of $2.2 million in total for the three-month period ended March 31, 2018, compared to $6.7 million for the three-month period ended March 31, 2017.
Parent Company and other IHC Entities Borrowings and Debt Obligations
The following table presents information regarding the Parent Company and its subsidiaries' borrowings and other debt obligations at the dates indicated:
|
| | | | | | | | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| Balance | | Effective Rate | | Balance | | Effective Rate |
| (dollars in thousands) |
Parent Company | | | | | | | |
Senior notes, due November 2017 (1) | $ | 599,626 |
| | 2.80 | % | | $ | 599,206 |
| | 2.67 | % |
3.45% senior notes, due August 2018 | 499,017 |
| | 3.62 | % | | 498,604 |
| | 3.62 | % |
2.70% senior notes, due May 2019 | 997,773 |
| | 2.82 | % | | 997,207 |
| | 2.82 | % |
2.65% senior notes, due April 2020 | 995,450 |
| | 2.82 | % | | 994,672 |
| | 2.82 | % |
3.70% senior notes, due March 2022 | 993,979 |
| | 3.82 | % | | — |
| | — | % |
4.50% senior notes, due July 2025 | 1,095,199 |
| | 4.56 | % | | 1,094,955 |
| | 4.56 | % |
Junior subordinate debentures - Capital Trust VI , due June 2036 | 69,810 |
| | 7.91 | % | | 69,798 |
| | 7.91 | % |
Common securities - Capital Trust VI | 10,000 |
| | 7.91 | % | | 10,000 |
| | 7.91 | % |
Junior subordinate debentures - Capital Trust IX, due July 2036 | 149,448 |
| | 2.84 | % | | 149,434 |
| | 2.49 | % |
Common securities - Capital Trust IX | 4,640 |
| | 2.84 | % | | 4,640 |
| | 2.49 | % |
Senior notes, due July 2019 (2) | 388,499 |
| | 2.25 | % | | — |
| | — | % |
Senior notes, due September 2019 (2) | 370,699 |
| | 2.42 | % | | — |
| | — | % |
Other IHC Entities | | | | | | | |
Overnight Funds Purchase, due within one year, due April 2017 | 690 |
| | 1.05 | % | | 830 |
| | 0.50 | % |
2.00% subordinated debt, maturing through 2042 | 40,689 |
| | 2.00 | % | | 40,457 |
| | 2.00 | % |
Short-term borrowings, due within one year, due April 2017 | 78,000 |
| | 1.13 | % | | 54,000 |
| | 0.63 | % |
Total due to others overnight, due within one year, due April 2017 | 27,000 |
| | 1.13 | % | | 17,000 |
| | 0.63 | % |
Short-term borrowings, due within one year, April 2017 | 58,284 |
| | 0.25 | % | | 207,173 |
| | 0.25 | % |
Short-term borrowings, due within one year, July 2017 | 3,260 |
| | 0.35 | % | | — |
| | — | % |
Short-term borrowings, due within one year, September 2017 | 13,412 |
| | 0.35 | % | | — |
| | — | % |
Temporary subordinated debt to Santander, due within one year | 525,771 |
| | 3.75 | % | | — |
| | — | % |
Total Parent Company and other subsidiaries' borrowings and other debt obligations | $ | 6,921,246 |
| | 3.31 | % | | $ | 4,737,976 |
| | 3.21 | % |
|
| | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
(dollars in thousands) | | Balance | | Effective Rate | | Balance | | Effective Rate |
Parent Company | | | | | | | | |
3.45% senior notes, due August 2018 | | $ | 181,227 |
| | 3.62 | % | | $ | 244,317 |
| | 3.62 | % |
2.70% senior notes, due May 2019 | | 662,337 |
| | 2.82 | % | | 998,349 |
| | 2.82 | % |
2.65% senior notes, due April 2020 | | 996,636 |
| | 2.82 | % | | 996,238 |
| | 2.82 | % |
3.70% senior notes, due March 2022 | | 1,445,928 |
| | 3.74 | % | | 1,440,044 |
| | 3.74 | % |
3.40% senior notes, due January 2023 | | 993,950 |
| | 3.54 | % | | 993,662 |
| | 3.54 | % |
4.50% senior notes, due July 2025 | | 1,095,576 |
| | 4.56 | % | | 1,095,449 |
| | 4.56 | % |
4.40% senior notes, due July 2027 | | 1,049,790 |
| | 4.40 | % | | 1,049,787 |
| | 4.40 | % |
Junior subordinated debentures - Sovereign Capital Trust IX, due July 2036 | | 149,469 |
| | 3.38 | % | | 149,462 |
| | 3.14 | % |
Common securities - Sovereign Capital Trust IX | | 4,640 |
| | 3.38 | % | | 4,640 |
| | 3.14 | % |
Senior notes, due July 2019 (1) | | 388,592 |
| | 2.69 | % | | 388,565 |
| | 2.31 | % |
Senior notes, due September 2019 (1) | | 370,783 |
| | 2.70 | % | | 370,754 |
| | 2.34 | % |
Senior notes, due January 2020 (1) | | 302,512 |
| | 2.71 | % | | 302,494 |
| | 2.40 | % |
Senior notes, due September 2020 (2) | | 114,370 |
| | 3.16 | % | | 115,804 |
| | 3.32 | % |
Subsidiaries | | | | | | | | |
2.00% subordinated debt, maturing through 2042 | | 40,934 |
| | 2.00 | % | | 40,842 |
| | 2.00 | % |
Short-term borrowings, due within one year, due April 2018 | | 93,806 |
| | 1.70 | % | | 24,000 |
| | 1.38 | % |
Total due to others overnight, due within one year, due April 2018 | | 18,600 |
| | 1.70 | % | | 10,000 |
| | 1.38 | % |
Short-term borrowings, due within one year, due April 2018 | | 20,421 |
| | 0.25 | % | | 37,546 |
| | 0.25 | % |
Short-term borrowings, due within one year, maturing through 2018 | | — |
| | — | % | | 7,123 |
| | 0.83 | % |
Total Parent Company and subsidiaries' borrowings and other debt obligations | | $ | 7,929,571 |
| | 3.52 | % | | $ | 8,269,076 |
| | 3.45 | % |
(1) These notes bear interest at a rate equal to the three-month LIBORLondon Interbank Offered Rate ("LIBOR") plus 145100 basis points per annum.
(2) These notes will bear interest at a rate equal to the three-month LIBOR plus 100105 basis points per annum.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
39
NOTE 10. BORROWINGS (continued)
Bank Borrowings and Debt Obligations
The following table presents information regarding the Bank's borrowings and other debt obligations at the dates indicated: |
| | | | | | | | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| Balance | | Effective Rate | | Balance | | Effective Rate |
| (dollars in thousands) |
2.00% senior notes, due January 2018 | $ | 76,954 |
| | 2.24 | % | | $ | 748,143 |
| | 2.24 | % |
Senior notes, due January 2018(1)(2) | 41,888 |
| | 0.37 | % | | 249,705 |
| | 1.99 | % |
8.750% subordinated debentures, due May 2018 | 499,260 |
| | 8.92 | % | | 498,882 |
| | 8.92 | % |
Subordinated term loan, due February 2019 | 116,519 |
| | 7.01 | % | | 122,313 |
| | 6.78 | % |
FHLB advances, maturing through July 2019 | 5,350,000 |
| | 1.22 | % | | 5,950,000 |
| | 0.85 | % |
REIT preferred, due May 2020 (3) | 143,461 |
| | 13.05 | % | | 156,457 |
| | 13.46 | % |
Subordinated term loan, due August 2022 | 28,431 |
| | 8.77 | % | | 29,202 |
| | 8.35 | % |
Total Bank borrowings and other debt obligations | $ | 6,256,513 |
| | 2.25 | % | | $ | 7,754,702 |
| | 1.92 | % |
(1) These notes bear interest at a rate equal to the three-month LIBOR plus 93 basis points per annum.
(2) Effective rate of this debt is a proxy to account for the portion of this debt that was repurchased following a tender offer which settled on March 29, 2017.
(3) During the second quarter of 2017, the Company repurchased $14.2 million of the REIT preferred notes. |
| | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
(dollars in thousands) | | Balance | | Effective Rate | | Balance | | Effective Rate |
8.750% subordinated debentures, due May 2018 | | $ | 192,098 |
| | 8.92 | % | | $ | 192,019 |
| | 8.92 | % |
Subordinated term loan, due February 2019 | | 104,740 |
| | 7.63 | % | | 111,883 |
| | 7.12 | % |
FHLB advances, maturing through July 2019 | | 1,500,000 |
| | 1.91 | % | | 1,950,000 |
| | 1.53 | % |
Securities sold under repurchase agreements | | 150,000 |
| | 1.90 | % | | 150,000 |
| | 1.56 | % |
Real estate investment trust preferred, due May 2020 | | 144,522 |
| | 13.24 | % | | 144,167 |
| | 13.35 | % |
Subordinated term loan, due August 2022 | | 28,001 |
| | 9.29 | % | | 27,911 |
| | 8.89 | % |
Total Bank borrowings and other debt obligations | | $ | 2,119,361 |
| | 3.70 | % | | $ | 2,575,980 |
| | 3.07 | % |
The Bank had outstanding irrevocable letters of credit totaling $777.3$485.8 million from the FHLB of Pittsburgh at June 30, 2017,March 31, 2018, used to secure uninsured deposits placed with the Bank by state and local governments and their political subdivisions.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. BORROWINGS (continued)
Revolving Credit Facilities
The following tables present information regarding SC's credit facilities as of June 30, 2017March 31, 2018 and December 31, 2016:2017: |
| | | | | | | | | | | | | | | | | | |
| June 30, 2017 |
| Balance | | Committed Amount | | Effective Rate | | Assets Pledged | | Restricted Cash Pledged |
| (dollars in thousands) |
Warehouse line, maturing on various dates(1) | $ | 406,845 |
| | $ | 1,250,000 |
| | 3.05 | % | | $ | 585,892 |
| | $ | 15,554 |
|
Warehouse line, due November 2018 | 425,220 |
| | 500,000 |
| | 1.71 | % | | 460,321 |
| | 14,651 |
|
Warehouse line, due August 2018(2) | 258,020 |
| | 780,000 |
| | 3.14 | % | | 287,163 |
| | 10,465 |
|
Warehouse line, due August 2018(3) | 2,536,942 |
| | 3,120,000 |
| | 2.27 | % | | 3,833,368 |
| | 61,011 |
|
Warehouse line, due October 2018 | 359,577 |
| | 1,800,000 |
| | 3.69 | % | | 513,837 |
| | 10,686 |
|
Warehouse line, due October 2018 | 144,865 |
| | 400,000 |
| | 2.96 | % | | 206,322 |
| | 3,718 |
|
Warehouse line, due January 2018 | 214,484 |
| | 500,000 |
| | 2.78 | % | | 308,211 |
| | — |
|
Warehouse line, due November 2018 | 167,799 |
| | 1,000,000 |
| | 3.83 | % | | 253,895 |
| | 6,438 |
|
Warehouse line, due October 2017 | 253,000 |
| | 300,000 |
| | 2.58 | % | | 299,444 |
| | 10,364 |
|
Warehouse line, due July 2018 | 158,735 |
| | 250,000 |
| | 3.46 | % | | 414,321 |
| | 29,964 |
|
Repurchase facility, due December 2017(4) | 262,363 |
| | 262,363 |
| | 3.54 | % | | — |
| | 11,423 |
|
Repurchase facility, due April 2018(4) | 202,311 |
| | 202,311 |
| | 2.49 | % | | — |
| | — |
|
Repurchase facility, due March 2018(4) | 147,182 |
| | 147,182 |
| | 3.31 | % | | — |
| | — |
|
Repurchase facility, due August 2017(4) | 87,097 |
| | 87,097 |
| | 2.42 | % | | — |
| | — |
|
Line of credit with related party, due December 2017(5) | 825,000 |
| | 1,000,000 |
| | 3.03 | % | | — |
| | — |
|
Line of credit with related party, due December 2018(5) | — |
| | 1,000,000 |
| | 3.29 | % | | — |
| | — |
|
Line of credit with related party, due December 2018(5) | — |
| | 750,000 |
| | 3.17 | % | | — |
| | — |
|
Line of credit with related party, due December 2018(5) | — |
| | 500,000 |
| | 3.89 | % | | — |
| | — |
|
Total SC revolving credit facilities | $ | 6,449,440 |
| | $ | 13,848,953 |
| | 2.69 | % | | $ | 7,162,774 |
| | $ | 174,274 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 |
(dollars in thousands) | | Balance | | Committed Amount | | Effective Rate | | Assets Pledged | | Restricted Cash Pledged |
Warehouse line, maturing on various dates(1) | | $ | 603,145 |
| | $ | 1,250,000 |
| | 2.71 | % | | $ | 865,991 |
| | $ | 24,063 |
|
Warehouse line, due November 2019 | | 358,220 |
| | 500,000 |
| | 2.06 | % | | 421,622 |
| | 21,337 |
|
Warehouse line, due August 2019(2) | | 2,105,842 |
| | 3,900,000 |
| | 3.42 | % | | 3,108,422 |
| | 68,631 |
|
Warehouse line, due October 2019 | | 611,477 |
| | 1,800,000 |
| | 3.43 | % | | 839,499 |
| | 14,727 |
|
Warehouse line, due October 2019 | | 148,565 |
| | 400,000 |
| | 3.65 | % | | 206,287 |
| | 4,070 |
|
Warehouse line, due August 2019(3) | | 229,984 |
| | 500,000 |
| | 3.74 | % | | 348,645 |
| | 19,915 |
|
Warehouse line, due November 2019 | | 297,699 |
| | 1,000,000 |
| | 3.63 | % | | 420,623 |
| | 11,557 |
|
Warehouse line, due October 2018 | | 229,800 |
| | 300,000 |
| | 3.37 | % | | 268,054 |
| | 10,719 |
|
Warehouse line, due December 2018 | | — |
| | 300,000 |
| | — | % | | — |
| | — |
|
Repurchase facility, maturing on various dates(4)(5) | | 291,949 |
| | 291,949 |
| | 3.49 | % | | 407,299 |
| | 12,962 |
|
Repurchase facility, due April 2018(5)(7) | | 196,727 |
| | 196,727 |
| | 3.06 | % | | 257,054 |
| | — |
|
Repurchase facility, due June 2018(5) | | 153,177 |
| | 153,177 |
| | 3.80 | % | | 222,108 |
| | — |
|
Repurchase facility, due December 2018(4) | | 67,773 |
| | 67,773 |
| | 3.55 | % | | 156,202 |
| | — |
|
Line of credit with related party, due December 2018(6) | | 30,000 |
| | 1,000,000 |
| | 3.09 | % | | 30,000 |
| | — |
|
Line of credit with related party, due December 2018(6) | | 114,200 |
| | 750,000 |
| | 4.34 | % | | 126,392 |
| | 2,376 |
|
Total SC revolving credit facilities | | $ | 5,438,558 |
| | $ | 12,409,626 |
| | 3.30 | % | | $ | 7,678,198 |
| | $ | 190,357 |
|
| |
(1) | As of March 31, 2018, half of the outstanding balance on this facility matures in March 2019 and the remaining balance matures in March 2020. |
| |
(2) | This line is held exclusively for financing of Chrysler Capital leases. |
| |
(3) | On February 14, 2018, the maturity of this warehouse line was extended from January 2018 to August 2019. |
(4) The maturity of this repurchase facility ranges from April 2018 to July 2018.
| |
(5) | These repurchase facilities are collateralized by securitization notes payable retained by SC. No portion of these facilities is unsecured. These facilities have rolling maturities of up to one year. As the borrower, SC is exposed to liquidity risk due to changes in the market value of retrained securities pledged. In some instances, SC places or receives cash collateral with counteparties under collateral arrangements associated with SC's repurchase agreements. |
| |
(6) | These lines are also collateralized by securitization notes payable and residuals retained by SC. As of March 31, 2018, no portion of these facilities was unsecured. |
(7) Half of this repurchase facility was settled on maturity in April 2018 and remaining balance of this repurchase facility was extended to July 2018.
NOTE 10. BORROWINGS (continued)
|
| | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
(dollars in thousands) | | Balance | | Committed Amount | | Effective Rate | | Assets Pledged | | Restricted Cash Pledged |
Warehouse line, maturing on various dates(1) | | $ | 339,145 |
| | $ | 1,250,000 |
| | 2.53 | % | | $ | 461,353 |
| | $ | 12,645 |
|
Warehouse line, due November 2019 | | 435,220 |
| | 500,000 |
| | 1.92 | % | | 521,365 |
| | 16,866 |
|
Warehouse line, due August 2019(2) | | 2,044,843 |
| | 3,900,000 |
| | 2.96 | % | | 2,929,890 |
| | 53,639 |
|
Warehouse line, due October 2019 | | 226,577 |
| | 1,800,000 |
| | 4.95 | % | | 311,336 |
| | 6,772 |
|
Warehouse line, due October 2019 | | 81,865 |
| | 400,000 |
| | 4.09 | % | | 114,021 |
| | 3,057 |
|
Warehouse line, due January 2018(3) | | 336,484 |
| | 500,000 |
| | 2.87 | % | | 473,208 |
| | — |
|
Warehouse line, due November 2019 | | 403,999 |
| | 1,000,000 |
| | 2.66 | % | | 546,782 |
| | 14,729 |
|
Warehouse line, due October 2018 | | 235,700 |
| | 300,000 |
| | 2.84 | % | | 289,634 |
| | 10,474 |
|
Warehouse line, due December 2018 | | — |
| | 300,000 |
| | 1.49 | % | | — |
| | — |
|
Repurchase facility, maturing on various dates(4)(5) | | 325,775 |
| | 325,775 |
| | 3.24 | % | | 474,188 |
| | 13,842 |
|
Repurchase facility, due April 2018(5) | | 202,311 |
| | 202,311 |
| | 2.67 | % | | 264,120 |
| | — |
|
Repurchase facility, due March 2018(5) | | 147,500 |
| | 147,500 |
| | 3.91 | % | | 222,108 |
| | — |
|
Repurchase facility, due March 2018(5) | | 68,897 |
| | 68,897 |
| | 3.04 | % | | 95,762 |
| | — |
|
Line of credit with related party, due December 2018(6) | | — |
| | 1,000,000 |
| | 3.09 | % | | — |
| | — |
|
Line of credit with related party, due December 2018(6) | | 750,000 |
| | 750,000 |
| | 1.33 | % | | — |
| | — |
|
Total SC revolving credit facilities | | $ | 5,598,316 |
| | $ | 12,444,483 |
| | 2.73 | % | | $ | 6,703,767 |
| | $ | 132,024 |
|
(1) As of June 30,December 31, 2017, half of the outstanding balance on this facility maturedwill mature in April 2017March 2019 and half matureswill mature in March 2018. In April 2017, the facilities that matured were extended to March 2019.2020.
(2) This line is held exclusively for financing of Chrysler Capital loans.leases.
(3) ThisOn February 14, 2018, the maturity of this warehouse line is held exclusively for financing of Chrysler Capital leases.was extended to August 2019.
(4) TheseThe maturity of this repurchase facilities are collateralized by securitization notes payable retained by SC. No portion of these facilities is unsecured. These facilities have rolling maturities of upfacility ranges from February 2018 to one year.July 2018.
(5) These lines are also collateralized by securitization notes payable and residuals retained by SC. As of June 30, 2017, $1.6 billion of the aggregate outstanding balances on these credit facilities was unsecured.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. BORROWINGS (continued)
|
| | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| Balance | | Committed Amount | | Effective Rate | | Assets Pledged | | Restricted Cash Pledged |
| (dollars in thousands) |
Warehouse line, maturing on various dates(1) | $ | 462,085 |
| | $ | 1,250,000 |
| | 2.52 | % | | $ | 653,014 |
| | $ | 14,916 |
|
Warehouse line, due August 2018(2) | 534,220 |
| | 780,000 |
| | 1.98 | % | | 608,025 |
| | 24,520 |
|
Warehouse line, due August 2018(3) | 3,119,943 |
| | 3,120,000 |
| | 1.91 | % | | 4,700,774 |
| | 70,991 |
|
Warehouse line, due October 2018(5) | 702,377 |
| | 1,800,000 |
| | 2.51 | % | | 994,684 |
| | 23,378 |
|
Warehouse line, due October 2018 | 202,000 |
| | 400,000 |
| | 2.22 | % | | 290,867 |
| | 5,435 |
|
Warehouse line, due January 2018 | 153,784 |
| | 500,000 |
| | 3.17 | % | | 213,578 |
| | — |
|
Warehouse line, due November 2018 | 578,999 |
| | 1,000,000 |
| | 1.56 | % | | 850,758 |
| | 17,642 |
|
Warehouse line, due October 2017 | 243,100 |
| | 300,000 |
| | 2.38 | % | | 295,045 |
| | 9,235 |
|
Warehouse line, due November 2018 | — |
| | 500,000 |
| | 2.07 | % | | — |
| | — |
|
Repurchase facility, due December 2017(4) | 507,800 |
| | 507,800 |
| | 2.83 | % | | — |
| | 22,613 |
|
Repurchase facility, due April 2018(4) | 235,509 |
| | 235,509 |
| | 2.04 | % | | — |
| | — |
|
Line of credit with related party, due December 2017(5) | 1,000,000 |
| | 1,000,000 |
| | 2.86 | % | | — |
| | — |
|
Line of credit with related party, due December 2017(5) | 500,000 |
| | 500,000 |
| | 3.04 | % | | — |
| | — |
|
Line of credit with related party, due December 2018(5) | 175,000 |
| | 500,000 |
| | 3.87 | % | | — |
| | — |
|
Line of credit with related party, due December 2018(5) | 1,000,000 |
| | 1,000,000 |
| | 2.88 | % | | — |
| | — |
|
Total SC revolving credit facilities | $ | 9,414,817 |
| | $ | 13,393,309 |
| | 2.36 | % | | $ | 8,606,745 |
| | $ | 188,730 |
|
(1) Half of the outstanding balance on this facility matured in March 2017 and half matures in March 2018.
(2) This line is held exclusively for financing of Chrysler Capital loans.
(3) This line is held exclusively for financing of Chrysler Capital leases.
(4) These repurchase facilities are collateralized by securitization notes payable retained by SC. No portion of these facilities are unsecured. These facilities have rolling maturities of up to one year. As the borrower, SC is exposed to liquidity risk due to changes in the market value of retrained securities pledged. In some instances, SC places or receives cash collateral with counteparties under collateral arrangements associated with SC's repurchase agreements.
(5)(6) These lines are also collateralized by securitization notes payable and residuals retained by SC. As of December 31, 2016, $1.3 billion2017, no portion 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 June 30, 2017March 31, 2018 and December 31, 2016:2017:
| | | June 30, 2017 | | March 31, 2018 |
| Balance | | Initial Note Amounts Issued | | Initial Weighted Average Interest Rate Range | | Collateral | | Restricted Cash | |
| (dollars in thousands) | |
SC public securitizations, maturing on various dates(1,2) | $ | 15,222,575 |
| | $ | 35,291,692 |
| | 0.89% - 2.80% | | $ | 19,723,449 |
| | $ | 1,567,511 |
| |
(dollars in thousands) | | | Balance | | Initial Note Amounts Issued | | Initial Weighted Average Interest Rate Range | | Collateral | | Restricted Cash |
SC public securitizations, maturing on various dates(1)(2) | | | $ | 15,943,321 |
| | $ | 37,984,872 |
| | 1.16% - 2.80% | | $ | 20,910,432 |
| | $ | 1,629,738 |
|
SC privately issued amortizing notes, maturing on various dates(1) | 8,529,281 |
| | 12,445,241 |
| | 0.88% - 2.86% | | 11,809,555 |
| | 511,632 |
| | 6,919,434 |
| | 12,632,368 |
| | 0.88% - 2.86% | | 8,522,690 |
| | 573,486 |
|
Total SC secured structured financings | $ | 23,751,856 |
| | $ | 47,736,933 |
| | 0.88% - 2.86% | | $ | 31,533,004 |
| | $ | 2,079,143 |
| | $ | 22,862,755 |
| | $ | 50,617,240 |
| | 0.88% - 2.86% | | $ | 29,433,122 |
| | $ | 2,203,224 |
|
(1) SC has entered into various securitization transactions involving its retail automobile installment loans and leases. These transactions are accounted for as secured financings and therefore both the securitized RICs and the related securitization debt issued by SPEs remain on the Condensed Consolidated Balance Sheets. The maturity of this debt is based on the timing of repayments from the securitized assets.
(2) Securitizations executed under Rule 144A of the Securities Act are included within this balance.
NOTE 10. BORROWINGS (continued)
|
| | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
(dollars in thousands) | | Balance | | Initial Note Amounts Issued | | Initial Weighted Average Interest Rate Range | | Collateral | | Restricted Cash |
SC public securitizations, maturing on various dates(1)(2) | | $ | 14,995,304 |
| | $ | 36,800,642 |
| | 0.89% - 2.80% | | $ | 19,873,621 |
| | $ | 1,470,459 |
|
SC privately issued amortizing notes, maturing on various dates(1) | | 7,564,637 |
| | 12,278,282 |
| | 0.88% - 4.09% | | 9,232,658 |
| | 377,300 |
|
Total SC secured structured financings | | $ | 22,559,941 |
| | $ | 49,078,924 |
| | 0.88% - 4.09% | | $ | 29,106,279 |
| | $ | 1,847,759 |
|
(1) SC has entered into various securitization transactions involving its retail automobile installment loans and leases. These transactions are accounted for as secured financings and therefore both the securitized RICs and the related securitization debt issued by SPEs remain on the Condensed Consolidated Balance Sheets. The maturity of this debt is based on the timing of repayments from the securitized assets.
(2) Securitizations executed under Rule 144A of the Securities Act of 1933 (the “Securities Act”) are included within this balance.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10. BORROWINGS (continued)
|
| | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| Balance | | Initial Note Amounts Issued | | Initial Weighted Average Interest Rate Range | | Collateral | | Restricted Cash |
| (dollars in thousands) |
SC public securitizations, maturing on various dates(1,2) | $ | 13,444,543 |
| | $ | 32,386,082 |
| | 0.89% - 2.46% | | $ | 17,474,524 |
| | $ | 1,423,599 |
|
SC privately issued amortizing notes, maturing on various dates(1) | 8,172,407 |
| | 14,085,991 |
| | 0.88% - 2.86% | | 12,021,887 |
| | 500,868 |
|
Total SC secured structured financings | $ | 21,616,950 |
| | $ | 46,472,073 |
| | 0.88% - 2.86% | | $ | 29,496,411 |
| | $ | 1,924,467 |
|
(1) SC has entered into various securitization transactions involving its retail automobile installment loans and leases. These transactions are accounted for as secured financings and therefore both the securitized RICs, and the related securitization debt issued by SPEs, remain on the Condensed Consolidated Balance Sheets. The maturity of this debt is based on the timing of repayments from the securitized assets.
(2) Securitizations executed under Rule 144A of the Securities Act are included within this balance.
In July 2017, the Company executed a new warehouse line with an overall commitment limit of $600.0 million.
Most of SC's secured structured financings are in the form of public, SEC-registered securitizations. The CompanySC also executes private securitizations under Rule 144A of the Securities Act, and periodically issues private term amortizing notes, which are structured similarly to securitizations but are acquired by banks and conduits. The Company'sSC's securitizations and private issuances are collateralized by RICs or vehicle leases. As of March 31, 2018 and December 31, 2017, SC had private issuances of notes backed by vehicle leases totaling $4.6 billion and $3.7 billion. respectively.
NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS)
The following table presents the components of accumulated other comprehensive income/(loss), net of related tax, for the three-month period ended March 31, 2018 and 2017, respectively.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Other Comprehensive Income/(Loss) | | Total Accumulated Other Comprehensive (Loss)/Income |
| | Three-Month Period Ended March 31, 2018 | | December 31, 2017 | |
| | March 31, 2018 |
(in thousands) | | Pretax Activity | | Tax Effect | | Net Activity | | Beginning Balance | | Net Activity | | Ending Balance |
Change in accumulated other comprehensive income on cash flow hedge derivative financial instruments | | $ | (11,462 | ) | | $ | (4,671 | ) | | $ | (16,133 | ) | | | | | | |
Reclassification adjustment for net (gains) on cash flow hedge derivative financial instruments(1) | | (1,687 | ) | | 455 |
| | (1,232 | ) | | | | | | |
Net unrealized (losses) on cash flow hedge derivative financial instruments | | (13,149 | ) | | (4,216 | ) | | (17,365 | ) | | $ | (6,388 | ) | | $ | (17,365 | ) | | $ | (23,753 | ) |
| | | | | | | | | | | | |
Change in unrealized (losses) on investments in debt securities AFS | | (122,244 | ) | | 10,710 |
| | (111,534 | ) | | | | | | |
Reclassification adjustment for net losses included in net income/(expense) on non-OTTI securities (2) | | 663 |
| | (58 | ) | | 605 |
| | | | | | |
Net unrealized (losses) on investments in debt securities AFS | | (121,581 | ) | | 10,652 |
| | (110,929 | ) | | (140,498 | ) | | (110,929 | ) | | |
Cumulative effect of adoption of new ASUs(4) | | | | | | | |
|
| | (39,094 | ) | |
|
|
Net unrealized (losses) on investments in debt securities AFS - upon adoption | | | | | | | |
|
| | (150,023 | ) | | (290,521 | ) |
| | | | | | | | | | | | |
Pension and post-retirement actuarial (loss)(3) | | 842 |
| | (5,304 | ) | | (4,462 | ) | | (51,545 | ) | | (4,462 | ) | | (56,007 | ) |
| | | | | | | | | | | | |
As of March 31, 2018 | | $ | (133,888 | ) |
| $ | 1,132 |
|
| $ | (132,756 | ) |
| $ | (198,431 | ) |
| $ | (171,850 | ) |
| $ | (370,281 | ) |
| |
(1) | Net (losses)/gains reclassified into Interest on borrowings and other debt obligations in the Condensed Consolidated Statements of Operations for settlements of interest rate swap contracts designated as cash flow hedges. |
| |
(2) | Net (gains)/losses reclassified into Net gain on sale of investment securities sales in the Condensed Consolidated Statements of Operations for the sale of AFS securities. |
| |
(3) | Included in the computation of net periodic pension costs. |
(4) Includes impact of other comprehensive income reclassified to Retained earnings as a result of the adoption of ASU 2018-02. Refer to Note 1 for further discussion.
NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS) (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Total Other Comprehensive Income/(Loss) | | Total Accumulated Other Comprehensive (Loss)/Income |
| | Three-Month Period Ended March 31, 2017 | | December 31, 2016 | | | | March 31, 2017 |
(in thousands) | | Pretax Activity | | Tax Effect | | Net Activity | | Beginning Balance | | Net Activity | | Ending Balance |
Change in accumulated other comprehensive income on cash flow hedge derivative financial instruments | | $ | (2,828 | ) | | $ | (1,269 | ) | | $ | (4,097 | ) | | | | | | |
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments(1) | | 2,387 |
| | (777 | ) | | 1,610 |
| | | | | | |
Net unrealized (losses) on cash flow hedge derivative financial instruments | | (441 | ) | | (2,046 | ) | | (2,487 | ) | | $ | (6,725 | ) | | $ | (2,487 | ) | | $ | (9,212 | ) |
| | | | | | | | | | | | |
Change in unrealized gains on investment securities AFS | | 31,479 |
| | (10,510 | ) | | 20,969 |
| | | | | | |
Reclassification adjustment for net (gains) included in net income/(expense) on non-OTTI securities (2) | | — |
| | — |
| | — |
| | | | | | |
Reclassification adjustment for net losses included in net income/(expense) on OTTI securities (3) | | — |
| | — |
| | — |
| | | | | | |
Reclassification adjustment for net (gains) included in net income | | — |
| | — |
| | — |
| | | | | | |
Net unrealized gains on investment securities AFS | | 31,479 |
| | (10,510 | ) | | 20,969 |
| | (130,754 | ) | | 20,969 |
| | (109,785 | ) |
| | | | | | | | | | | | |
Pension and post-retirement actuarial gain(4) | | 913 |
| | (428 | ) | | 485 |
| | (55,729 | ) | | 485 |
| | (55,244 | ) |
As of March 31, 2017 | | $ | 31,951 |
| | $ | (12,984 | ) | | $ | 18,967 |
| | $ | (193,208 | ) | | $ | 18,967 |
| | $ | (174,241 | ) |
| |
(1) | Net gains/(losses) reclassified into Interest on borrowings and other debt obligations in the Condensed Consolidated Statements of Operations for settlements of interest rate swap contracts designated as cash flow hedges. |
| |
(2) | Net (gains)/losses reclassified into Net gain on sale of investment securities sales in the Condensed Consolidated Statements of Operations for the sale of AFS securities. |
| |
(3) | Unrealized losses/(gains) previously recognized in accumulated other comprehensive income on securities for which OTTI was recognized during the period. See further discussion in Note 3 to the Condensed Consolidated Financial Statements. |
| |
(4) | Included in the computation of net periodic pension costs. |
NOTE 12. DERIVATIVES
General
The Company uses derivative financial instruments primarily to help manage exposure to interest rate, foreign exchange, equity and credit risk, as well as to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. The Company also enters into derivatives with customers to facilitate their risk management activities.activities, and often provides commercial loan customers the option to purchase derivative products to hedge interest rate risk associated with loans made by the Bank. The Company uses derivative financial instruments as risk management tools and not for speculative trading purposes. The fair value of all derivative balances is recorded within Other assets and Other liabilities on the Condensed Consolidated Balance Sheet.
See Note 1614 for discussion of the valuation methodology for derivative instruments.
NOTE 12. DERIVATIVES (continued)
Derivatives represent contracts between parties that usually require little or no initial net investment and result in one party delivering cash or another type of asset to the other party based on a notional amount and an underlying asset, index, or interest rate or future purchase commitment or option as specified in the contract. Derivative transactions are often measured in terms of notional amount, but this amount is generally not exchanged, is not recorded on the balance sheet, and does not represent the Company`s exposure to credit loss. The notional amount is the basis on which the financial obligation of each party to the contract areis calculated to determine required payments under the derivative contract. The Company controls the credit risk of its derivative contracts through credit approvals, limits and monitoring procedures. The underlying asset is typically a referenced interest rate (commonly the Overnight Indexed Swap ("OIS") rate or LIBOR), security, credit spread or index.
The Company’s capital markets and mortgage banking activities are subject to price risk. The Company employs various tools to measure and manage price risk in its portfolios. In addition, the Board of Directors has established certain limits relative to positions and activities. The level of price risk exposure at any given time depends on the market environment and expectations of future price and market movements and will vary from period to period.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. DERIVATIVES (continued)
Credit Risk Contingent Features
The Company has entered into certain derivative contracts that require the posting of collateral to counterparties when those contracts are in a net liability position. The amount of collateral to be posted is based on the amount of the net liability and thresholds generally related to the Company's long-term senior unsecured credit ratings. In a limited number of instances, counterparties also have the right to terminate their International Swaps and Derivatives Association, Inc. ("ISDA") Master Agreementsmaster agreements if the Company's ratings fall below a specified level, typically investment grade. As of June 30, 2017March 31, 2018, derivatives in this category had a fair value of $19.8$1.7 million. The credit ratings of the Company and the Bank are currently considered investment grade. During the secondfirst quarter of 2017,2018, no additional collateral would be required if there were a further 1- or 2- notch downgrade by either Standard & Poor's ("S&P") or Moody's Investor Services ("Moody's").
As of June 30, 2017March 31, 2018 and December 31, 20162017, 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 $35.27.3 million and $27.010.4 million, respectively. The Company had $38.110.7 million and $28.315.7 million in cash and securities collateral posted to cover those positions as of June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.
Hedge Accounting
Management uses derivative instruments designated as hedges to mitigate the impact of interest rate and foreign exchange rate movements on the fair value of certain assets and liabilities and on highly probable forecasted cash flows. These instruments primarily include interest rate swaps that have underlying interest rates based on key benchmark indices and forward sale or purchase commitments.indices. The nature and volume of the derivative instruments used to manage interest rate risk depend on the level and type of assets and liabilities on the balance sheet and the risk management strategies for the current and anticipated interest rate environment.
Interest rate swaps are generally used to convert fixed-rate assets and liabilities to variable rate assets and liabilities and vice versa. The Company utilizes interest rate swaps that have a high degree of correlation to the related financial instrument.
Fair Value Hedges
During the three-month period ended June 30, 2017, the Company entered into interest rate swaps to hedge the interest rate risk on certain fixed-rate borrowings. These derivatives were designated as fair value hedges at inception of the hedge relationship. The Company included all components of each derivative's gain or loss in the assessment of hedge effectiveness. The earnings impact of the ineffective portion of these hedges was not material for the three-month and six-month periods ended June 30, 2017. Prior to 2017, the Company entered into cross-currency swaps to hedge its foreign currency exchange risk on certain Euro-denominated investments, which were sold during 2016.
Cash Flow Hedges
The Company has outstanding interest rate swap agreements designed to hedge a portion of the Company’s floating rate assets, and liabilities (including its borrowed funds). All of these swaps have been deemed as highly effective cash flow hedges. The effective portiongain or loss on the derivative instrument is reported as a component of the hedging gains and losses associated with these hedges is recorded in accumulated other comprehensive income;income and reclassified into earnings in the ineffective portionsame period or periods during which the hedged transaction affects earnings and is presented in the same Consolidated Statements of Operations line item as the earnings effect of the hedging gains and losses is recorded in earnings.hedged item.
The last of the hedges is scheduled to expire in December 2030. The Company includes all components of each derivative's gain or loss in the assessment of hedge effectiveness. The earnings impact of the ineffective portion of these hedges was not material for the six-month periods ended June 30, 2017 and 2016. As of June 30, 2017,March 31, 2018, the Company expects $1.4expected $34.7 million of gross gainsgains/losses recorded in accumulated other comprehensive loss to be reclassified to earnings during the subsequent twelve months as the future cash flows occur.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
45
NOTE 11.12. DERIVATIVES (continued)
Derivatives Designated in Hedge Relationships – Notional and Fair Values
Derivatives designated as accounting hedges at June 30, 2017March 31, 2018 and December 31, 20162017 included:
|
| | | | | | | | | | | | | | | | | | | |
| Notional Amount | | Asset | | Liability | | Weighted Average Receive Rate | | Weighted Average Pay Rate | | Weighted Average Life (Years) |
| (dollars in thousands) |
June 30, 2017 | | | | | | | | | | | |
Fair value hedges: | | | | | | | | | | | |
Interest rate swaps | $ | 650,000 |
| | $ | 1,258 |
| | $ | — |
| | 1.94 | % | | 4.2 | % | | 4.75 |
Cash flow hedges: | | | | | | | | | | | |
Pay fixed — receive floating interest rate swaps | 6,649,230 |
| | 45,003 |
| | 5,367 |
| | 1.08 | % | | 1.20 | % | | 2.31 |
Pay variable - receive fixed interest rate swaps | 4,000,000 |
| | 1,783 |
| | 50,322 |
| | 1.41 | % | | 1.10 | % | | 3.48 |
Total | $ | 11,299,230 |
| | $ | 48,044 |
| | $ | 55,689 |
| | 1.25 | % | | 1.34 | % | | 2.86 |
| | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | |
Cash flow hedges: | | | | | | | | | | | |
Pay fixed — receive floating interest rate swaps (1) | $ | 8,124,172 |
| | $ | 45,681 |
| | $ | 5,083 |
| | 0.83 | % | | 1.13 | % | | 2.57 |
Pay variable - receive fixed interest rate swaps (1) | 2,000,000 |
| | — |
| | 54,729 |
| | 1.19 | % | | 0.62 | % | | 4.79 |
Total | $ | 10,124,172 |
| | $ | 45,681 |
| | $ | 59,812 |
| | 0.91 | % | | 1.03 | % | | 3.01 |
(1) The prior period amounts have been revised. The revision had no impact on the Company's Consolidated Balance Sheets or its results of operations.
See Note 13 for detail of the amounts included in accumulated other comprehensive income related to derivatives activity. |
| | | | | | | | | | | | | | | | | | | | |
(dollars in thousands) | | Notional Amount | | Asset | | Liability | | Weighted Average Receive Rate | | Weighted Average Pay Rate | | Weighted Average Life (Years) |
March 31, 2018 | | | | | | | | | | | | |
Cash flow hedges: | | | | | | | | | | | | |
Pay fixed — receive variable interest rate swaps | | $ | 4,931,593 |
| | $ | 71,974 |
| | $ | 2,346 |
| | 0.07 | % | | 0.15 | % | | 1.92 |
Pay variable - receive fixed interest rate swaps | | 4,000,000 |
| | — |
| | 117,398 |
| | 1.41 | % | | 1.73 | % | | 2.78 |
Interest rate floor | | 1,400,000 |
| | 3,819 |
| | — |
| | 0.05 | % | | — | % | | 2.37 |
Total | | $ | 10,331,593 |
| | $ | 75,793 |
| | $ | 119,744 |
| | 0.58 | % | | 0.74 | % | | 2.31 |
| | | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | | |
Cash flow hedges: | | | | | | | | | | | | |
Pay fixed — receive variable interest rate swaps | | $ | 5,183,511 |
| | $ | 46,422 |
| | $ | 4,458 |
| | 0.05 | % | | 0.14 | % | | 2.12 |
Pay variable - receive fixed interest rate swaps | | 4,000,000 |
| | — |
| | 80,453 |
| | 1.41 | % | | 1.42 | % | | 3.02 |
Interest rate floor | | 1,000,000 |
| | 3,020 |
| | — |
| | — | % | | — | % | | 2.64 |
Total | | $ | 10,183,511 |
| | $ | 49,442 |
| | $ | 84,911 |
| | 0.58 | % | | 0.63 | % | | 2.53 |
Other Derivative Activities
The Company also enters into derivatives that are not designated as accounting hedges under GAAP. The majority of these derivatives are customer-related derivatives relating to foreign exchange and lending arrangements, as well as derivatives to hedge interest rate risk on SC's secured structured financings and the borrowings under its revolving credit facilities. SC uses both interest rate swaps and interest rate caps to satisfy these requirements and to hedge the variability of cash flows on securities issued by Trusts and borrowings under its warehouse facilities. In addition, derivatives are used to manage risks related to residential and commercial mortgage banking and investing activities. Although these derivatives are used to hedge risk and are considered economic hedges, they are not designated as accounting hedges because the contracts they are hedging are typically also carried at fair value on the balance sheet, resulting in generally symmetrical accounting treatment for the hedging instrument and the hedged item.
Mortgage Banking Derivatives
The Company's derivatives portfolio includes mortgage banking interest rate lock commitments, forward sale commitments and interest rate swaps. As part of its overall business strategy, the Company originates fixed-rate residential mortgages. It sells a portion of this production to the FHLMC, the FNMA, and private investors. The Company uses forward sales as a means of hedging against the economic impact of changes in interest rates on the mortgages that are originated for sale and on interest rate lock commitments.
The Company typically retains the servicing rights related to residential mortgage loans that are sold. Most of the Company`s residential MSRs are accounted for at fair value. As deemed appropriate, the Company economically hedges MSRs using interest rate swaps and forward contracts to purchase MBS.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11. DERIVATIVES (continued)
Customer-related derivatives
The Company offers derivatives to its customers in connection with their risk management needs.needs and requirements. These financial derivative transactions primarily consist of interest rate swaps, caps, floors and foreign exchange contracts. Risk exposure from customer positions is managed through transactions with other dealers, including Santander.
Other derivative activities
The Company uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. Foreign exchange contracts, which include spot and forward contracts as well as cross-currency swaps, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Exposure to gains and losses on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate.
NOTE 12. DERIVATIVES (continued)
Other derivative instruments primarily include forward contracts related to certain investment securities sales, an OIS,overnight indexed swap, a total return swap on Visa, Inc. Class B common shares, and equity options, which manage the Company's market risk associated with certain investments and customer deposit products.
Derivatives Not Designated in Hedge Relationships – Notional and Fair Values
Other derivative activities at June 30, 2017March 31, 2018 and December 31, 20162017 included:
| | | Notional | | Asset derivatives Fair value | | Liability derivatives Fair value | | Notional | | Asset derivatives Fair value | | Liability derivatives Fair value |
| June 30, 2017 | | December 31, 2016 | | June 30, 2017 | | December 31, 2016 | | June 30, 2017 | | December 31, 2016 | |
| (in thousands) | |
(in thousands) | | | March 31, 2018 | | December 31, 2017 | | March 31, 2018 | | December 31, 2017 | | March 31, 2018 | | December 31, 2017 |
Mortgage banking derivatives: | | | | | | | | | | | | | | | | | | | | | | | |
Forward commitments to sell loans | $ | 465,975 |
| | $ | 693,137 |
| | $ | 1,262 |
| | $ | 8,577 |
| | $ | — |
| | $ | — |
| | $ | 318,562 |
| | $ | 311,852 |
| | $ | 1 |
| | $ | 3 |
| | $ | 972 |
| | $ | 459 |
|
Interest rate lock commitments | 187,111 |
| | 253,568 |
| | 2,896 |
| | 2,316 |
| | — |
| | — |
| | 175,662 |
| | 126,194 |
| | 2,253 |
| | 2,105 |
| | — |
| | — |
|
Mortgage servicing | 320,000 |
| | 295,000 |
| | 2,246 |
| | 838 |
| | 1,043 |
| | 1,635 |
| | 355,000 |
| | 330,000 |
| | 1,006 |
| | 193 |
| | 9,800 |
| | 2,092 |
|
Total mortgage banking risk management | 973,086 |
| | 1,241,705 |
| | 6,404 |
| | 11,731 |
| | 1,043 |
| | 1,635 |
| | 849,224 |
| | 768,046 |
| | 3,260 |
| | 2,301 |
| | 10,772 |
| | 2,551 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Customer related derivatives: | | | | | | | | | | | | | | | | | | | | | | | |
Swaps receive fixed | 9,233,955 |
| | 9,646,151 |
| | 113,495 |
| | 127,123 |
| | 42,012 |
| | 49,642 |
| | 9,525,889 |
| | 9,328,079 |
| | 34,637 |
| | 72,912 |
| | 157,132 |
| | 70,348 |
|
Swaps pay fixed | 9,524,931 |
| | 9,785,170 |
| | 73,244 |
| | 85,877 |
| | 82,254 |
| | 97,759 |
| | 9,852,498 |
| | 9,576,893 |
| | 210,611 |
| | 110,109 |
| | 27,306 |
| | 51,380 |
|
Other | 2,256,215 |
| | 1,611,342 |
| | 24,614 |
| | 3,421 |
| | 22,992 |
| | 1,989 |
| | 2,054,761 |
| | 1,834,962 |
| | 25,707 |
| | 19,971 |
| | 23,841 |
| | 18,308 |
|
Total customer related derivatives | 21,015,101 |
| | 21,042,663 |
| | 211,353 |
| | 216,421 |
| | 147,258 |
| | 149,390 |
| | 21,433,148 |
| | 20,739,934 |
| | 270,955 |
| | 202,992 |
| | 208,279 |
| | 140,036 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
Other derivative activities: | | | | | | | | | | | | | | | | | | | | | | | |
Foreign exchange contracts | 3,622,161 |
| | 3,366,483 |
| | 34,338 |
| | 56,742 |
| | 38,879 |
| | 46,430 |
| | 3,708,688 |
| | 2,764,999 |
| | 20,053 |
| | 24,932 |
| | 26,872 |
| | 25,521 |
|
Interest rate swap agreements | 631,414 |
| | 1,064,289 |
| | 2,957 |
| | 2,075 |
| | 1,932 |
| | 2,647 |
| | 2,176,064 |
| | 1,749,349 |
| | 16,685 |
| | 9,596 |
| | 1,520 |
| | 1,631 |
|
Interest rate cap agreements | 10,101,891 |
| | 9,491,468 |
| | 95,731 |
| | 76,387 |
| | — |
| | — |
| | 10,851,530 |
| | 10,932,707 |
| | 197,801 |
| | 135,942 |
| | — |
| | 32,109 |
|
Options for interest rate cap agreements | 10,074,799 |
| | 9,463,935 |
| | — |
| | — |
| | 95,630 |
| | 76,281 |
| | 10,825,149 |
| | 10,906,081 |
| | — |
| | 32,165 |
| | 197,548 |
| | 135,824 |
|
Total return settlement | 658,471 |
| | 658,471 |
| | — |
| | — |
| | 31,123 |
| | 30,618 |
| |
Other | 1,228,440 |
| | 1,265,583 |
| | 12,263 |
| | 12,293 |
| | 17,043 |
| | 16,325 |
| | 979,071 |
| | 824,786 |
| | 4,103 |
| | 5,874 |
| | 5,924 |
| | 5,228 |
|
Total | $ | 48,305,363 |
| | $ | 47,594,597 |
| | $ | 363,046 |
| | $ | 375,649 |
| | $ | 332,908 |
| | $ | 323,326 |
| | $ | 50,822,874 |
| | $ | 48,685,902 |
| | $ | 512,857 |
| | $ | 413,802 |
| | $ | 450,915 |
| | $ | 342,900 |
|
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
47
NOTE 11.12. DERIVATIVES (continued)
Gains (Losses) on All Derivatives
The following Condensed Consolidated Statement of Operations line items were impacted by the Company’s derivative activities for the six-monththree-month periods ended June 30, 2017March 31, 2018 and 20162017:
| | | | | | Three-Month Period Ended June 30, | | Six-Month Period Ended June 30, | | | | Three-Month Period Ended March 31, |
Derivative Activity(1) | | Line Item | | 2017 | | 2016 | | 2017 | | 2016 | | Line Item | | 2018 | | 2017 |
| | (in thousands) | | (in thousands) |
Fair value hedges: | | | | | | | | | |
Cross-currency swaps (2) | | Miscellaneous income | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 174 |
| |
Interest rate swaps | | Miscellaneous income | | (2,162 | ) | | 6,253 |
| | (2,162 | ) | | 1,769 |
| |
Cash flow hedges: | | | | |
| | |
| | | | |
| | | | | | |
|
Pay fixed-receive variable interest rate swaps | | Net interest income | | (4,084 | ) | | (1,462 | ) | | (6,471 | ) | | (4,125 | ) | | Interest expense on borrowings | | $ | 2,764 |
| | $ | 2,343 |
|
Pay variable receive-fixed interest rate swap | | Net interest income | | (3,506 | ) | | — |
| | (6,287 | ) | | — |
| | Interest income on loans | | (2,020 | ) | | (2,781 | ) |
Other derivative activities: | | | | |
| | |
| | | | |
| | | | | | |
|
Forward commitments to sell loans | | Mortgage banking income | | 3,625 |
| | (4,581 | ) | | (7,315 | ) | | (8,476 | ) | | Miscellaneous income, net | | (514 | ) | | (10,940 | ) |
Interest rate lock commitments | | Mortgage banking income | | (1,414 | ) | | 2,986 |
| | 580 |
| | 7,438 |
| | Miscellaneous income, net | | 148 |
| | 1,994 |
|
Mortgage servicing | | Mortgage banking income | | 1,503 |
| | 8,757 |
| | 2,000 |
| | 23,827 |
| | Miscellaneous income, net | | (6,895 | ) | | 497 |
|
Customer related derivatives | | Miscellaneous income | | (1,124 | ) | | (6,707 | ) | | (2,737 | ) | | (5,113 | ) | | Miscellaneous income, net | | 2,586 |
| | (1,887 | ) |
Foreign exchange | | Miscellaneous income | | 886 |
| | 1,665 |
| | 3,146 |
| | 3,728 |
| | Miscellaneous income, net | | 1,289 |
| | 2,260 |
|
Interest rate swaps, caps, and options | | Miscellaneous income | | 4 |
| | (500 | ) | | 1,511 |
| | (6,130 | ) | | Miscellaneous income, net | | 9,717 |
| | 1,204 |
|
| Net interest income | | (1,068 | ) | | 15,033 |
| | 3,662 |
| | 30,172 |
| | Interest expense | | — |
| | — |
|
| | | | | | | | | | | | |
Total return settlement | | Other administrative expenses | | — |
| | (1,364 | ) | | (505 | ) | | (2,680 | ) | | Other administrative expenses | | — |
| | (505 | ) |
Other | | Miscellaneous income | | 557 |
| | 2,870 |
| | (944 | ) | | 1,739 |
| | Miscellaneous income, net | | (2,831 | ) | | (1,501 | ) |
| |
(1) | Gains are disclosed as positive numbers while losses are shown as a negative number regardless of the line item being affected. |
The amount of loss recognized in Other Comprehensive Income for cash flow hedge derivatives was $16.1 million and $4.1 million, net of tax, for the three-month periods ended ended March 31, 2018 and March 31, 2017, respectively.
(1) Gains are disclosed as positive numbers while losses are shown as a negative number regardlessThe amount of gain reclassified from Other Comprehensive Income into earnings for cash flow hedge derivatives was $1.2 million for the line item being affected.
(2) Cross currency swaps designated as hedges matured inthree-month period ended ended March 31, 2018 and the first quarteramount of 2016.loss reclassified from Other Comprehensive Income into earnings for cash flow hedge derivatives was $1.6 million, net of tax, for the three-month period ended ended March 31, 2017.
Disclosures about Offsetting Assets and Liabilities
The Company enters into legally enforceable master netting agreements, which reduce risk by permitting netting of transactions with the same counterparty on the occurrence of certain events. A master netting agreement allows two counterparties the ability to net-settle amounts under all contracts, including any related collateral posted, through a single payment and in a single currency. The right to offset and certain terms regarding the collateral process, such as valuation, credit events and settlement, are contained in the ISDA master agreement. The Company's financial instruments, including resell and repurchase agreements, securities lending arrangements, derivatives and cash collateral, may be eligible for offset on its Condensed Consolidated Balance Sheet.Sheets.
The Company has elected to present derivative balances on a gross basis even if the derivative is subject to a legally enforceable master netting ISDA for all trades executed after April 1, 2013. Collateral that is received or pledged for these transactions is disclosed within the “Gross amounts not offset in the Condensed Consolidated Balance Sheet” section of the tables below. Prior to April 1, 2013, the Company had elected to net all caps, floors, and interest rate swaps when it had an ISDA agreement with the counterparty. The collateral received or pledged in connection with these transactions is disclosed within the “Gross amounts offset in the Condensed Consolidated Balance Sheet" section of the tables below.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
48
NOTE 11.12. DERIVATIVES (continued)
Information about financial assets and liabilities that are eligible for offset on the Condensed Consolidated Balance Sheet as of June 30, 2017March 31, 2018 and December 31, 20162017, respectively, is presented in the following tables:
| | | | Offsetting of Financial Assets | | Offsetting of Financial Assets |
| | | | | | | | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet | | | | | | | | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet |
| | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | | Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet | | Financial Instruments | | Cash Collateral Received | | Net Amount | |
| | (in thousands) | |
June 30, 2017 | | | | | | | | | | | | | |
Fair value hedges | | $ | 1,258 |
| | $ | — |
| | $ | 1,258 |
| | $ | — |
| | $ | 85 |
| | $ | 1,173 |
| |
(in thousands) | | | Gross Amounts of Recognized Assets | | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | | Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet | | Financial Instruments | | Cash Collateral Received | | Net Amount |
March 31, 2018 | | | | | | | | | | | | | |
Cash flow hedges | | 46,786 |
| | — |
| | 46,786 |
| | — |
| | 2,704 |
| | 44,082 |
| | $ | 75,793 |
| | $ | — |
| | $ | 75,793 |
| | $ | — |
| | $ | 50,677 |
| | $ | 25,116 |
|
Other derivative activities(1) | | 359,654 |
| | 4,526 |
| | 355,128 |
| | 4,928 |
| | 26,959 |
| | 323,241 |
| | 510,604 |
| | 7,496 |
| | 503,108 |
| | 1,978 |
| | 106,006 |
| | 395,124 |
|
Total derivatives subject to a master netting arrangement or similar arrangement | | 407,698 |
| | 4,526 |
| | 403,172 |
| | 4,928 |
| | 29,748 |
| | 368,496 |
| | 586,397 |
| | 7,496 |
| | 578,901 |
| | 1,978 |
| | 156,683 |
| | 420,240 |
|
Total derivatives not subject to a master netting arrangement or similar arrangement(2) | | 3,392 |
| | — |
| | 3,392 |
| | — |
| | — |
| | 3,392 |
| | 2,253 |
| | — |
| | 2,253 |
| | — |
| | — |
| | 2,253 |
|
Total Derivative Assets | | $ | 411,090 |
| | $ | 4,526 |
| | $ | 406,564 |
| | $ | 4,928 |
| | $ | 29,748 |
| | $ | 371,888 |
| | $ | 588,650 |
| | $ | 7,496 |
| | $ | 581,154 |
| | $ | 1,978 |
| | $ | 156,683 |
| | $ | 422,493 |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | | | |
December 31, 2017 | | | | | | | | | | | | | |
Cash flow hedges | | $ | 45,681 |
| | $ | — |
| | $ | 45,681 |
| | $ | — |
| | $ | 21,690 |
| | $ | 23,991 |
| | $ | 49,442 |
| | $ | — |
| | $ | 49,442 |
| | $ | — |
| | $ | 3,076 |
| | $ | 46,366 |
|
Other derivative activities(1) | | 374,052 |
| | 7,551 |
| | 366,501 |
| | 4,484 |
| | 39,474 |
| | 322,543 |
| | 411,697 |
| | 6,731 |
| | 404,966 |
| | 2,021 |
| | 77,975 |
| | 324,970 |
|
Total derivatives subject to a master netting arrangement or similar arrangement | | 419,733 |
| | 7,551 |
| | 412,182 |
| | 4,484 |
| | 61,164 |
| | 346,534 |
| | 461,139 |
| | 6,731 |
| | 454,408 |
| | 2,021 |
| | 81,051 |
| | 371,336 |
|
Total derivatives not subject to a master netting arrangement or similar arrangement(2) | | 1,597 |
| | — |
| | 1,597 |
| | — |
| | — |
| | 1,597 |
| | 2,105 |
| | — |
| | 2,105 |
| | — |
| | — |
| | 2,105 |
|
Total Derivative Assets | | $ | 421,330 |
| | $ | 7,551 |
| | $ | 413,779 |
| | $ | 4,484 |
| | $ | 61,164 |
| | $ | 348,131 |
| | $ | 463,244 |
| | $ | 6,731 |
| | $ | 456,513 |
| | $ | 2,021 |
| | $ | 81,051 |
| | $ | 373,441 |
|
| |
(1) | Includes customer-related and other derivatives. |
| |
(2) | Includes mortgage banking derivatives. |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
49
NOTE 11.12. DERIVATIVES (continued)
| | | | Offsetting of Financial Liabilities | | Offsetting of Financial Liabilities |
| | | | | | | | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet | | | | | | | | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet | | Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet |
| | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | | Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheet | | Cash Collateral Pledged | | Net Amount | |
| | (in thousands) | |
June 30, 2017 | | | | | | | | | | | |
Fair value hedges | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| |
Cash flow hedges (3) | | 55,689 |
| | — |
| | 55,689 |
| | 127,918 |
| | — |
| |
(in thousands) | | | Gross Amounts of Recognized Liabilities | | Gross Amounts Offset in the Condensed Consolidated Balance Sheet | | Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheet | | Financial Instruments | | Cash Collateral Pledged | | Net Amount |
March 31, 2018 | | | | | | | | | | | | | |
Cash flow hedges | | | $ | 119,955 |
| | $ | — |
| | $ | 119,955 |
| | $ | — |
| | $ | 211 |
| | $ | 119,744 |
|
Other derivative activities(1) | | 301,785 |
| | 29,611 |
| | 272,174 |
| | 119,560 |
| | 152,614 |
| | 450,485 |
| | 13,255 |
| | 437,230 |
| | — |
| | 331,304 |
| | 105,926 |
|
Total derivatives subject to a master netting arrangement or similar arrangement | | 357,474 |
| | 29,611 |
| | 327,863 |
| | 247,478 |
| | 152,614 |
| | 570,440 |
| | 13,255 |
| | 557,185 |
| | — |
| | 331,515 |
| | 225,670 |
|
Total derivatives not subject to a master netting arrangement or similar arrangement(2) | | 31,123 |
| | — |
| | 31,123 |
| | — |
| | 31,123 |
| | 219 |
| | — |
| | 219 |
| | — |
| | — |
| | 219 |
|
Total Derivative Liabilities | | $ | 388,597 |
| | $ | 29,611 |
| | $ | 358,986 |
| | $ | 247,478 |
| | $ | 183,737 |
| | $ | 570,659 |
| | $ | 13,255 |
| | $ | 557,404 |
| | $ | — |
| | $ | 331,515 |
| | $ | 225,889 |
|
| | | | | | | | | | | | | | | | | | | | | | |
December 31, 2016 | | | | | | | | | | | |
Cash flow hedges (3) | | $ | 59,812 |
| | $ | — |
| | $ | 59,812 |
| | $ | 110,856 |
| | $ | — |
| |
December 31, 2017 | | | | | | | | | | | | | |
Cash flow hedges | | | $ | 84,911 |
| | $ | — |
| | $ | 84,911 |
| | $ | — |
| | $ | 622 |
| | $ | 84,289 |
|
Other derivative activities(1) | | 292,708 |
| | 34,197 |
| | 258,511 |
| | 95,138 |
| | 163,373 |
| | 342,752 |
| | 16,236 |
| | 326,516 |
| | — |
| | 165,716 |
| | 160,800 |
|
Total derivatives subject to a master netting arrangement or similar arrangement | | 352,520 |
| | 34,197 |
| | 318,323 |
| | 205,994 |
| | 163,373 |
| | 427,663 |
| | 16,236 |
| | 411,427 |
| | — |
| | 166,338 |
| | 245,089 |
|
Total derivatives not subject to a master netting arrangement or similar arrangement(2) | | 30,618 |
| | — |
| | 30,618 |
| | — |
| | 30,618 |
| | 148 |
| | — |
| | 148 |
| | — |
| | — |
| | 148 |
|
Total Derivative Liabilities | | $ | 383,138 |
| | $ | 34,197 |
| | $ | 348,941 |
| | $ | 205,994 |
| | $ | 193,991 |
| | $ | 427,811 |
| | $ | 16,236 |
| | $ | 411,575 |
| | $ | — |
| | $ | 166,338 |
| | $ | 245,237 |
|
| |
(1) | Includes customer-related and other derivativesderivatives. |
| |
(2) | Includes mortgage banking derivatives |
| |
(3) | In certain instances, the Company is over-collateralized since the actual amount of cash pledged as collateral exceeds the associated financial liability. As a result, the actual amount of cash collateral pledged that is reported in Other Liabilities or Due from affiliates may be greater than the amount shown. The prior period have been revised to conform with current period presentation.derivatives. |
NOTE 12.13. INCOME TAXES
An income tax provision of $92.0 million and $170.9$95.3 million was recorded for the three-month and six-month periodsperiod ended June 30, 2017, respectively,March 31, 2018, compared to $153.3 million and $232.1$78.9 million for the corresponding periodsperiod in 2016.2017. This resulted in an effective tax rate ("ETR") of 24.2% and 27.5%27.0% for the three-month and six-month periodsperiod ended June 30, 2017, respectively,March 31, 2018, compared to 35.8% and 37.6%32.5% for the corresponding periodsperiod in 2016.2017.
The decrease in the ETR for the three-month and six-month periods ending June 30, 2017period ended March 31, 2018 was predominantly due to the undistributed net earningsreduction in the Federal corporate income tax rate provided for by the TCJA as enacted on December 22, 2017 and effective January 1, 2018. The full impact of a Puerto Rico subsidiarythe corporate rate reduction on the period-over-period decrease in the ETR was partially off-set by the impact of the TCJA provision that will be indefinitely reinvested outsidedisallows tax deductions for FDIC premiums, and was further off-set by the U.S.,impact of discrete tax benefits booked in addition to the increase infirst quarter of 2017 for certain state tax credits.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12. INCOME TAXES (continued)items.
The Company is subject to the income tax laws of the U.S., its states and municipalities and certain foreign countries. These tax laws are complex and are potentially subject to different interpretations by the taxpayer and the relevant governmental taxing authorities. In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of these inherently complex tax laws.
NOTE 13. INCOME TAXES (continued)
Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. The Company reviews its tax balances quarterly and, as new information becomes available, the balances are adjusted as appropriate. The Company is subject to ongoing tax examinations and assessments in various jurisdictions.
As noted above, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%. Due to the complexities involved in accounting for the enactment of the TCJA, SEC Staff Accounting Bulletin (“SAB”) 118 specifies, among other things, that reasonable estimates of the income tax effects of the TCJA should be used, if determinable. Further, SAB 118 clarifies accounting for income taxes under ASC Topic 740, Income Taxes (ASC 740), if information is not yet available or complete and provides for up to a one-year period in which to complete the required analyses and accounting (the measurement period). The Company has obtained and analyzed all currently available information to record the effect of the change in tax law. While we were able to make a reasonable estimate of the impact of the reduction in the corporate tax rate and the other provisions of the TCJA, the accounting may be impacted by other analyses related to the TCJA, technical corrections or other amendments to the TCJA, and further accounting or administrative tax guidance.
The Company filed a lawsuit against the United States in 2009 in Federal District Court in Massachusetts relating to the proper tax consequences of two financing transactions with an international bank through which the Company borrowed $1.2 billion. As a result of these financing transactions, the Company paid foreign taxes of $264.0 million during the years 2003 through 2007 and claimed a corresponding foreign tax credit for foreign taxes paid during those years, which the Internal Revenue Service ("IRS") disallowed. The IRS also disallowed the Company's deductions for interest expense and transaction costs, totaling $74.6 million in tax liability, and assessed penalties and interest totaling approximately $92.5 million. The Company has paid the taxes, penalties and interest associated with the IRS adjustments for all tax years, and the lawsuit will determine whether the Company is entitled to a refund of the amounts paid.
OnIn November 13, 2015, the Federal District Court issued a written opinion in favor ofgranted the Company on all contested issues,Company's motions for summary judgment and in a judgment issued on January 13, 2016,later ordered amounts assessed by the IRS for the years 2003 through 2005 to be refunded to the Company. The IRS appealed that judgment. On December 15, 2016,judgment, and the U.S. Court of Appeals for the First Circuit partially reversed the judgment of the Federal District Court. Pursuant to the First Circuit's decision,Court, finding that the Company is not entitled to claim the foreign tax credits it claimed but will be allowed to exclude from income $132.0 million (representing half of the U.K. taxes the Company paid) and will be allowed to claim the interest expense deductions. The First Circuit ordered the case to behas been remanded to the Federal District Court for further proceedings to determine, among other issues, whether penalties should be sustained. On March 16, 2017,remand, the parties are awaiting the Court’s decision on motions for summary judgment filed by the Company filed a petition requestingregarding the U.S. Supreme Court to hear its appeal of the First Circuit Court's decision. On June 26, 2017 the U.S. Supreme Court denied the Company’s request, and the case has now been remanded to the Federal District Court as ordered by the Court of Appeals.remaining issues.
In response to the First Circuit's decision, the Company, at December 31, 2016, used its previously established $230.1 million tax reserve to write off deferred tax assets and a portion of the receivable that would not be realized under the Court's decision. Additionally, the Company established a $36.0$36.8 million tax reserve in relation to items that have not yet been determined by the courts, including potential penalties. Over the next 12 months, it is reasonably possible that changes in the reserve for uncertain tax positions could range from a decrease of $36$36.8 million to an increase of $0 million.no change.
With few exceptions, the Company is no longer subject to federal, state and non-U.S. income tax examinations by tax authorities for years prior to 2003.2006.
57The Company applies an aggregate portfolio approach whereby income tax effects from accumulated other comprehensive income are released only when an entire portfolio (i.e. all related units of account) of a particular type is liquidated, sold or extinguished.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS)14. FAIR VALUE
General
A portion of the Company’s assets and liabilities are carried at fair value, including AFS investment securities and derivative instruments. In addition, the Company elects to account for its residential mortgages HFS and a portion of its MSRs at fair value. Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include impairments for certain loans and foreclosed assets.
NOTE 14. FAIR VALUE (continued)
As of March 31, 2018, $14.4 billion of the Company’s total assets consisted of financial instruments measured at fair value on a recurring basis, including financial instruments for which the Company elected the FVO. Approximately $174.4 million of these financial assets were measured using quoted market prices for identical instruments, or Level 1 inputs. Approximately $13.6 billion of these financial assets were measured using valuation methodologies involving market-based and market-derived information, or Level 2 inputs. Approximately $678.6 million of these financial assets were measured using model-based techniques, or Level 3 inputs, and represented approximately 4.7% of total assets measured at fair value on a recurring basis and approximately 0.5% of total consolidated assets.
Fair value is defined in GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP establishes a fair value reporting hierarchy to maximize the use of observable inputs when measuring fair value and defines the three levels of inputs as noted below:
•Level 1 - Assets or liabilities for which the identical item is traded on an active exchange, such as publicly-traded instruments.
•Level 2 - Assets and liabilities valued based on observable market data for similar instruments. Fair value is estimated using inputs other than quoted prices included within Level 1 that are observable for assets or liabilities, either directly or indirectly.
•Level 3 - Assets or liabilities for which significant valuation assumptions are not readily observable in the market, and instruments valued based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require. Fair value is estimated using unobservable inputs that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities may include financial instruments whose value is determined using pricing services, pricing models with internally developed assumptions, discounted cash flow ("DCF") methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Assets and liabilities measured at fair value, by their nature, result in a higher degree of financial statement volatility. When available, the Company uses quoted market prices or matrix pricing in active markets to determine fair value and classifies such items as Level 1 or Level 2 assets or liabilities. If quoted market prices in active markets are not available, fair value is determined using third-party broker quotes and/or DCF models incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using broker quotes and/or DCF models are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation.
The Company values assets and liabilities based on the principal market in which each would be sold (in the case of assets) or transferred (in the case of liabilities). The principal market is the forum with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market. In the absence of observable market transactions, the Company considers liquidity valuation adjustments to reflect the uncertainty in pricing the instruments. The fair value of a financial asset is measured on a stand-alone basis and cannot be measured as a group, with the exception of certain financial instruments held and managed on a net portfolio basis. In measuring the fair value of a nonfinancial asset, the Company assumes the highest and best use of the asset by a market participant, not just the intended use, to maximize the value of the asset. The Company also considers whether any credit valuation adjustments are necessary based on the counterparty's credit quality.
Any models used to determine fair values or validate dealer quotes based on the descriptions below are subject to review and testing as part of the Company's model validation and internal control testing processes.
The Bank's Market Risk Department is responsible for determining and approving the fair values of all assets and liabilities valued at fair value, including the Company's Level 3 assets and liabilities. Price validation procedures are performed and the results are reviewed for Level 3 assets and liabilities by the Market Risk Department. Price validation procedures performed for these assets and liabilities can include comparing current prices to historical pricing trends by collateral type and vintage, comparing prices by product type to indicative pricing grids published by market makers, and obtaining corroborating dealer prices for significant securities.
The Company reviews the assumptions utilized to determine fair value on a quarterly basis. Any changes in methodologies or significant inputs used in determining fair values are further reviewed to determine if a change in fair value level hierarchy has occurred. Transfers in and out of Levels 1, 2 and 3 are considered to be effective as of the end of the quarter in which they occur.
There were no transfers between Levels 1, 2 or 3 during the three-month periods ended March 31, 2018 and 2017 for any assets or liabilities valued at fair value on a recurring basis.
NOTE 14. FAIR VALUE (continued)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables present the assets and liabilities that are measured at fair value on a recurring basis by major product category and fair value hierarchy as of March 31, 2018 and December 31, 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Balance at March 31, 2018 | | Level 1 | | Level 2 | | Level 3 | | Balance at December 31, 2017 |
Financial assets: | | | | | | | | | | | | | | | | |
U.S. Treasury securities | | $ | 174,439 |
| | $ | 1,200,666 |
| | $ | — |
| | $ | 1,375,105 |
| | $ | 139,615 |
| | $ | 858,497 |
| | $ | — |
| | $ | 998,112 |
|
Corporate debt | | — |
| | 2,723 |
| | — |
| | 2,723 |
| | — |
| | 11,660 |
| | — |
| | 11,660 |
|
ABS | | — |
| | 138,598 |
| | 348,634 |
| | 487,232 |
| | — |
| | 156,910 |
| | 350,252 |
| | 507,162 |
|
State and municipal securities | | — |
| | 21 |
| | — |
| | 21 |
| | — |
| | 23 |
| | — |
| | 23 |
|
MBS | | — |
| | 11,456,513 |
| | — |
| | 11,456,513 |
| | — |
| | 12,885,412 |
| | — |
| | 12,885,412 |
|
Investment in debt securities AFS(3)(6) | | 174,439 |
| | 12,798,521 |
| | 348,634 |
| | 13,321,594 |
| | 139,615 |
| | 13,912,502 |
| | 350,252 |
| | 14,402,369 |
|
Other investments - trading securities | | 1 |
| | 3,023 |
| | — |
| | 3,024 |
| | 1 |
| | — |
| | — |
| | 1 |
|
RICs HFI(4) | | — |
| | — |
| | 167,597 |
| | 167,597 |
| | — |
| | — |
| | 186,471 |
| | 186,471 |
|
LHFS (1)(5) | | — |
| | 162,468 |
| | — |
| | 162,468 |
| | — |
| | 197,691 |
| | — |
| | 197,691 |
|
MSRs (2) | | — |
| | — |
| | 160,130 |
| | 160,130 |
| | — |
| | — |
| | 145,993 |
| | 145,993 |
|
Other assets - derivatives (3) | | — |
| | 586,396 |
| | 2,254 |
| | 588,650 |
| | — |
| | 461,139 |
| | 2,105 |
| | 463,244 |
|
Total financial assets | | $ | 174,440 |
| | $ | 13,550,408 |
| | $ | 678,615 |
| | $ | 14,403,463 |
| | $ | 139,616 |
| | $ | 14,571,332 |
| | $ | 684,821 |
| | $ | 15,395,769 |
|
Financial liabilities: | | | | | | | | | | | | | | | | |
Other liabilities - derivatives (3) | | — |
| | 570,150 |
| | 509 |
| | 570,659 |
| | — |
| | 427,217 |
| | 594 |
| | 427,811 |
|
Total financial liabilities | | $ | — |
| | $ | 570,150 |
| | $ | 509 |
| | $ | 570,659 |
| | $ | — |
| | $ | 427,217 |
| | $ | 594 |
| | $ | 427,811 |
|
| |
(1) | LHFS disclosed on the Condensed Consolidated Balance Sheets also includes LHFS that are held at the lower of cost or fair value and are not presented within this table. |
| |
(2) | The Company has total MSRs of $163.1 million and $149.2 million as of March 31, 2018.and December 31, 2017, respectively. The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or fair value and are not presented within this table. |
| |
(3) | Refer to Note 3 for the fair value of investment securities and to Note 12 for the fair values of derivative assets and liabilities, on a further disaggregated basis. |
(4) RICs collateralized by vehicle titles at SC and RV/marine loans at SBNA.
(5) Residential mortgage loans
(6) Investment in debt securities AFS disclosed on the Consolidated Balance Sheets at December 31, 2017 included $10.8 million of equity securities valued using the net asset value as a practical expedient that are not presented within this table.
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
The Company may be required to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with GAAP from time to time. These adjustments to fair value usually result from application of lower-of-cost-or-fair value accounting or certain impairment measures. Assets measured at fair value on a nonrecurring basis that were still held on the balance sheet were as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Balance at March 31, 2018 | | Level 1 | | Level 2 | | Level 3 | | Balance at December 31, 2017 |
Impaired commercial LHFI | | $ | — |
| | $ | 132,339 |
| | $ | 310,237 |
| | $ | 442,576 |
| | $ | — |
| | $ | 226,832 |
| | $ | 356,343 |
| | $ | 583,175 |
|
Foreclosed assets | | — |
| | 2,373 |
| | 104,014 |
| | 106,387 |
| | — |
| | 20,011 |
| | 106,581 |
| | 126,592 |
|
Vehicle inventory | | — |
| | 415,262 |
| | — |
| | 415,262 |
| | — |
| | 325,203 |
| | — |
| | 325,203 |
|
LHFS(1) | | — |
| | — |
| | 1,798,222 |
| | 1,798,222 |
| | — |
| | — |
| | 2,324,830 |
| | 2,324,830 |
|
Auto loans impaired due to bankruptcy | | — |
| | 128,641 |
| | — |
| | 128,641 |
| | — |
| | 121,578 |
| | — |
| | 121,578 |
|
MSRs | | — |
| | — |
| | 9,381 |
| | 9,381 |
| | — |
| | — |
| | 9,273 |
| | 9,273 |
|
| |
(1) | These amounts include $967.8 million and $1.1 billion of personal loans held for sale that are impaired as of March 31, 2018 and December 31, 2017, respectively. |
NOTE 14. FAIR VALUE (continued)
Valuation Processes and Techniques
Impaired commercial LHFI in the table above represents the recorded investment of impaired commercial loans for which the Company measures impairment during the period based on the fair value of the underlying collateral supporting the loan. Written offers to purchase a specific impaired loan are considered observable market inputs, which are considered Level 1 inputs. Appraisals are obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and are considered Level 2 inputs. Loans for which the value of the underlying collateral is determined using a combination of real estate appraisals, field examinations and internal calculations are classified as Level 3. The inputs in the internal calculations may include the loan balance, estimation of the collectability of the underlying receivables held by the customer used as collateral, sale and liquidation value of the inventory held by the customer used as collateral and historical loss-given-default parameters. In cases in which the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized. The net carrying value of these loans was $357.7 million and $491.5 million at March 31, 2018 and December 31, 2017, respectively. Loans previously impaired which were not marked to fair value during the periods presented are excluded from this table.
Foreclosed assets represent the recorded investment in assets taken during the period presented in foreclosure of defaulted loans, and are primarily comprised of commercial and residential real properties and generally measured at fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of market value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace.
The Company estimates the fair value of its vehicles, which are obtained either through repossession or lease termination, using historical auction rates and current market values of used cars.
The Company's LHFS portfolios that are measured at fair value on a nonrecurring basis primarily consist of personal, commercial, and RICs LHFS. The estimated fair value for these LHFS is calculated based on a combination of estimated market rates for similar loans with similar credit risks and a DCF analysis in which the Company uses significant unobservable inputs on key assumptions, including historical default rates and adjustments to reflect voluntary prepayments, prepayment rates, discount rates reflective of the cost of funding, and credit loss expectations. The lower of cost or fair value adjustment for personal loans held for sale includes customer default activity and adjustments related to the net change in the portfolio balance during the reporting period.
For loans that are considered collateral-dependent, such as certain bankruptcy loans, impairment is measured based on the fair value of the collateral less its estimated cost to sell. For the underlying collateral, the estimated fair value is obtained using historical auction rates and current market levels of used car prices.
A portion of the Company's MSRs are measured at fair value on a nonrecurring basis. These MSRs are priced internally using a DCF model. The DCF model incorporates assumptions that market participants would use in estimating future net servicing income, including portfolio characteristics, prepayments assumptions, discount rates, delinquency and foreclosure rates, late charges, other ancillary revenues, cost to service and other economic factors. Due to the unobservable nature of certain valuation inputs, these MSRs are classified as Level 3.
Fair Value Adjustments
The following table presents the componentsincreases and decreases in value of accumulated other comprehensive income/(loss), net of related tax,certain assets that are measured at fair value on a nonrecurring basis for the three-month and six-month periods ended June 30, 2017 and 2016, respectively.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Other Comprehensive Income/(Loss) |
| Total Accumulated Other Comprehensive (Loss)/Income |
| Three-Month Period Ended June 30, 2017 |
| March 31, 2017 |
|
|
| June 30, 2017 |
| Pretax Activity |
| Tax Effect |
| Net Activity |
| Beginning Balance |
| Net Activity |
| Ending Balance |
| (in thousands) |
Change in accumulated gains on cash flow hedge derivative financial instruments | $ | 10,205 |
|
| $ | (596 | ) |
| $ | 9,609 |
|
| |
| |
| |
Reclassification adjustment for net (losses)/gains on cash flow hedge derivative financial instruments (1) | (4,072 | ) |
| 986 |
|
| (3,086 | ) |
| |
| |
| |
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments | 6,133 |
|
| 390 |
|
| 6,523 |
|
| $ | (9,212 | ) |
| $ | 6,523 |
|
| $ | (2,689 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains/(losses) on investment securities available-for-sale | 36,480 |
|
| (14,369 | ) |
| 22,111 |
|
| |
| |
| |
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities (2) | (11,125 | ) |
| 4,363 |
|
| (6,762 | ) |
|
|
|
|
|
|
Reclassification adjustment for net (gains)/losses included in net income/(expense) on OTTI securities | — |
|
| — |
|
| — |
|
|
|
|
|
|
|
Net unrealized gains/(losses) on investment securities available-for-sale | 25,355 |
|
| (10,006 | ) |
| 15,349 |
|
| (109,785 | ) |
| 15,349 |
|
| (94,436 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and post-retirement actuarial losses(3) | 911 |
|
| (355 | ) |
| 556 |
|
| (55,244 | ) |
| 556 |
|
| (54,688 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30, 2017 | $ | 32,399 |
|
| $ | (9,971 | ) |
| $ | 22,428 |
|
| $ | (174,241 | ) |
| $ | 22,428 |
|
| $ | (151,813 | ) |
| | | | | | | | | | | |
(1) Net gains/(losses) reclassified into Interest on borrowings and other debt obligationswhich a fair value adjustment has been included in the Condensed Consolidated StatementStatements of Operations relating to assets held at period-end:
|
| | | | | | | | | |
| | | Three-Month Period Ended March 31, |
(in thousands) | Statement of Operations Location | | 2018 | | 2017 |
Impaired LHFI | Provision for credit losses | | $ | (29,312 | ) | | $ | (45,772 | ) |
Foreclosed assets | Miscellaneous income(1) | | (2,473 | ) | | (1,742 | ) |
LHFS | Provision for credit losses | | (381 | ) | | — |
|
LHFS | Miscellaneous income(1) | | (70,490 | ) | | (66,121 | ) |
Auto loans impaired due to bankruptcy | Provision for credit losses | | (82,145 | ) | | (23,600 | ) |
MSRs | Miscellaneous income, net | | (549 | ) | | 95 |
|
| |
(1) | These amounts reduce Miscellaneous income. |
NOTE 14. FAIR VALUE (continued)
Level 3 Rollforward for settlementsAssets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below present the changes in Level 3 balances for the three-month periods ended March 31, 2018 and 2017, respectively, for those assets and liabilities measured at fair value on a recurring basis.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three-Month Period Ended March 31, 2018 | | Three-Month Period Ended March 31, 2017 |
(in thousands) | | Investments AFS | | RICs HFI | | MSRs | | Derivatives | | Total | | Investments AFS | | RICs HFI | | MSRs | | Derivatives | | Total |
Balances, beginning of period | | $ | 350,252 |
| | $ | 186,471 |
| | $ | 145,993 |
| | $ | 1,514 |
| | $ | 684,230 |
| | $ | 814,567 |
| | $ | 217,170 |
| | $ | 146,589 |
| | $ | (29,000 | ) | | $ | 1,149,326 |
|
Losses in other comprehensive income | | (499 | ) | | — |
| | — |
| | — |
| | (499 | ) | | (619 | ) | | — |
| | — |
| | — |
| | (619 | ) |
Gains/(losses) in earnings | | — |
| | 5,276 |
| | 15,043 |
| | 134 |
| | 20,453 |
| | — |
| | 16,891 |
| | 1,457 |
| | 1,194 |
| | 19,542 |
|
Additions/Issuances | | — |
| | 1,349 |
| | 2,755 |
| | — |
| | 4,104 |
| | — |
| | 13,331 |
| | 5,730 |
| | — |
| | 19,061 |
|
Settlements(1) | | (1,119 | ) | | (25,499 | ) | | (3,661 | ) | | 97 |
| | (30,182 | ) | | (240,494 | ) | | (44,919 | ) | | (4,321 | ) | | 97 |
| | (289,637 | ) |
Balances, end of period | | $ | 348,634 |
| | $ | 167,597 |
| | $ | 160,130 |
| | $ | 1,745 |
| | $ | 678,106 |
| | $ | 573,454 |
| | $ | 202,473 |
| | $ | 149,455 |
| | $ | (27,709 | ) | | $ | 897,673 |
|
Changes in unrealized gains (losses) included in earnings related to balances still held at end of period | | $ | — |
| | $ | 5,276 |
| | $ | 15,043 |
| | $ | (14 | ) | | $ | 20,305 |
| | $ | — |
| | $ | 16,891 |
| | $ | 1,457 |
| | $ | (800 | ) | | $ | 17,548 |
|
| |
(1) | Settlements include charge-offs, prepayments, pay downs and maturities. |
The gains in earnings reported in the table above related to the RICs HFI for which the Company elected the FVO are driven by three primary factors: 1) the recognition of interest rate swap contracts designatedincome, 2) recoveries of previously charged-off RICs, and 3) actual performance of the portfolio since the Change in Control. Recoveries from RICs that were charged off at the Change in Control date are a direct increase to the gain recognized within the portfolio. In accordance with ASC 805, Business Combinations, the Company did not ascribe a fair value to the portfolio of sub-prime charged-off RICs at the Change in Control date. Recoveries of previously charged off loans are usually recorded as a reduction to charge-offs in the period in which the recovery is made; however, in instances where the FVO is elected, it will flow through the fair value mark. At the Change in Control date, the UPB of the previously charged-off RIC portfolio was approximately $3.0 billion.
Valuation Processes and Techniques - Recurring Fair Value Assets and Liabilities
The following is a description of the valuation techniques used for instruments measured at fair value on a recurring basis:
Debt Securities Classified as AFS and Trading Securities
Debt securities accounted for at fair value include both AFS and trading securities portfolios. The Company utilizes a third-party pricing service to value its investment securities portfolios on a global basis. Its primary pricing service has consistently proved to be a high quality third-party pricing provider. For those investments not valued by pricing vendors, other trusted market sources are utilized. The Company monitors and validates the reliability of vendor pricing on an ongoing basis, which can include pricing methodology reviews, performing detailed reviews of the assumptions and inputs used by the vendor to price individual securities, and price validation testing. Price validation testing is performed independently of the risk-taking function and can include corroborating the prices received from third-party vendors with prices from another third-party source, reviewing valuations of comparable instruments, comparison to internal valuations, or by reference to recent sales of similar securities.
The classification of securities within the fair value hierarchy is based upon the activity level in the market for the security type and the observability of the inputs used to determine their fair values. Trading securities and certain of the Company's U.S. Treasury securities are valued utilizing observable market quotes. The Company obtains vendor trading platform data (actual prices) from a number of live data sources, including active market makers and interdealer brokers. These certain investment securities are, therefore, classified as Level 1.
NOTE 14. FAIR VALUE (continued)
Actively traded quoted market prices for the majority of the debt securities AFS, such as U.S. Treasury and government agency securities, corporate debt, state and municipal securities, and MBS, are not readily available. The Company's principal markets for its investment securities are the secondary institutional markets with an exit price that is predominantly reflective of bid-level pricing in these markets. These investment securities are priced by third-party pricing vendors. The third-party vendors use a variety of methods when pricing these securities that incorporate relevant observable market data to arrive at an estimate of what a buyer in the marketplace would pay for a security under current market conditions. These investment securities are, therefore, considered Level 2.
Certain ABS are valued using DCF models. The DCF models are obtained from a third-party pricing vendor who uses observable market data and therefore are classified as Level 2. Other ABS that could not be valued using a third-party pricing service are valued using an internally-developed DCF model. When estimating the fair value using this model, the Company uses its best estimate of the key assumptions, which include the discount rates and forward yield curves. The Company uses comparable bond indices based on industry, term, and rating to discount the expected future cash flow hedges.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.
(2)
Realized gains and losses on investments in debt securities are recognized in the Condensed Consolidated Statements of Operations through Net (gains)(losses)/losses reclassified into Net gaingains on sale of investment securities sales
RICs HFI
For certain RICs HFI, the Company has elected the FVO. The fair values of RICs are estimated using the DCF model. In estimating the fair value using this model, the Company uses significant unobservable inputs on key assumptions, which includes historical default rates and adjustments to reflect voluntary prepayments, prepayment rates based on available data from a comparable market securitization of similar assets, discount rates reflective of the cost of funding debt issuance and recent historical equity yields, recovery rates based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. Accordingly, RICs HFI for which the Company has elected the FVO are classified as Level 3.
LHFS
The Company's LHFS portfolios that are measured at fair value on a recurring basis consists primarily of residential mortgage LHFS. The fair values of LHFS are estimated using published forward agency prices to agency buyers such as FNMA and FHLMC. The majority of the residential mortgage LHFS portfolio is sold to these two agencies. The fair value is determined using current secondary market prices for portfolios with similar characteristics, adjusted for servicing values and market conditions.
These loans are regularly traded in active markets, and observable pricing information is available from market participants. The prices are adjusted as necessary to include the embedded servicing value in the loans as well as the specific characteristics of certain loans that are priced based on the pricing of similar loans. These adjustments represent unobservable inputs to the valuation, and are not significant given the relative insensitivity of the value to changes in these inputs to the fair value of the loans. Accordingly, residential mortgage LHFS are classified as Level 2. Gains and losses on residential mortgage LHFS are recognized in the Condensed Consolidated StatementStatements of Operations for the sale of available-for-sale securities.
(3) Includedthrough Miscellaneous income. See further discussion below in the computationsection captioned "FVO for Financial Assets and Financial Liabilities."
NOTE 14. FAIR VALUE (continued)
MSRs
The model to value MSRs estimates the present value of the future net periodic pension costs.cash flows from mortgage servicing activities based on various assumptions. These cash flows include servicing and ancillary revenue, offset by the estimated costs of performing servicing activities. Significant assumptions used in the valuation of residential MSRs include changes in anticipated loan prepayment rates ("CPRs") and the discount rate, reflective of a market participant's required return on an investment for similar assets. Other important valuation assumptions include market-based servicing costs and the anticipated earnings on escrow and similar balances held by the Company in the normal course of mortgage servicing activities. All of these assumptions are considered to be unobservable inputs. Historically, servicing costs and discount rates have been less volatile than CPR and earnings rates, both of which are directly correlated with changes in market interest rates. Increases in prepayment speeds, discount rates and servicing costs result in lower valuations of MSRs. Decreases in the anticipated earnings rate on escrow and similar balances result in lower valuations of MSRs. For each of these items, the Company makes assumptions based on current market information and future expectations. All of the assumptions are based on standards that the Company believes would be utilized by market participants in valuing MSRs and are derived and/or benchmarked against independent public sources. Accordingly, MSRs are classified as Level 3. Gains and losses on MSRs are recognized on the Condensed Consolidated Statements of Operations through Miscellaneous income, net. See further discussion on MSRs in Note 8.
Listed below are the most significant inputs that are utilized by the Company in the evaluation of residential MSRs:
A 10% and 20% increase in the CPR speed would decrease the fair value of the residential servicing asset by $4.9 million and $9.5 million, respectively, at March 31, 2018.
A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $6.0 million and $11.7 million, respectively, at March 31, 2018.
Significant increases (decreases) in any of those inputs in isolation would result in significantly (lower) higher fair value measurements. These sensitivity calculations are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change. Prepayment estimates generally increase when market interest rates decline and decrease when market interest rates rise. Discount rates typically increase when market interest rates increase and/or credit and liquidity risks increase, and decrease when market interest rates decline and/or credit and liquidity conditions improve.
Derivatives
The valuation of these instruments is determined using widely accepted valuation techniques, including DCF analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable and unobservable market-based inputs. The fair value represents the estimated amount the Company would receive or pay to terminate the contract or agreement, taking into account current interest rates, foreign exchange rates, equity prices and, when appropriate, the current creditworthiness of the counterparties.
The Company incorporates credit valuation adjustments in the fair value measurement of its derivatives to reflect the counterparty's nonperformance risk in the fair value measurement of its derivatives, except for those derivative contracts with associated credit support annexes which provide credit enhancements, such as collateral postings and guarantees.
The Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy. Certain of the Company's derivatives utilize Level 3 inputs, which are primarily related to mortgage banking derivatives-interest rate lock commitments and total return settlement derivative contracts.
NOTE 14. FAIR VALUE (continued)
The DCF model is utilized to determine the fair value of the mortgage banking derivatives-interest rate lock commitments and the total return settlement derivative contracts. The significant unobservable inputs for mortgage banking derivatives used in the fair value measurement of the Company's loan commitments are "pull through" percentage and the MSR value that is inherent in the underlying loan value. The pull through percentage is an estimate of loan commitments that will result in closed loans. The significant unobservable inputs for total return settlement derivative contracts used in the fair value measurement of the Company's liabilities are discount percentages, which are based on comparable financial instruments. Significant increases (decreases) in any of these inputs in isolation would result in significantly higher (lower) fair value measurements. Significant increases (decreases) in the fair value of a mortgage banking derivative asset (liability) results when the probability of funding increases (decreases). Significant increases (decreases) in the fair value of a mortgage loan commitment result when the embedded servicing value increases (decreases).
Gains and losses related to derivatives affect various line items in the Condensed Consolidated Statements of Operations. See Note 12 for a discussion of derivatives activity.
Level 3 Inputs - Significant Recurring and Nonrecurring Fair Value Assets and Liabilities
The following table presents quantitative information about the significant unobservable inputs within significant Level 3 recurring and nonrecurring assets and liabilities at March 31, 2018 and December 31, 2017.
|
| | | | | | | | | | | |
(dollars in thousands) | | Fair Value at March 31, 2018 | | Valuation Technique | | Unobservable Inputs | | Range (Weighted Average) |
Financial Assets: | | |
ABS | | | | | | | | |
Financing bonds | | $ | 304,851 |
| | DCF | | Discount Rate (1) | | 2.80% - 3.02% (2.84%) |
|
Sale-leaseback securities | | $ | 43,783 |
| | Consensus Pricing (2) | | Offered quotes (3) | | 117.11 | % |
RICs HFI | | $ | 167,597 |
| | DCF | | Prepayment rate (CPR) (4) | | 6.66 | % |
| | | | | | Discount Rate (5) | | 9.50% - 14.50% (12.41%) |
|
| | | | | | Recovery Rate (6) | | 25.00% - 43.00% (41.59%) |
|
Personal LHFS | | $ | 967,789 |
| | Lower of Market or Income Approach | | Market Participant View | | 70.00% - 80.00% |
|
| | | | | | Discount Rate | | 15.00% - 20.00% |
|
| | | | | | Default Rate | | 30.00% - 40.00% |
|
| | | | | | Net Principal Payment Rate | | 50.00% - 70.00% |
|
| | | | | | Loss Severity Rate | | 90.00% - 95.00% |
|
RICs HFS | | $ | 620,168 |
| | Income Approach | | Expected Yield | | 1.00% - 2.00% |
|
| | | | | | Expected Life Time Cumulative Loss | | 4.00% - 6.00% |
|
| | | | | | Weighted Average Life | | 2 -3 years |
|
MSRs (11) | | $ | 160,130 |
| | DCF | | Prepayment rate ("CPR") (7) | | 3.92% - 85.90% (8.20%) |
|
| | | | | | Discount Rate (8) | | 9.75 | % |
Mortgage banking interest rate lock commitments | | $ | 2,253 |
| | DCF | | Pull through percentage (9) | | 78.00 | % |
| | | | | | MSR value (10) | | .73% - 1.03% (1.03%) |
|
| |
(1) | Based on the applicable term and discount index. |
| |
(2) | Consensus pricing refers to fair value estimates that are generally developed using information such as dealer quotes or other third-party valuations or comparable asset prices. |
| |
(3) | Based on the nature of the input, a range or weighted average does not exist. For sale-leaseback securities, the Company owns one security. |
| |
(4) | Based on the analysis of available data from a comparable market securitization of similar assets. |
| |
(5) | Based on the cost of funding of debt issuance and recent historical equity yields. |
| |
(6) | Based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. |
| |
(7) | Average CPR projected from collateral stratified by loan type, note rate and maturity. |
| |
(8) | Based on the nature of the input, a range or weighted average does not exist. |
| |
(9) | Historical weighted average based on principal balance calculated as the percentage of loans originated for sale divided by total commitments less outstanding commitments. |
| |
(10) | MSR value is the estimated value of the servicing right embedded in the underlying loan, expressed in basis points of outstanding unpaid principal balance. |
(11) Excludes MSR valued on a non-recurring basis for which we do not consider there to be significant unobservable assumptions.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS)14. FAIR VALUE (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Other Comprehensive Income/(Loss) | | Total Accumulated Other Comprehensive (Loss)/Income |
| Six-Month Period Ended June 30, 2017 | | December 31, 2016 | |
| | June 30, 2017 |
| 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 | $ | 12,151 |
| | $ | (3,430 | ) | | $ | 8,721 |
| | | | | | |
Reclassification adjustment for net (losses)/gains on cash flow hedge derivative financial instruments (1) | (6,459 | ) | | 1,774 |
| | (4,685 | ) | | | | | | |
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments | 5,692 |
| | (1,656 | ) | | 4,036 |
| | $ | (6,725 | ) | | $ | 4,036 |
| | $ | (2,689 | ) |
| | | | | | | | | | | |
Change in unrealized gains/(losses) on investment securities available-for-sale | 67,928 |
| | (24,477 | ) | | 43,451 |
| | | | | | |
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities (2) | (11,125 | ) | | 3,992 |
| | (7,133 | ) | | | | | | |
Reclassification adjustment for net (gains)/losses included in net income/(expense) on OTTI securities | — |
| | — |
| | — |
| | | | | | |
Net unrealized gains/(losses) on investment securities available-for-sale | 56,803 |
| | (20,485 | ) | | 36,318 |
| | (130,754 | ) | | 36,318 |
| | (94,436 | ) |
| | | | | | | | | | | |
Pension and post-retirement actuarial gains/(losses)(3) | 1,824 |
| | (783 | ) | | 1,041 |
| | (55,729 | ) | | 1,041 |
| | (54,688 | ) |
| | | | | �� | | | | | | |
As of June 30, 2017 | $ | 64,319 |
|
| $ | (22,924 | ) |
| $ | 41,395 |
|
| $ | (193,208 | ) |
| $ | 41,395 |
|
| $ | (151,813 | ) |
| | | | | | | | | | | |
|
| | | | | | | | | | |
| Fair Value at December 31, 2017 | | Valuation Technique | | Unobservable Inputs | | Range (Weighted Average) |
|
| | | | | | |
Financing bonds | |
ABS | | | | | | | |
Financing bonds | $ | 304,727 |
| | DCF | | Discount Rate (1) | | 2.16% - 2.90% (2.28%) |
|
Sale-leaseback securities | $ | 45,525 |
| | Consensus Pricing (2) | | Offered Quotes (3) | | 120.19 | % |
RICs HFI | $ | 186,471 |
| | DCF | | CPR (4) | | 6.66 | % |
|
|
| |
| | Discount Rate (5) | | 9.50% - 14.50% (12.37%) |
|
| | | | | Recovery Rate (6) | | 25.00% - 43.00% (41.51%) |
|
Personal LHFS | $ | 1,062,090 |
| | Lower of Market or Income Approach | | Market Participant View | | 70.00% - 80.00% |
|
| | | | | Discount Rate | | 15.00% - 20.00% |
|
| | | | | Default Rate | | 30.00% - 40.00% |
|
| | | | | Net Principal Payment Rate | | 50.00% - 70.00% |
|
| | | | | Loss Severity Rate | | 90.00% - 95.00% |
|
RICs HFS | $ | 1,101,049 |
| | DCF | | Discount Rate | | 3.00% - 6.00% |
|
| | | | | Default Rate | | 3.00% - 4.00% |
|
| | | | | Prepayment Rate | | 15.00% - 20.00% |
|
| | | | | Loss Severity Rate | | 50.00% - 60.00% |
|
MSRs (11) | $ | 145,993 |
| | DCF | | CPR (7) | | 0.06% - 46.95% (9.80%) |
|
| | | | | Discount Rate (8) | | 9.90 | % |
Mortgage banking interest rate lock commitments | $ | 2,105 |
| | DCF | | Pull through percentage (9) | | 76.98 | % |
| | | | | MSR Value (10) | | 0.73% - 1.03% (0.95%) |
|
| |
(1) | Based on the applicable term and discount index. |
| |
(2) | Consensus pricing refers to fair value estimates that are generally developed using information such as dealer quotes or other third-party valuations or comparable asset prices. |
| |
(3) | Based on the nature of the input, a range or weighted average does not exist. For sale-leaseback securities, the Company owns one security. |
| |
(4) | Based on the analysis of available data from a comparable market securitization of similar assets. |
| |
(5) | Based on the cost of funding of debt issuance and recent historical equity yields. |
| |
(6) | Based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. |
| |
(7) | Average CPR projected from collateral stratified by loan type, note rate and maturity. |
| |
(8) | Based on the nature of the input, a range or weighted average does not exist. |
| |
(9) | Historical weighted average based on principal balance calculated as the percentage of loans originated for sale divided by total commitments less outstanding commitments. |
| |
(10) | MSR value is the estimated value of the servicing right embedded in the underlying loan, expressed in basis points of outstanding unpaid principal balance. |
(11) Excludes MSR valued on a non-recurring basis for which we do not consider there to be significant unobservable assumptions.
(1) Net gains/(losses) reclassified into Interest on borrowings and other debt obligations in the Condensed Consolidated Statement of Operations for settlements of interest rate swap contracts designated as cash flow hedges.
(2) Net (gains)/losses reclassified into Net gain on sale of investment securities sales in the Condensed Consolidated Statement of Operations for the sale of available-for-sale securities.
(3) Included in the computation of net periodic pension costs.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS)14. FAIR VALUE (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Total Other Comprehensive Income/(Loss) | | Total Accumulated Other Comprehensive (Loss)/Income |
| Three-Month Period Ended June 30, 2016 | | March 31, 2016 | | | | June 30, 2016 |
| 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 | $ | (17,457 | ) | | $ | 1,327 |
| | $ | (16,130 | ) | | | | | | |
Reclassification adjustment for net gains/(losses) on cash flow hedge derivative financial instruments (1) | 2,113 |
| | (755 | ) | | 1,358 |
| | | | | | |
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments | (15,344 | ) | | 572 |
| | (14,772 | ) | | $ | (49,109 | ) | | $ | (14,772 | ) | | $ | (63,881 | ) |
| | | | | | | | | | | |
Change in unrealized gains/(losses) on investment securities available-for-sale | 84,909 |
| | (33,295 | ) | | 51,614 |
| | | | | | |
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities (2) | (30,138 | ) | | 12,178 |
| | (17,960 | ) | | | | | | |
Reclassification adjustment for net losses/(gains) included in net income/(expense) on OTTI securities (3) | 34 |
| | (13 | ) | | 21 |
| | | | | | |
Reclassification adjustment for net (gains)/losses included in net income | (30,104 | ) | | 12,165 |
| | (17,939 | ) | | | | | | |
Net unrealized gains/(losses) on investment securities available-for-sale | 54,805 |
| | (21,130 | ) | | 33,675 |
| | 49,587 |
| | 33,675 |
| | 83,262 |
|
| | | | | | | | | | | |
Pension and post-retirement actuarial gains/(losses)(4) | 929 |
| | (364 | ) | | 565 |
| | (57,442 | ) | | 565 |
| | (56,877 | ) |
| | | | | | | | | | | |
As of June 30, 2016 | $ | 40,390 |
| | $ | (20,922 | ) | | $ | 19,468 |
| | $ | (56,964 | ) | | $ | 19,468 |
| | $ | (37,496 | ) |
| | | | | | | | | | | |
Fair Value of Financial Instruments
(1) Net gains/(losses) reclassified into InterestThe carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company's financial instruments are as follows:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
(in thousands) | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
Financial assets: | | | | | | | | | | | | | | | | | | | | |
Cash and amounts due from depository institutions | | $ | 7,900,607 |
| | $ | 7,900,607 |
| | $ | 7,900,607 |
| | $ | — |
| | $ | — |
| | $ | 6,519,967 |
| | $ | 6,519,967 |
| | $ | 6,519,967 |
| | $ | — |
| | $ | — |
|
Investment in debt securities AFS | | 13,321,594 |
| | 13,321,594 |
| | 174,439 |
| | 12,798,521 |
| | 348,634 |
| | 14,402,369 |
| | 14,402,369 |
| | 139,615 |
| | 13,912,502 |
| | 350,252 |
|
Investment in debt securities HTM | | 2,877,357 |
| | 2,797,698 |
| | — |
| | 2,797,698 |
| | — |
| | 1,799,808 |
| | 1,773,938 |
| | — |
| | 1,773,938 |
| | — |
|
Other Investments - Trading Securities | | 3,024 |
| | 3,024 |
| | 1 |
| | 3,023 |
| | — |
| | 1 |
| | 1 |
| | 1 |
| | — |
| | — |
|
LHFI, net | | 76,265,119 |
| | 77,793,838 |
| | — |
| | 42,339 |
| | 77,751,499 |
| | 76,829,277 |
| | 78,579,144 |
| | — |
| | 136,832 |
| | 78,442,312 |
|
LHFS | | 1,960,695 |
| | 1,960,690 |
| | — |
| | 162,468 |
| | 1,798,222 |
| | 2,522,486 |
| | 2,522,521 |
| | — |
| | 197,691 |
| | 2,324,830 |
|
Restricted cash | | 3,810,962 |
| | 3,810,962 |
| | 3,810,962 |
| | — |
| | — |
| | 3,818,807 |
| | 3,818,807 |
| | 3,818,807 |
| | — |
| | — |
|
MSRs(1) | | 163,148 |
| | 169,511 |
| | — |
| | — |
| | 169,511 |
| | 149,197 |
| | 155,266 |
| | — |
| | — |
| | 155,266 |
|
Derivatives | | 588,650 |
| | 588,650 |
| | — |
| | 586,396 |
| | 2,254 |
| | 463,244 |
| | 463,244 |
| | — |
| | 461,139 |
| | 2,105 |
|
| | | | | | | | | | | | | | | | | | | | |
Financial liabilities: | | |
| | |
| | | | |
| | |
| | | | | | | | | | |
Deposits | | 61,841,175 |
| | 61,598,475 |
| | 53,343,250 |
| | 8,255,225 |
| | — |
| | 60,831,103 |
| | 60,864,110 |
| | 55,456,511 |
| | 5,407,599 |
| | — |
|
Borrowings and other debt obligations | | 38,350,245 |
| | 38,525,215 |
| | — |
| | 23,769,098 |
| | 14,756,117 |
| | 39,003,313 |
| | 39,335,087 |
| | — |
| | 23,281,166 |
| | 16,053,921 |
|
Derivatives | | 570,659 |
| | 570,659 |
| | — |
| | 570,150 |
| | 509 |
| | 427,811 |
| | 427,811 |
| | — |
| | 427,217 |
| | 594 |
|
| |
(1) | The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or fair value. |
(2) Investment in debt securities AFS disclosed on borrowingsthe Consolidated Balance Sheets at December 31, 2017 included $10.8 million of equity securities valued using net asset value as a practical expedient that are not presented within this table.
Valuation Processes and Techniques - Financial Instruments
The preceding tables present disclosures about the fair value of the Company's financial instruments. Those fair values for certain instruments are presented based upon subjective estimates of relevant market conditions at a specific point in time and information about each financial instrument. In cases in which quoted market prices are not available, fair values are based on estimates using present value or other debt obligationsvaluation techniques. These techniques involve uncertainties resulting in variability in estimates affected by changes in assumptions and risks of the Condensed Consolidated Statementfinancial 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 Operationsa particular financial instrument, nor does it reflect potential taxes and the expenses that would be incurred in an actual sale or settlement. Accordingly, the aggregate fair value amounts presented above do not represent the underlying value of the Company.
FVO for settlementsFinancial Assets and Financial Liabilities
LHFS
The Company's LHFS portfolios that are measured using the FVO consist of interest rate swap contracts designatedresidential mortgage LHFS. The adoption of the FVO on residential mortgage loans classified as cash flow hedges.
(2) Net (gains)/losses reclassified into Net gain on sale of investment securities sales inHFS allows the Condensed Consolidated Statement of Operations forCompany to record the sale of available-for-sale securities.
(3) Unrealized losses/(gains) previously recognized in accumulated other comprehensive income on securities for which OTTI was recognized during the period. See further discussion in Note 3mortgage LHFS portfolio at fair market value compared to the Condensed Consolidated Financial Statements.
(4) Includedlower 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 computation of net periodic pension costs.hedges. Both the loans and related hedges are carried at fair value, which reduces earnings volatility, as the amounts more closely offset.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSNOTE 14. FAIR VALUE (continued)
RICs HFI
To reduce accounting and operational complexity, the Company elected the FVO for certain of its RICs HFI. These loans consisted primarily of SC’s RICs accounted for by SC under ASC 310-30, as well as all of SC’s RICs that were more than 60 days past due at the date of the Change in Control, which collectively had an aggregate outstanding UPB of $2.6 billion with a fair value of $1.9 billion at that date. The balance also includes non-performing loans acquired by SC under optional clean up calls from its non-consolidated Trusts.
The following table summarizes the differences between the fair value and the principal balance of LHFS and RICs measured at fair value on a recurring basis as of March 31, 2018 and December 31, 2017.
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
(in thousands) | | Fair Value | | Aggregate Unpaid Principal Balance | | Difference | | Fair Value | | Aggregate Unpaid Principal Balance | | Difference |
LHFS(1) | | $ | 162,468 |
| | $ | 161,818 |
| | $ | 650 |
| | $ | 197,691 |
| | $ | 194,928 |
| | $ | 2,763 |
|
RICs HFI | | 167,597 |
| | 190,587 |
| | (22,990 | ) | | 186,471 |
| | 211,580 |
| | (25,109 | ) |
Nonaccrual loans | | 9,420 |
| | 13,044 |
| | (3,624 | ) | | 15,023 |
| | 19,836 |
| | (4,813 | ) |
| |
(1) | LHFS disclosed on the Condensed Consolidated Balance Sheets also includes LHFS that are held at the lower of cost or fair value that are not presented within this table. There were no nonaccrual loans related to the LHFS measured using the FVO. |
Interest income on the Company’s LHFS and RICs HFI is recognized when earned based on their respective contractual rates in Interest income on loans in the Condensed Consolidated Statements of Operations. The accrual of interest is discontinued and reversed once the loans become more than 90 days past due for LHFS and more than 60 days past due for RICs HFI.
Residential MSRs
The Company elected to account for the majority of its existing portfolio of MSRs at fair value. This election created greater flexibility with regard to risk management of the asset by aligning the accounting for the MSRs with the accounting for risk management instruments, which are also generally carried at fair value. The remainder of the MSRs are accounted for using the lower of cost or fair value and are presented above in the section captioned "Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis."
The Company's residential MSRs that are accounted for at fair value had an aggregate fair value of $160.1 million at March 31, 2018. Changes in fair value totaling a gain of $15.0 million was recorded in Miscellaneous income, net in the Condensed Consolidated Statements of Operations during the three-month period ended March 31, 2018.
NOTE 13. ACCUMULATED OTHER COMPREHENSIVE15. NON-INTEREST INCOME / (LOSS) (continued)
The following table presents the details of the Company's Non-interest income for the following periods:
|
| | | | | | | | |
| | Three-Month Period Ended March 31, |
(in thousands) | | 2018 | | 2017 (1) |
Non-interest income: | | | | |
Consumer and commercial fees | | $ | 138,561 |
| | $ | 154,349 |
|
Lease income | | 540,896 |
| | 496,045 |
|
Miscellaneous income, net | | | | |
Mortgage banking income, net | | 16,345 |
| | 13,174 |
|
BOLI | | 14,568 |
| | 17,299 |
|
Capital market revenue | | 56,613 |
| | 45,817 |
|
Net gain on sale of operating leases | | 53,200 |
| | 22,715 |
|
Asset and wealth management fees | | 43,337 |
| | 36,501 |
|
Loss on sale of non-mortgage loans | | (43,910 | ) | | (69,768 | ) |
Other miscellaneous (loss)/income, net | | (15,583 | ) | | 11,767 |
|
Net (losses)/gains on sale of investment securities | | (663 | ) | | 519 |
|
Total Non-interest income | | $ | 803,364 |
| | $ | 728,418 |
|
(1) - Prior period amounts have not been adjusted under the modified retrospective method. For further information, see Note 1.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | |
| Total Other Comprehensive Income/(Loss) | | Total Accumulated Other Comprehensive (Loss)/Income |
| Six-Month Period Ended June 30, 2016 | | December 31, 2015 | | | | June 30, 2016 |
| 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 | $ | (81,647 | ) | | $ | 31,371 |
| | $ | (50,276 | ) | | | | | | |
Reclassification adjustment for net gains/(losses) on cash flow hedge derivative financial instruments(1) | 4,770 |
| | (1,794 | ) | | 2,976 |
| | | | | | |
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments | (76,877 | ) | | 29,577 |
| | (47,300 | ) | | $ | (16,581 | ) | | $ | (47,300 | ) | | $ | (63,881 | ) |
| | | | | | | | | | | |
Change in unrealized gains/(losses) on investment securities available-for-sale | 352,049 |
| | (137,796 | ) | | 214,253 |
| | | | | | |
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities (2) | (57,770 | ) | | 22,694 |
| | (35,076 | ) | | | | | | |
Reclassification adjustment for net losses/(gains) included in net income/(expense) on OTTI securities (3) | 44 |
| | (17 | ) | | 27 |
| | | | | | |
Reclassification adjustment for net (gains)/losses included in net income | (57,726 | ) | | 22,677 |
| | (35,049 | ) | | | | | | |
Net unrealized gains/(losses) on investment securities available-for-sale | 294,323 |
| | (115,119 | ) | | 179,204 |
| | (95,942 | ) | | 179,204 |
| | 83,262 |
|
| | | | | | | | | | | |
Pension and post-retirement actuarial gains/(losses)(4) | 1,858 |
| | (728 | ) | | 1,130 |
| | (58,007 | ) | | 1,130 |
| | (56,877 | ) |
| | | | | | | | | | | |
As of June 30, 2016 | $ | 219,304 |
| | $ | (86,270 | ) | | $ | 133,034 |
| | $ | (170,530 | ) | | $ | 133,034 |
| | $ | (37,496 | ) |
61
NOTE 15. NON-INTEREST INCOME (continued)
Disaggregation of Revenue from Contracts with Customers
Beginning January 1, 2018 the Company adopted the new accounting standard, "Revenue from Contracts with Customers", which requires the Company to disclose a disaggregation of revenue from contracts with customers that falls within the scope of this new accounting standard. The scope of the guidance explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Therefore, the Company has evaluated the revenue streams within our Non-interest income line items to determine whether they are in-scope or out-of-scope. The following table presents the Company's Non-interest income disaggregated by revenue source.
|
| | | | | | | | |
| | Three-Month Period Ended March 31, |
(in thousands) | | 2018 | | 2017 (1) |
Non-interest income: | | | | |
In-scope of Revenue from Contracts with Customers: | | | | |
Depository services(2) | | $ | 58,346 |
| | $ | 60,440 |
|
Commission and trailer fees(3) | | 29,450 |
| | 31,168 |
|
Interchange income, net(3) | | 13,473 |
| | 12,649 |
|
Underwriting service fees(3) | | 24,504 |
| | 24,600 |
|
Asset and wealth management fees(3) | | 38,203 |
| | 28,245 |
|
Other revenue from contracts with customers(3) | | 10,002 |
| | 13,311 |
|
Total In-scope of Revenue from Contracts with Customers | | 173,978 |
| | 170,413 |
|
Out-of-scope of Revenue from Contracts with Customers: | | | | |
Consumer and commercial fees(4) | | 73,204 |
| | 87,096 |
|
Lease income | | 540,896 |
| | 496,045 |
|
Miscellaneous income/(loss)(4) | | 15,949 |
| | (25,655 | ) |
Net (losses)/gains on sale of investment securities | | (663 | ) | | 519 |
|
Total Out-of-scope of Revenue from Contracts with Customers | | 629,386 |
| | 558,005 |
|
Total Non-interest income | | $ | 803,364 |
| | $ | 728,418 |
|
(1) Net gains/(losses) reclassified into Interest- Prior period amounts have not been adjusted under the modified retrospective method. For further information, see Note 1.
(2) - Primarily recorded in the Company's Condensed Consolidated Statements of Operations within Consumer and commercial fees.
(3) - Primarily recorded in the Company's Condensed Consolidated Statements of Operations within Miscellaneous income, net.
(4) - The balance presented excludes certain revenue streams that are considered in-scope and presented above.
Arrangements with Multiple Performance Obligations
Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on borrowingsits relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or using expected cost plus margin.
Practical Expedients
In instances where incremental costs, such as commission expenses, are incurred and other debt obligations inthe period of benefit is equal to or less than one year, the Company has elected to apply the practical expedient where the Company expenses such amounts as incurred. These costs are recorded within Compensation and benefits, within the Condensed Consolidated StatementStatements of Operations for settlements of interest rate swapOperations.
In instances where contracts designated as cash flow hedges.
(2) Net (gains)/losses reclassified into Net gain on sale of investment securities sales inwith customers contain a financing component and the Condensed Consolidated Statement of OperationsCompany expects the customer to pay for the salegoods or services within one year or less, the Company has elected to apply the practical expedient where the Company does not adjust the contracted amount of available-for-sale securities.consideration for the effects of financing components.
(3) Unrealized losses/(gains) previously recognized in accumulated other comprehensive income on securities
The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less or (ii) contracts for which OTTI was recognized duringwe recognize revenue at the period. See further discussion in Note 3amount to which we have the Condensed Consolidated Financial Statements.
(4) Included inright to invoice for services performed. As a result of the computationpractical expedient and for the Company's material revenue streams, there are no unperformed performance obligations. As a result of net periodic pension costs.
the practical expedient and the Company's revenue recognition for contracts with customers, there are no material contract assets or liabilities.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14.16. COMMITMENTS, CONTINGENCIES AND GUARANTEES
Off-Balance Sheet Risk - Financial Instruments
In the normal course of business, the Company utilizes a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers and manage its exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, letters of credit, loans sold with recourse, forward contracts, and interest rate and cross currency swaps, caps and floors. These financial instruments may involve, to varying degrees, elements of credit, liquidity, and interest rate risk in excess of the amount recognized on the Condensed Consolidated Balance Sheet.Sheets. The contractual or notional amounts of these financial instruments reflect the extent of involvement the Company has in particular classes of financial instruments.
The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, letters of credit and loans sold with recourse is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For forward contracts and interest rate swaps, caps and floors, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of its forward contracts and interest rate swaps, caps and floors through credit approvals, limits and monitoring procedures. See Note 1112 to these Condensed Consolidated Financial Statements for discussion of all derivative contract commitments.
The following table details the amount of commitments at the dates indicated:
| | Other Commitments | | June 30, 2017 | | December 31, 2016 | | March 31, 2018 | | December 31, 2017 |
| | (in thousands) | | (in thousands) |
Commitments to extend credit | | $ | 29,019,869 |
| | $ | 28,889,904 |
| | $ | 28,753,073 |
| | $ | 29,475,864 |
|
Letters of credit | | | 1,405,521 |
| | 1,559,297 |
|
Unsecured revolving lines of credit | | 27,294 |
| | 30,547 |
| | 27,314 |
| | 27,938 |
|
Letters of credit | | 1,763,155 |
| | 2,071,089 |
| |
Recourse exposure on sold loans | | 69,534 |
| | 69,877 |
| | 46,720 |
| | 46,572 |
|
Commitments to sell loans | | 19,954 |
| | 49,121 |
| | 26,314 |
| | 19,477 |
|
Total commitments | | $ | 30,899,806 |
| | $ | 31,110,538 |
| | $ | 30,258,942 |
| | $ | 31,129,148 |
|
Commitments to Extend Credit
Commitments to extend credit generally have fixed expiration dates, are variable rate, and contain provisions that permit the Company to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer’s credit quality. These arrangements normally require payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements.
Included within the reported balances for Commitments to extend credit at June 30, 2017March 31, 2018 and December 31, 20162017 are $6.6$6.3 billion and $6.3$6.4 billion, respectively, of commitments that can be canceled by the Company without notice.
The following table details the amount of commitments to extend credit expiring per period as of the dates indicated:
| | | | June 30, 2017 | | December 31, 2016 | |
| | (in thousands) | |
(in thousands) | | | March 31, 2018 | | December 31, 2017 |
1 year or less | | $ | 4,881,551 |
| | $ | 5,656,552 |
| | $ | 5,084,166 |
| | $ | 5,858,236 |
|
Over 1 year to 3 years | | 5,695,104 |
| | 5,265,685 |
| | 4,838,484 |
| | 5,381,113 |
|
Over 3 years to 5 years | | 3,772,868 |
| | 4,680,057 |
| | 4,747,297 |
| | 4,478,320 |
|
Over 5 years (1) | | 14,670,346 |
| | 13,287,610 |
| | 14,083,126 |
| | 13,758,195 |
|
Total | | $ | 29,019,869 |
| | $ | 28,889,904 |
| | $ | 28,753,073 |
| | $ | 29,475,864 |
|
(1)Includes certain commitments to extend credit that do not have a contractual maturity date, but are expected to be outstanding more than 5 years.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
| |
(1) | Includes certain commitments to extend credit that do not have a contractual maturity date, but are expected to be outstanding more than 5 years. |
Unsecured Revolving Lines of Credit
Such commitments, included in the Commitments to extend credit table above, arise primarily from agreements with customers for unused lines of credit on unsecured revolving accounts and credit cards, provided there is no violation of conditions in the underlying agreement. These commitments, substantially all of which the Company can terminate at any time and which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualifications.
NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
Letters of Credit
The Company’s letters of credit meet the definition of a guarantee. Letters of credit commit the Company to make payments on behalf of its customers if specified future events occur. The guarantees are primarily issued to support public and private borrowing arrangements. The weighted average term of these commitments at June 30, 2017March 31, 2018 was 12.316.7 months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the event of a requested draw by the beneficiary that complies with the terms of the letter of credit, the Company would be required to honor the commitment. The Company has various forms of collateral for these letters of credit, including real estate assets and other customer business assets. The maximum undiscounted exposure related to these commitments at June 30, 2017March 31, 2018 was $1.8$1.4 billion. The fees related to letters of credit are deferred and amortized over the life of the respective commitments, and were immaterial to the Company’s financial statements at June 30, 2017.March 31, 2018. Management believes that the utilization rate of these letters of credit will continue to be substantially less than the amount of the commitments, as has been the Company’s experience to date. As of June 30, 2017March 31, 2018 and December 31, 2016,2017, the liability related to these letters of credit was $5.2$3.5 million and $8.1$18.2 million, respectively, which is recorded within the reserve for unfunded lending commitments in Other liabilities on the Condensed Consolidated Balance Sheet. The credit risk associated with letters of credit is monitored using the same risk rating system utilized within the loan and financing lease portfolio. Also included within the reserve for unfunded lending commitments at June 30, 2017March 31, 2018 and December 31, 20162017 were lines of credit outstanding of $106.6$86.4 million and $114.4$90.9 million, respectively.
The following table details the amount of letters of credit expiring per period as of the dates indicated:
| | | | June 30, 2017 | | December 31, 2016 | |
| | (in thousands) | |
(in thousands) | | | March 31, 2018 | | December 31, 2017 |
1 year or less | | $ | 1,260,401 |
| | $ | 1,360,495 |
| | $ | 702,190 |
| | $ | 918,191 |
|
Over 1 year to 3 years | | 435,597 |
| | 399,866 |
| | 328,062 |
| | 286,505 |
|
Over 3 years to 5 years | | 37,941 |
| | 283,975 |
| | 329,005 |
| | 312,881 |
|
Over 5 years | | 29,216 |
| | 26,753 |
| | 46,264 |
| | 41,720 |
|
Total | | $ | 1,763,155 |
| | $ | 2,071,089 |
| | $ | 1,405,521 |
| | $ | 1,559,297 |
|
Loans Sold with Recourse
The Company has loans sold with recourse that meet the definition of a guarantee. For loans sold with recourse under the terms of its multifamily sales program with FNMA, the Company retained a portion of the associated credit risk. The UPB outstanding of loans sold in these programs was $253.5$102.6 million as of June 30, 2017March 31, 2018 and $341.7$136.0 million as of December 31, 2016.2017. As a result of its agreement with FNMA, the Company retained a 100% first loss position on each multifamily loan sold to FNMA until the earlier
to occur of (i) the aggregate approved losses on multifamily loans sold to FNMA reaching the maximum loss exposure for the
portfolio as a whole of $34.4$12.2 million as of June 30, 2017March 31, 2018 and $34.4$12.2 million as of December 31, 2016,2017 or (ii) the time when such loans sold to FNMA under this program are fully paid off. Any losses sustained as a result of impediments in standard representations and warranties would be in addition to the maximum loss exposure.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
At the time of the sale, the Company established a liability which represented the fair value of the retained credit exposure and the amount the Company estimates it would have to pay a third party to assume the retained recourse obligation. The estimated liability is calculated as the present value of losses that the portfolio is projected to incur based upon specific internal specific information and an industry-based default curve with a range of estimated losses. At June 30, 2017March 31, 2018 and December 31, 2016,2017, the Company had $2.6$0.9 million and $3.8$1.3 million, respectively, of reserves classified in Accrued expenses and payables on the Condensed Consolidated Balance Sheets related to the retained credit exposure for loans sold to the FNMA under this program. The Company's commitment will expire in March 2039 based on the maturity of the loans sold with recourse. Losses sustained by the Company may be offset, or partially offset, by proceeds resulting from the disposition of the underlying mortgaged properties. Approval from the FNMA is required for all transactions related to the liquidation of properties underlying the mortgages.
Commitments to Sell Loans
The Company enters into forward contracts relating to its mortgage banking business to hedge the exposures from commitments to make new residential mortgage loans with existing customers and from mortgage loans classified as LHFS. These contracts mature in less than one year.
NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
SC Commitments
SC is obligatedparty to make purchase price holdback payments to a third-party originator of auto loans it has purchased when losses are lower than originally expected. SC also is obligated to make total return settlement payments to this third-party originator in 2017 if returns on the purchased loans are greater than originally expected. These obligations are accounted for as derivatives (Note 11).
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 June 30, 2017 and December 31, 2016, there was an outstanding balance of $26,000 and $2.5 million, respectively, and a committed amount under these lines of credit of $26,000 and $2.9 million, respectively.
agreements with Bluestem whereby SC is committed to purchase certain new advances on personal revolving financings originated by a third-party retailer, along with existing balances on accounts with new advances, for an initial term ending in April 2020 and renewing through April 2022 at Bluestem's option. As of March 31, 2018, the retailer's option.total unused credit available to customers was $3.7 billion. In 2017, the Company purchased $1.2 billion of receivables out of the $4.0 billion of unused credit available to customers at December 31, 2016. During the three months ended March 31, 2018, the Company purchased $0.3 billion of receivables, out of the $3.9 billionunused credit available to customers as of December 31, 2017. In addition, SC purchased $17.4 million of receivables related to newly-opened customer accounts during the three months ended March 31, 2018. Each customer account generated under the agreements generally is approved with a credit limit higher than the amount of the initial purchase, with each subsequent purchase automatically approved as long as it does not cause the account to exceed its limit and the customer is in good standing. As of June 30, 2017March 31, 2018 and December 31, 2016,2017, SC was obligated to purchase $14.0$10.3 million and $12.6$11.5 million, respectively, in receivables that had been originated by the retailer but not yet purchased by SC. SC also is required to make a profit-sharing payment to the retailer each month if performance exceeds a specified return threshold. During the year ended December 31, 2015, SC and the third-party retailer executed an amendment that, among other provisions, increases the profit-sharing percentage retained by SC, gives the retailer the right to repurchase up to 9.99% of the existing portfolio at any time during the term of the agreement, and, provided that the repurchase right is exercised, gives the retailer the right to retain up to 20% of new accounts subsequently originated.
Under terms of an application transfer agreement with an original equipment manufacturer (“OEM") other than Fiat Chrysler Automobiles US LLC ("FCA"),FCA, SC has the first opportunity to review for its own portfolio any credit applications turned down by the OEM's captive finance company. The agreement does not require SC to originate any loans, but for each loan originated SC will pay the OEM a referral fee, comprised of a volume bonus fee and a loss betterment bonus fee.
In connection with the sale of RICs through securitizations and other sales, SC has made standard representations and warranties customary to the consumer finance industry. Violations of these representations and warranties may require SC to repurchase loans previously sold to on- or off-balance sheet Trusts or other third parties. As of June 30, 2017,March 31, 2018, there were no loans that were the subject of a demand to repurchase or replace for breach of representations andor warranties for SC's ABS or other sales. In the opinion of management, the potential exposure of other recourse obligations related to SC’s RIC sales agreements will not have a material adverse effect on SC’s consolidated financial position, results of operations, or cash flows.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
Santander has provided guarantees on the covenants, agreements, and obligations of SC under the governing documents of its warehouse facilities and privately issued amortizing notes. These guarantees are limited to the obligations of SC as servicer.
Chrysler Agreement
Under terms of the Chrysler Agreement, SC must make revenue sharing payments to FCA and also must make gain-sharing payments to FCA when residual gains on leased vehicles exceed a specified threshold. SC had accrued $16.1$11.6 million and $10.1$6.6 million at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively, related to these obligations.
The Chrysler Agreement requires, among other things, that SC bears the risk of loss on loans originated pursuant to the agreement, but also that FCA shares in any residual gains and losses from consumer leases. The agreement also requires that SC maintains at least $5.0 billion in funding available for dealer inventory financing and $4.5 billion of financing dedicated to FCA retail financing. In turn, FCA must provide designated minimum threshold percentages of its subvention business to SC. The Chrysler Agreement is subject to early termination in certain circumstances, including the failure by either party to comply with certain of its ongoing obligations under the agreement. These obligations include SC's meeting specified escalating penetration rates for the first five years of the agreement. SC has not met these penetration rates at June 30, 2017.March 31, 2018. If the Chrysler Agreement were to terminate, there could be a materially adverse impact to our and SC's business financial condition and results of operations.
Agreement with Bank of America
Until January 31, 2017, SC had a flow agreement with Bank of America whereby SC was committed to sell up to $300.0 million of eligible loans to the bank each month. On October 27, 2016, Bank of America notified SC that it was terminating the flow agreement effective January 31, 2017 and, accordingly, the flow agreement has terminated. SC retains servicing on all sold loans and may receive or pay a servicer performance payment based on an agreed-upon formula if performance on the sold loans is better or worse, respectively, than expected performance at the time of sale. Servicer payments are due six years from the cut-off date of each loan sale. SC had accrued $8.9$7.5 million and $9.8$8.1 million at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively, related to this obligation.
NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
Agreement with Citizens Bank of Pennsylvania ("CBP")
Until May 1, 2017, SC sold loans to Citizens Bank of Pennsylvania ("CBP")CBP under terms of a flow agreement and predecessor sale agreements. Under the flow agreement, as amended, CBP's committed purchases of Chrysler Capital prime loans were a maximum of $200.0 million and a minimum of $50.0 million per quarter. SC retains servicing on the sold loans and will owe CBP a loss-sharing payment capped at 0.5% of the original pool balance if losses exceed a specified threshold, established on a pool-by-pool basis. Loss-sharing payments are due the month in which net losses exceed the established threshold of each loan sale. The Company had accrued $4.6$5.5 million and $5.6 million at June 30, 2017March 31, 2018 and December 31, 20162017, respectively, related to this obligation.
Other Agreements
As of June 30, 2017,March 31, 2018, SC iswas party to a forward flow asset sale agreement with a third party under the terms of which SC is committed to sell charged-off loan receivables in bankruptcy status on a quarterly basis until sales total at least $200.0 million in proceeds. On June 29, 2015, SC and the third party executed an amendment to the forward flow asset sale agreement which increased the committed sales of charged off loan receivables in bankruptcy status to $275.0 million. On September 30, 2015, SC and the third party executed a second amendment to the forward flow asset sale agreement which required sales to occur quarterly. On November 13, 2015, 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 of more than $275.0 million is subject to a market price check. As of June 30, 2017March 31, 2018 and December 31, 2016,2017, the remaining aggregate commitments were $119.3$88.0 million and $166.2$98.9 million, respectively.
PursuantOther Contingencies
SC is or may be subject to potential liability under various other contingent exposures. SC had accrued $3.4 million and $6.3 million at March 31, 2018 and December 31, 2017, respectively, for other miscellaneous contingencies.
Impact from Hurricanes
Our footprint was impacted by three significant hurricanes during the third quarter of 2017, Hurricane Harvey, which struck the State of Texas and the surrounding region, Hurricane Irma, which primarily struck the State of Florida, and Hurricane Maria, which struck the island of Puerto Rico. Each of these hurricanes resulted in widespread flooding, power outages and associated damage to real and personal property in the affected areas Our SC subsidiary, headquartered in Dallas, Texas, our BSI subsidiary, headquartered in Miami, Florida, and our Santander BanCorp, BSPR and SSLLC subsidiaries in Puerto Rico were most directly affected by these
hurricanes. In Puerto Rico, there was significant damage to the termsinfrastructure and the power grid on the entire island, which resulted in extended delays in BSPR returning to normal operations.
The Company assessed the potential additional credit losses related to its consumer and commercial lending exposures in the greater Texas, Florida and Puerto Rico regions. As a result, the Company's ALLL had approximately $110 million of a separation agreement among SC`s former Chief Executive Officer ("CEO") Thomas G. Dundon, SC, DDFS LLC,reserves at March 31, 2018 related to the hurricanes. However, for credit exposures in Puerto Rico, given the current state of the region, the Company has had limited information with which to estimate probable credit losses. As of March 31, 2018, the Company has approximately $3.4 billion of loan exposures in Puerto Rico, consisting of $1.6 billion in consumer loans, $1.8 billion in commercial loans including $220 million in loans to municipalities. The Company will continue to monitor and Santander, upon satisfactionassess the impact of applicable conditions, including receiptthese hurricanes on our subsidiaries’ businesses, and may establish additional reserves for losses in future periods.
See discussion under the "Puerto Rico FINRA Arbitrations" section of required regulatory approvals, SC will owe Mr. Dundon a cash payment of up to $115.1 million.Note 16 below for further discussion.
Other Off-Balance Sheet Risk
Other off-balance sheet risk stems from financial instruments that do not meet the definition of guarantees under applicable accounting guidance, and from other relationships that include items such as indemnifications provided in the ordinary course of business and intercompany guarantees.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
66
NOTE 14.16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
Legal and Regulatory Proceedings
Periodically, the Company is party to, or otherwise involved in, various lawsuits, investigations, regulatory matters and other legal proceedings that arise in the ordinary course of business. In view of the inherent difficulty of predicting the outcome of any such lawsuit, investigation, regulatory matter and/or legal proceeding, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of the matters, or the eventual loss, fines or penalties related to the matter. Accordingly, except as provided below, the Company is unable to reasonably estimate a range of its potential exposure, if any, to these lawsuits, investigations, regulatory matters and other legal proceedings at this time. However, it is reasonably possible that actual outcomes or losses may differ materially from the Company's current assessments and estimates and any adverse resolution of any of these matters against it could have a material adverse effect on the Company's financial position, liquidity, and results of operations.
In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation, investigation, regulatory matters and other legal proceedings when those matters present material loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation, investigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether the matter presents a material loss contingency that is probable and estimable. If a determination is made during a given quarter that a material loss contingency is probable and estimable, an accrued liability is established during such quarter with respect to such loss contingency; the Company continues to monitor the matter for further developments that could affect the amount of the accrued liability previously established.
As of June 30, 2017March 31, 2018 and December 31, 2016,2017, the Company has accrued aggregate legal and regulatory liabilities of $63.7$167.2 million and $98.8$161.8 million, respectively. Further, the Company estimates the aggregate range of reasonably possible losses for legal and regulatory proceedings in excess of reserves of up to $260 million and $255 million as of March 31, 2018 and December 31, 2017, respectively. Descriptions of the material lawsuits, regulatory matters and other legal proceedings to which the Company is subject are set forth below.
Other Regulatory and Governmental Proceedings
OCC Identity Theft Protection Product ("SIP") Matter
In 2014, the Bank commenced discussions with the OCC to address concerns that some customers may have paid for but did not receive certain benefits of SIP, an identity theft protection product from the Bank's third-party vendor. In response to those concerns, as of December 31, 2016, the Bank made $37.3 million in total remediation payments to customers. Notwithstanding those payments, onOn March 26, 2015, the Bank entered into a Consent Cease and Desist Order ("SIP(the "SIP Consent Order") with the OCC regarding identified deficiencies in SBNA's billing practices with regard to SIP.SIP, an identity theft protection product from the Bank's third party vendor. Pursuant to the SIP Consent Order, the Bank paid a civil monetary penalty ("CMP") of $6.0$6 million and agreed to remediate customers who paid for but may not have received certain benefits of SIP. As indicated above, as ofPrior to entering into the end of 2014, allSIP Consent Order, the Bank made $37.3 million in remediation payments to customers, had been mailed a refund representing the total amount paid for product enrollment.
Subsequently, the Bank commenced a further review in order to remediate checking account customers who may have been charged an overdraft fee and credit card customers who may have been charged an over limit fee and/or finance charge related to SIP product fees. The approximate amount of the expected additional remediation wasis $5.2 million. On June 26, 2015, theThe Bank sent its formal response to the SIP Consent Order and, on October 15, 2015, the OCC responded 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,is currently implementing the actions and remediation set forth in the Bank’s action plans are underway, as is ongoing quarterly reporting to the OCC.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)reimburse customers.
CFPB Overdraft Coverage Consent Order
On April 1, 2014, the Bank received a civil investigative demand ("CID") from the CFPB requesting information and documents in connection with the Bank’s marketing to consumers of overdraft coverage for ATM and onetime debit card transactions through a third-party vendor. On July 14, 2016, the Bank entered into a consent order with the CFPB regarding these practices. Pursuant to the terms of the consent order, the Bank paid a CMP of $10.0 million and agreed to validate the elections made by customers who opted in to overdraft coverage for ATMautomated teller machine ("ATM") and onetime debit card transactions in connection with telemarketing by the third-party vendor. The Bank is also required to make certain changes to its third partythird-party vendor oversight policy and its customer complaint policy. The Bank is currently implementing a remediation plan and working to meet the other consent order requirements. It is possible that additional litigation could be filed as a result of these issues.
FIRREA Subpoena
NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
Other Matters
On May 22, 2013,July 2, 2015, the Bank receivedCompany entered into 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 connectionwritten agreement with the foreclosureFRB of loans insured or guaranteed byBoston. Under the Federal Housing Agency,terms of that written agreement, the FNMA orCompany is required to make enhancements with respect to, among other matters, Board oversight of the FHLMC. The Bank continues to cooperate with the investigation; however, there can be no assurance that claims or litigation will not arise from this matter. There is insufficient information/status to assess a likelihood of fines/penalties or other loss and/or estimates at this time.consolidated organization, risk management, capital planning and liquidity risk management.
SC Matters
Periodically, SC is party to, or otherwise involved in, various lawsuits and other legal proceedings that arise in the ordinary course of business.
On August 26, 2014,Securities Class Action and Shareholder Derivative Lawsuits
Deka Lawsuit: SC is a defendant in a purported securities class action lawsuit was filed(the "Deka Lawsuit") in the United States District Court, SouthernNorthern District of New York,Texas, captioned SteckDeka Investment GmbH et al. v. Santander Consumer USA Holdings Inc. et al., No. 1:14-cv-06942 (the "Deka Lawsuit").3:15-cv-2129-K. The Deka Lawsuit was broughtis against SC, certain of its current and former directors and executive officers and certain institutions that served as underwriters in SC's IPOinitial public offering (the "IPO") , including SIS, on behalf of a class consisting of those who purchased or otherwise acquired SC'sSC securities between January 23, 2014 and June 12, 2014. In June 2015, the venue of the Deka Lawsuit was transferred to the United States District Court, Northern District of Texas. In September 2015, the court granted a motion to appoint lead plaintiffs and lead counsel, and the Deka Lawsuit is now captioned Deka Investment GmbH et al. v.Santander Consumer USA Holdings, Inc. et al., No. 3:15-cv-2129-K.
The amended class action complaint inalleges, among other things, that the Deka Lawsuit alleges that that SC'sIPO registration statement and prospectus and certain subsequent public disclosures containedviolated federal securities laws by containing misleading statements concerning SC’s ability to pay dividends and the adequacy of SC’s compliance systems and oversight. The amended complaint asserts claims under Sections 11, 12(a) and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, and seeks damages and other relief. On December 18, 2015, SC and the individual defendants moved to dismiss the amended class action complaint and on June 13, 2016, the motion to dismisslawsuit, which was denied. On December 2, 2016, the plaintiffs moved to certify the proposed classes, on February 17, 2017, SC filed an opposition to the plaintiffs' motion to certify the proposed classes, and on March 31, 2017, the plaintiffs filed their reply brief.classes. On July 11, 2017, the court grantedentered an order staying the Deka Lawsuit pending the resolution of the appeal of a class certification order in In re Cobalt Int'lInt’l Energy, Inc. Sec. Litig., No. H-14-3428, 2017 U.S. Dist. LexisLEXIS 91938 (S.D. Tex. June 15, 2017).
Feldman Lawsuit:On October 15, 2015, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Feldman v. Jason A. Kulas, et al., C.A. No. 11614 (the "Feldman Lawsuit"). The Feldman Lawsuit names as defendants certain current and former members of SC’s Board of Directors, and names SC as a nominal defendant. The complaint alleges, among other things, that the current and former director defendants breached their fiduciary duties in connection with overseeing SC’s subprimenonprime auto lending practices, resulting in harm to SC. The complaint seeks unspecified damages and equitable relief. On December 29, 2015, the Feldman Lawsuit was stayed pending the resolution of the Deka Lawsuit.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
On March 18, 2016, a purported securities class action lawsuit was filed in the United States District Court, Northern District of Texas, captioned Parmelee v. Santander Consumer USA Holdings Inc. et al., No. 3:16-cv-783 (the Parmelee Lawsuit). On April 4, 2016, another purported securities class action lawsuit was filed in the United States District Court, Northern District of Texas, captioned Benson v. Santander Consumer USA Holdings Inc. et al., No. 3:16-cv-919 (the Benson Lawsuit). Both the Parmelee Lawsuit and the Benson Lawsuit were filed against SC and certain of its current and former directors and executive officers on behalf of a class consisting of all those who purchased or otherwise acquired SC's securities between February 3, 2015 and March 15, 2016. On May 25, 2016, the Benson Lawsuit was consolidated into the Parmelee Lawsuit, with the consolidated case captioned as Parmelee v. Santander Consumer USA Holdings Inc. et al., No. 3:16-cv-783.
On December 20, 2016, the plaintiffs filed an amended class action complaint. The amended class action complaint in the Parmelee Lawsuit alleges that SC made false or misleading statements, as well as failed to disclose material adverse facts, in prior Annual and Quarterly Reports filed under the Exchange Act and certain other public disclosures, in connection with, among other things, SC’s change in its methodology for estimating its ACL and correction of such allowance for prior periods in, among other public disclosures, SC’s Annual Report on Form 10-K for the year ended December 31, 2015, SC’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, and SC’s amended filings for prior reporting periods. The amended class action complaint asserts claims under Sections 10(b) and 20(a) of the Exchange Act, and Rule 10b-5 promulgated thereunder, and seeks damages and other relief. On March 14, 2017, SC filed a motion to dismiss the Parmelee Lawsuit. On March 14, 2017, SC filed a motion to dismiss the Parmelee Lawsuit. On April 25, 2017, the plaintiffs filed an opposition to the motion to dismiss, and on June 9, 2017, SC filed a reply to the plaintiffs’ opposition.
Jackie888 Lawsuit: On September 27, 2016, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware captioned Jackie888, Inc. v. Jason Kulas, et al., C.A. # 12775 (the Jackie888 Lawsuit)"Jackie888 Lawsuit"). The Jackie888 Lawsuit names as defendants current and former members of SC’s Board of Directors, and names SC as a nominal defendant. The complaint alleges, among other things, that the defendants breached their fiduciary duties in connection with SC’s accounting practices and controls. The complaint seeks unspecified damages and equitable relief. On April 13, 2017, the Jackie888 Lawsuit was stayed pending the resolution of the Deka Lawsuit.
Parmelee Lawsuits: Two purported securities class action lawsuits filed in March and April 2016 in the United States District Court, Northern District of Texas, were consolidated and are now captioned Parmelee v. Santander Consumer USA Holdings Inc. et al., No. 3:16-cv-783 (the "Parmelee Lawsuits"). The Parmelee Lawsuits were filed against SC and certain of its current and former directors and executive officers on behalf of a class consisting of all those who purchased or otherwise acquired SC securities between February 3, 2015 and March 15, 2016. The complaint alleges, among other things, that SC violated federal securities laws by making false or misleading statements, as well as failing to disclose material adverse facts, in its periodic reports filed under the Exchange Act and certain other public disclosures, in connection with, among other things, SC’s change in its methodology for estimating its ACL and the correction of such ACL for prior periods. On January 3, 2018, the court granted SC’s motion to dismiss the lawsuit as to defendant Ismail Dawood (SC’s former Chief Financial Officer) and denied the motion as to all other defendants.
Consumer Lending Cases
SC is also party to various lawsuits pending in federal and state courts alleging violations of state and federal consumer lending laws, including, without limitation, the Equal Credit Opportunity Act (the “ECOA”), the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, Section 5 of the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Truth in Lending Act, wrongful repossession laws, usury laws and laws related to unfair and deceptive acts or practices. In general, these cases seek damages and equitable and/or other relief.
NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
Regulatory Proceedings
SC is party to, or is periodically otherwise involved in, reviews, investigations, examinations and proceedings (both formal and informal), and information-gathering requests, by government and self-regulatory agencies, including the Federal Reserve Bank of Boston (the "FRBB"), the CFPB, the DOJ,Department of Justice (the “DOJ”), the SEC, the Federal Trade Commission and various state regulatory and enforcement agencies.
Currently, such proceedingsmatters include, but are not limited to, the following:
SC received a civil subpoena from the DOJ under the Financial Institutions Reform, Recovery and Enforcement Act, ("FIRREA"), requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime autovehicle loans, since 2007, and also from the SEC requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime vehicle loans. SC has responded to these requests within the deadlines specified in the subpoenas and has otherwise cooperated with the DOJ and the SEC with respect to these matters.
In October 2014, May 2015, July 2015 and February 2017, SC received subpoenas and/or CIDs from the attorneys general of California, Illinois, Oregon, New Jersey, Maryland and Washington under the authority of each state's consumer protection statutes. SC has been informed that these states will serve as an executive committee on behalf of a group of 31 state Attorneys General. The subpoenas and/or CIDs from the executive committee states contain broad requests for information and the production of documents related to SC’s underwriting, securitization, servicing and collection of nonprime vehicle loans. SC has responded to these requests within the deadlines specified in the subpoenas and/or CIDs, and has otherwise cooperated with the Attorneys General with respect to this matter.
In February 2016, the CFPB issued a supervisory letter relating to its investigation of SC’s compliance systems, Board and senior management oversight, consumer complaint handling, marketing of guaranteed auto loans since 2013.protection ("GAP") coverage and loan deferral disclosure practices. SC subsequently received a series of CIDs from the CFPB requesting information and testimony regarding SC’s marketing of GAP coverage and loan deferral disclosure practices. SC has responded to these requests within the deadlines specified in the CIDs, and has otherwise cooperated with the CFPB with respect to this matter.
In August 2017, SC received a CID from the CFPB. The stated purpose of the CID is to determine whether SC has complied with the Fair Credit Reporting Act and related regulations. SC has responded to these requests within the deadlines specified in the CID and has otherwise cooperated with the CFPB with respect to this matter.
2017 Written Agreement with the Federal Reserve
On March 21, 2017, SC and SHUSA entered into a written agreement (the "2017 Written Agreement") with the FRBB. Under the terms of the 2017 Written Agreement,that agreement, SC is required to enhance its compliance risk management program, board oversight of risk management and senior management oversight of risk management, and SHUSA is required to enhance its oversight of SC's management and operations.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
In August and September 2014, SC received civil subpoenas and/or CIDs from theMississippi Attorney General of Massachusetts ("the Massachusetts AG") and Delaware Department of Justice (the "Delaware DOJ") under the authority of each state’s consumer protection statutes requesting information and the production of documents related to our underwriting and securitizations of nonprime auto loans. On March 29, 2017, SC entered into an Assurance of Discontinuance ("AOD") with the Massachusetts AG and a Cease and Desist by Agreement ("C&D") with the Delaware DOJ to settle allegations that it facilitated the origination of certain Massachusetts and Delaware loans that it knew - or should have known - were in violation of applicable state consumer protection laws. In the AOD, filed in the Superior Court of Suffolk County, State of Massachusetts, captioned In the Matter of Santander Consumer USA Holdings Inc., C.A. # 17-946E, SC agreed to pay $16.3 million to an independent trust for the benefit of eligible customers and $5.8 million to the Commonwealth of Massachusetts. In the C&D, filed before the Consumer Protection Director of the Delaware Department of Justice, captioned In the Matter of Santander Consumer USA Holdings Inc., C.P.U. # 17-17-17001637, SC agreed to pay $2.9 million to an independent trust for the benefit of eligible customers and $1.0 million to the State of Delaware. SC also agreed to make certain changes to its business practices. Among other things, it agreed to enhance certain aspects of its dealer oversight and monitoring processes.
In October 2014, May 2015, July 2015, and February 2017, SC also received civil subpoenas and/or CIDs from the Attorneys General of California, Illinois, Oregon, New Jersey, Maryland and Washington under the authority of each state's consumer protection statutes. SC has been informed that these states serve as an executive committee on behalf of a group of 30 state Attorneys General. The subpoenas and/or CIDs from the executive committee states contained broad requests for information and documents related to SC's underwriting and securitization of nonprime auto loans. SC believes that several other companies in the auto finance sector have received similar subpoenas and CIDs. SC is cooperating with the Attorneys General of the states involved. SC believes that it is reasonably possible that it will suffer a loss, which could be material to its operating activities and/or results, related to the Attorneys General; however, any such loss is not currently estimable.Lawsuit
On January 10, 2017, the Attorney General of the State of Mississippi (the "Mississippi AG") filed a lawsuit against SC in the Chancery Court of the First Judicial District of Hinds County, State of Mississippi, captioned State of Mississippi ex rel. Jim Hood, Attorney General of the State of Mississippi v. Santander Consumer USA Inc., C.A. # G-2017-28. The complaint alleges that SC engaged in unfair and deceptive business practices to induce Mississippi consumers to apply for loans that they could not afford. The complaint asserts claims under the Mississippi Consumer Protection Act (the "MCPA") and seeks unspecified civil penalties, equitable relief and other relief. On March 31, 2017, SC filed motions to dismiss the Mississippi AG’s lawsuit. On May 18, 2017, SClawsuit, and subsequently filed a motion to stay the Mississippi AG’s lawsuit pending the resolution of an interlocutory appeal relating to the MCPA before the Mississippi Supreme Court in Purdue Pharma, L.P., et al. v. State, No. 2017-IA- 00300-SCT. On May 30,September 25, 2017, the Mississippi AG filed an opposition tocourt granted the motion to stay and ordered a stay of all proceedings, excluding discovery and final briefing on June 14, 2017, SC filed a replymotions to the Mississippi AG’s opposition.dismiss.
On
NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
Servicemembers’ Civil Relief Act (“SCRA') Consent Order
In February 25, 2015, SC entered into a consent order with the DOJ, approved by the United States District Court for the Northern District of Texas, which resolves the DOJ's claims against the CompanySC that certain of its repossession and collection activities during the period between January 2008 and February 2013 violated the SCRA. The consent order requires SC to pay a civil fine in the amount of $55,000, as well as at least $9.4 million to affected servicemembers consisting of $10,000 per servicemember plus compensation for any lost equity (with interest) for each repossession by SC, and $5,000 per servicemember for each instance where SC sought to collect repossession-related fees on accounts where a repossession was conducted by a prior account holder. The consent order also provides for monitoring by the DOJ of the Company’sSC’s SCRA compliance for a period of five years and requires SC to undertake certain additional remedial measures.
On July 31, 2015, the CFPB notified SC that it had referred to the DOJ certain alleged violations by SC of the ECOA regarding statistical disparities in markups charged by automobile dealers to protected groups on loans originated by those dealers and purchased by SC and the treatment of certain types of income in SC's underwriting process. On September 25, 2015, the DOJ notified SC that, based on the referral from the CFPB, it has initiated an investigation under the ECOA of SC's pricing of automobile loans.
IHCIntermediate Holding Company (“IHC') Matters
Periodically, SSLLC is party to pending and threatened legal actions and proceedings, including Financial Industry Regulatory Authority (“FINRA”) arbitration actions and class action claims.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
Puerto Rico FINRA Arbitrations
As of June 30, 2017,March 31, 2018, SSLLC hashad received 232379 FINRA arbitration cases related to Puerto Rico bonds and Puerto Rico closed-end funds.funds ("CEFs"). Most of these cases are based upon concerns regarding the local Puerto Rico securities market. The statements of claims allege, among other things, fraud, negligence, breach of fiduciary duty, breach of contract, unsuitability, over-concentration and failure to supervise. There are 151were 267 arbitration cases that remainremained pending as of June 30, 2017March 31, 2018.
As a result of Hurricane Maria impacting the Puerto Rico market including declines in Puerto Rico bond and CEF prices, it is possible that additional arbitration claims and/or increased claim amounts may be asserted in future periods.
Puerto Rico Closed-End FundsCEF Shareholder Derivative and Class ActionActions
On September 12, 2016, customersSantander, Santander BanCorp, BSPR, SSLLC, Santander Asset Management, LLC and several directors and members of certain Puerto Rico closed-end funds (“CEFs”) filedsenior management of these entities are defendants in a purported class action and shareholder derivative and class actionsuit pending in the United States District Court of First Instancefor the District of the Commonwealth of Puerto Rico Superior Court of San Juan, captioned Dionisio Trigo GonzálezGonzalez et al. v. Banco Santander, S.A. et al., Civil No. 2016-0857. Customers filed this action against Santander, Santander BanCorp, Banco Santander Puerto Rico, SSLLC, Santander Asset Management, LLC, and several directors and senior management3:2016cv02868 (the “Trigo Lawsuit”). Brought by customers of those entities. Thecertain CEFs, the complaint alleges misconduct including that the entities and individuals created, controlled, managed and advised certain CEFs within the First Puerto Rico Family of Funds (the “Funds”) from March 1, 2012 through the present to the detriment of the Funds and their shareholders. Brought on behalf of the Funds and Puerto-Rico basedPuerto-Rico-based investors, the complaint contains numerous allegations and seeks unspecified damages but alleges damages to be at least tens of millions of dollars. The court denied plaintiffs’ motion to remand the case was removed to U.S.Puerto Rico state court, and plaintiffs have sought reconsideration of that decision.
SSLLC, Santander BanCorp, BSPR, the Company and Santander are defendants in a putative class action alleging federal securities and common law claims relating to the solicitation and purchase of more than $180 million of Puerto Rico bonds and $101 million of CEFs during the period from December 2012 to October 2013. The case is pending in the United States District Court for the District of Puerto Rico. Plaintiffs movedRico and is captioned Jorge Ponsa-Rabell, et. al. v. SSLLC, Civ. No. 3:17-cv-02243 (the "Ponsa-Rabell Lawsuit"). The amended complaint alleges that defendants acted in concert to remanddefraud purchasers in connection with the action backunderwriting and sale of Puerto Rico municipal bonds, CEFs and open-end funds. The court denied a motion to state court, Plaintiffs' motion is pending.consolidate the Trigo Lawsuit with the Ponsa-Rabell Lawsuit.
SHUSA doesMexican Government Bonds Purported Antitrust Class Action: On March 30, 2018, a purported antitrust class action was filed in the United States District Court, Southern District of New York, captioned Oklahoma Firefighters & Pension Retirement System, et al.v. Banco Santander, S.A. et al.,No. 1:18-cv-02830-JPO (the “MGB Lawsuit”). The MGB Lawsuit is against the Company, SIS, Santander, Banco Santander (Mexico), S.A. Institucion de Banca Multiple, Grupo Financiero Santander and Santander Investment Bolsa, Sociedad de Valores, S.A. on behalf of a class of persons who entered into Mexican government bond (“MGB”) transactions between January 1, 2006 and April 19, 2017, where such persons were either domiciled in the United States or, if domiciled outside the United States, transacted in the United States. The complaint alleges, among other things, that the Santander defendants and the other defendants violated U.S. antitrust laws by conspiring to rig auctions and/or fix prices of MGBs.
NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)
These matters are ongoing and could in the future result in the imposition of damages, fines or other penalties. No assurance can be given that the ultimate outcome of these matters or any resulting proceedings would not believe that there are any other proceedings, threatened or pending, that, if determinedmaterially and adversely would have a material adverse effect onaffect the consolidatedCompany's business, financial position,condition and results of operations, or liquidity of the Company.
NOTE 15.17. RELATED PARTY TRANSACTIONS
The Company has various debt agreements with Santander. For a listing of these debt agreements, see Note 1110 to the Condensed Consolidated Financial Statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2017. The Company and its affiliates also entered into or were subject to various service agreements with Santander and its affiliates. Each of these agreements was made in the ordinary course of business and on market terms.
Contributions from Santander that impact common stock and paid in capital within the Condensed Consolidated Statements of Stockholder's Equity are disclosed within the table below:
|
| | | | | | | | |
| | Three-Month Period Ended March 31, |
(in thousands) | | 2018 | | 2017 |
Cash contribution | | $ | 5,741 |
| | $ | 9,000 |
|
Adjustment to book value of assets purchased on January 1 | | 277 |
| | — |
|
Deferred tax asset on purchased assets | | 3,156 |
| | — |
|
Contribution from shareholder | | $ | 9,174 |
| | $ | 9,000 |
|
On March 28,January 1, 2018, the Company purchased certain assets and assumed certain liabilities of Produban Servicios Informaticos Generales S.L. and Ingenieria De Software Bancario S.L., both affiliates of Santander. The book value and fair value of the net assets acquired was $2.8 million and $15.3 million respectively. Related to this transaction, in 2017, SHUSAthe Company received a $9.0 millionnet capital contribution from Santander.Santander of $2.8 million, representing cash received of $15.3 million and a return of capital of $12.5 million for the difference between the fair value of the assets purchased and the book value on the balance sheets of the affiliates. The Companyre-evaluated the assets received on January 1, 2018 and recorded an additional $0.3 million to additional paid-in capital. The Company contributed these assets at book value of $3.1 million to SBNA, a subsidiary of the Company on January 1, 2018.
During the first quarter of 2018, the Company recorded a $3.2 million deferred tax asset on the assets purchased by the Company to establish the intangible under Section 197 of the Internal Revenue Code.
On March 29, 2017, SC entered into a Master Securities Purchase Agreement (“MSPA”("MSPA") with Santander, wherebyunder which it has the option to sell a contractually determined amount of eligible prime loans to Santander, through the SPAINSantander Prime Auto Issuing Note Trust (“SPAIN") securitization platform, for a term ending in December 2018. SC will provide servicing on all loans originated under this arrangement. For the sixthree months ended June 30,March 31, 2017, the Company sold $700 million of loans at fair value under this MSPA. The MSPA was amended in March 2018 and under this amended agreement, SC sold $1.2$1.5 billion of prime loans under this agreementto Santander at fair value during the three months ended March 31, 2018. Total losses of $16.9 million and $2.7 million were recognized a lossfor the three-months periods ended March 31, 2018 and March 31, 2017, respectively, which are included in Miscellaneous income, net in the Condensed Consolidated Statements of $6.2 million. The CompanyOperations. SC had $5.2$15.4 million and $13.0 million of collections due to Santander as of June 30, 2017.
Employment and Related Agreements
On July 2, 2015, SC announced the departure of Mr. 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, he became entitled to receive certain payments and benefits under his employment agreement. The separation agreement also provided for the modification of terms for certain other equity-based awards. Certain of the payments, agreements to make payments and benefits may be effective only upon receipt of certain required regulatory approvals.
As of June 30, 2017, SC has not made any payments to Mr. Dundon, nor recorded any liability or obligation arising from or pursuant to the terms of the separation agreement. If all applicable conditions are satisfied, including receipt of required regulatory approvals and satisfaction of any conditions thereto, SC will be obligated to make a cash payment to Mr. Dundon of up to $115.1 million. This amount would be recorded as compensation expense in its Consolidated Statement of Income and Comprehensive Income.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15. RELATED PARTY TRANSACTIONS (continued)
The Company also entered into an agreement with Mr. Dundon, Dundon DFS LLC ("DDFS"), and Santander related to Mr. Dundon's departure from SC. Pursuant to the separation agreement, the Company was deemed to have delivered an irrevocable notice to exercise its option to acquire all of the 34,598,506 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. The Amended and Restated Loan Agreement provides for a $300.0 million revolving loan from Santander to DDFS which, as of June 30, 2017March 31, 2018 and December 31, 2016, had an unpaid principal balance of approximately $290.0 million. On April 17, 2017, the loan agreement matured and became due and payable. Pursuant to the Loan Agreement, 29,598,506 shares of the SC’s Common Stock owned by DDFS are pledged as collateral under a related pledge agreement. The Shareholders Agreement further provides that Santander may, at its option, become the direct beneficiary of the Call Option, and Santander has exercised this option. If consummated in full, DDFS LLC would receive $905.4 million plus interest that has accrued since the Call End Date. To date, the Call Transaction has not been consummated.respectively.
PursuantBeginning in 2018, SC agreed to the loan agreement, if at any time the value of SC Common Stock pledged under the Pledge Agreement is less than 150% of the aggregate principal amount outstanding under the loan agreement, DDFS has an obligation to either (a) repay a portion of the outstanding principal amount, such that the value of the pledged collateral is equal to at least 200% of the outstanding principal amount, or (b) pledge additional shares of SC Common Stock such that the value of the additional shares of SC Common Stock, togetherprovide SBNA with origination support services in connection with the 29,598,506 shares already pledged underprocessing, underwriting, and purchase of RICs, primarily from Chrysler dealers. In addition, SC agreed to perform the Pledge Agreement, is equalservicing for any RICs originated on SBNA's behalf. During the three-month period ended March 31, 2018, SC facilitated SBNA's purchase of $24 million of RICs. SC recognizes referral fee income and servicing fee income related to at least 200% of the outstanding principal amount. The value of the pledged collateral is less than 150% of aggregate principal amount outstanding under the loanthis agreement and DDFS has not taken any of the collateral posting actions described in clauses (a) or (b) above. Moreover, as noted above, on April 17, 2017, the loan agreement matured and became due and payable on that date. If Santander declares the borrower’s obligations under the loan agreement due and payable as a result of an event of default (including with respect to the collateral posting obligations described above), under the terms of the loan agreement and the Pledge Agreement, Santander’s ability to rely upon the shares of SC Common Stock subject to the Pledge Agreement is, subject to certain exceptions, limited to the right to consummate the Call Transaction at the price specifiedeliminates in the Shareholders Agreement. Because the borrower failed to pay obligations under the loan agreement on April 17, 2017, the borrower is in default and is currently being charged the default rateconsolidation of interest provided for in the loan agreement. The loan agreement generally defines the default interest rate as the base rate plus 2%. The base rate under the loan agreement is the higher of (1) the federal funds rate plus ½ of 1% or (2) the prime rate, which is the annual rate of interest publicly announced by Santander NY from time to time. As of April 21, 2017, the prime rate as announced by Santander NY was 4%.
In connection with, and pursuant to, the separation agreement, on July 2, 2015, DDFS LLC and Santander entered into amendments to the loan agreement and the Pledge Agreement that provide, among other things, the outstanding balance under the loan agreement will become due and payable upon the consummation of the Call Transaction and that the amount otherwise payable to DDFS under the Call Transaction will be reduced by the amount outstanding under the loan agreement, including principal, interest and fees, and further that any net cash proceeds received by DDFS on account of sales of SC Common Stock after the Call End Date are applied to the outstanding balance under the loan agreement.
The parties continue in discussions on these matters. Completion of the transactions with Mr. Dundon is subject to receipt of applicable regulatory approvals.SHUSA.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. FAIR VALUE
General
A portion of the Company’s assets and liabilities are carried at fair value, including available-for-sale ("AFS") investment securities and derivative instruments. In addition, the Company elects to account for its residential mortgages held for sale and a portion of its MSRs at fair value. Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include impairments for certain loans and foreclosed assets.
As of June 30, 2017, $19.5 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 $185.3 million of these financial assets were measured using quoted market prices for identical instruments, or Level 1 inputs. Approximately $18.3 billion of these financial assets were measured using valuation methodologies involving market-based and market-derived information, or Level 2 inputs. Approximately $943.8 million of these financial assets were measured using model-based techniques, or Level 3 inputs, and represented approximately 4.8% of total assets measured at fair value and approximately 0.7% of total consolidated assets.
Fair value is defined in GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP establishes a fair value reporting hierarchy to maximize the use of observable inputs when measuring fair value and defines the three levels of inputs as noted below:
•Level 1 - Assets or liabilities for which the identical item is traded on an active exchange, such as publicly-traded instruments.
•Level 2 - Assets and liabilities valued based on observable market data for similar instruments. Fair value is estimated using inputs other than quoted prices included within Level 1 that are observable for assets or liabilities, either directly or indirectly.
•Level 3 - Assets or liabilities for which significant valuation assumptions are not readily observable in the market, and instruments valued based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require. Fair value is estimated using unobservable inputs that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities may include financial instruments whose value is determined using pricing services, pricing models with internally developed assumptions, discounted cash flow ("DCF") methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
Assets and liabilities measured at fair value, by their nature, result in a higher degree of financial statement volatility. When available, the Company uses quoted market prices or matrix pricing in active markets to determine fair value and classifies such items as Level 1 or Level 2 assets or liabilities. If quoted market prices in active markets are not available, fair value is determined using third-party broker quotes and/or DCF models incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using broker quotes and/or DCF models are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation.
The Company values assets and liabilities based on the principal market in which each would be sold (in the case of assets) or transferred (in the case of liabilities). The principal market is the forum with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market. In the absence of observable market transactions, the Company considers liquidity valuation adjustments to reflect the uncertainty in pricing the instruments. The fair value of a financial asset is measured on a stand-alone basis and cannot be measured as a group, with the exception of certain financial instruments held and managed on a net portfolio basis. In measuring the fair value of a nonfinancial asset, the Company assumes the highest and best use of the asset by a market participant, not just the intended use, to maximize the value of the asset. The Company also considers whether any credit valuation adjustments are necessary based on the counterparty's credit quality.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. FAIR VALUE (continued)
Any models used to determine fair values or validate dealer quotes based on the descriptions below are subject to review and testing as part of the Company's model validation and internal control testing processes.
The Bank's Market Risk Department is responsible for determining and approving the fair values of all assets and liabilities valued at fair value, including the Company's Level 3 assets and liabilities. Price validation procedures are performed and the results are reviewed for Level 3 assets and liabilities by the Market Risk Department. Price validation procedures performed for these assets and liabilities can include comparing current prices to historical pricing trends by collateral type and vintage, comparing prices by product type to indicative pricing grids published by market makers, and obtaining corroborating dealer prices for significant securities.
The Company reviews the assumptions utilized to determine fair value on a quarterly basis. Any changes in methodologies or significant inputs used in determining fair values are further reviewed to determine if a change in fair value level hierarchy has occurred. Transfers in and out of Levels 1, 2 and 3 are considered to be effective as of the end of the quarter in which they occur.
There were no transfers between Levels 1, 2 or 3 during the six-month periods ended June 30, 2017 and 2016 for any assets or liabilities valued at fair value on a recurring basis.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. 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 June 30, 2017 and December 31, 2016. |
| | | | | | | | | | | | | | | |
| Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Balance at June 30, 2017 |
| (in thousands) |
Financial assets: | | | | | | | |
U.S. Treasury securities | $ | 184,605 |
| | $ | 1,492,821 |
| | $ | — |
| | $ | 1,677,426 |
|
Corporate debt | — |
| | 197,021 |
| | — |
| | 197,021 |
|
ABS | — |
| | 176,233 |
| | 587,571 |
| | 763,804 |
|
Equity securities(1) | 579 |
| | — |
| | — |
| | 579 |
|
State and municipal securities | — |
| | 27 |
| | — |
| | 27 |
|
MBS | — |
| | 15,749,980 |
| | — |
| | 15,749,980 |
|
Total investment securities available-for-sale(1) | 185,184 |
| | 17,616,082 |
| | 587,571 |
| | 18,388,837 |
|
Trading securities | 89 |
| | 10,156 |
| | — |
| | 10,245 |
|
RICs held-for-investment | — |
| | — |
| | 207,216 |
| | 207,216 |
|
LHFS (2) | — |
| | 303,154 |
| | — |
| | 303,154 |
|
MSRs (3) | — |
| | — |
| | 146,091 |
| | 146,091 |
|
Derivatives: | | | | | | | |
Fair value | — |
| | 1,258 |
| | — |
| | 1,258 |
|
Cash flow | — |
| | 46,786 |
| | — |
| | 46,786 |
|
Mortgage banking interest rate lock commitments | — |
| | — |
| | 2,896 |
| | 2,896 |
|
Mortgage banking forward sell commitments | — |
| | 1,256 |
| | 6 |
| | 1,262 |
|
Customer related | — |
| | 211,353 |
| | — |
| | 211,353 |
|
Foreign exchange | — |
| | 34,338 |
| | — |
| | 34,338 |
|
Mortgage servicing | — |
| | 2,246 |
| | — |
| | 2,246 |
|
Interest rate swap agreements | — |
| | 2,957 |
| | — |
| | 2,957 |
|
Interest rate cap agreements | — |
| | 95,731 |
| | — |
| | 95,731 |
|
Other | — |
| | 12,263 |
| | — |
| | 12,263 |
|
Total financial assets | $ | 185,273 |
| | $ | 18,337,580 |
| | $ | 943,780 |
| | $ | 19,466,633 |
|
Financial liabilities: | | | | | | | |
Derivatives: | | | | | | | |
Cash flow | $ | — |
| | $ | 55,689 |
| | $ | — |
| | $ | 55,689 |
|
Mortgage banking forward sell commitments | — |
| | — |
| | — |
| | — |
|
Customer related | — |
| | 147,258 |
| | — |
| | 147,258 |
|
Foreign exchange | — |
| | 38,879 |
| | — |
| | 38,879 |
|
Mortgage servicing | — |
| | 1,043 |
| | — |
| | 1,043 |
|
Interest rate swaps | — |
| | 1,932 |
| | — |
| | 1,932 |
|
Option for interest rate cap | — |
| | 95,630 |
| | — |
| | 95,630 |
|
Total return settlement | — |
| | — |
| | 31,123 |
| | 31,123 |
|
Other | — |
| | 16,244 |
| | 799 |
| | 17,043 |
|
Total financial liabilities | $ | — |
| | $ | 356,675 |
| | $ | 31,922 |
| | $ | 388,597 |
|
(1) Investment securities AFS disclosed on the Condensed Consolidated Balance Sheet at June 30, 2017 included $10.8 million of equity securities valued using net asset value as a practical expedient that are not presented within this table.
(2) LHFS disclosed on the Condensed Consolidated Balance Sheet also includes LHFS that are held at the lower of cost or fair value and are not presented within this table.
(3) The Company has total MSRs of $149.6 million as of June 30, 2017. The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or fair value and are not presented within this table.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. 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, 2016 |
| (in thousands) |
Financial assets: | | | | | | | |
U.S. Treasury securities | $ | 224,506 |
| | $ | 1,632,351 |
| | $ | — |
| | $ | 1,856,857 |
|
ABS | — |
| | 396,157 |
| | 814,567 |
| | 1,210,724 |
|
Equity securities(1) | 544 |
| | — |
| | — |
| | 544 |
|
State and municipal securities | — |
| | 30 |
| | — |
| | 30 |
|
MBS | — |
| | 13,945,463 |
| | — |
| | 13,945,463 |
|
Total investment securities available-for-sale(1) | 225,050 |
| | 15,974,001 |
| | 814,567 |
| | 17,013,618 |
|
Trading securities | 214 |
| | 1,416 |
| | — |
| | 1,630 |
|
RICs held-for-investment | — |
| | — |
| | 217,170 |
| | 217,170 |
|
LHFS (2) | — |
| | 453,293 |
| | — |
| | 453,293 |
|
MSRs (3) | — |
| | — |
| | 146,589 |
| | 146,589 |
|
Derivatives: | | | | | | | |
Cash flow | — |
| | 45,681 |
| | — |
| | 45,681 |
|
Mortgage banking interest rate lock commitments | — |
| | — |
| | 2,316 |
| | 2,316 |
|
Mortgage banking forward sell commitments | — |
| | 8,575 |
| | 2 |
| | 8,577 |
|
Customer related | — |
| | 216,421 |
| | — |
| | 216,421 |
|
Foreign exchange | — |
| | 56,742 |
| | — |
| | 56,742 |
|
Mortgage servicing | — |
| | 838 |
| | — |
| | 838 |
|
Interest rate swap agreements | — |
| | 2,075 |
| | — |
| | 2,075 |
|
Interest rate cap agreements | — |
| | 76,387 |
| | — |
| | 76,387 |
|
Other | — |
| | 12,293 |
| | — |
| | 12,293 |
|
Total financial assets | $ | 225,264 |
| | $ | 16,847,722 |
| | $ | 1,180,644 |
| | $ | 18,253,630 |
|
Financial liabilities: | | | | | | | |
Derivatives: | | | | | | | |
Cash flow | $ | — |
| | $ | 59,812 |
| | $ | — |
| | $ | 59,812 |
|
Customer related | — |
| | 149,390 |
| | — |
| | 149,390 |
|
Foreign exchange | — |
| | 46,430 |
| | — |
| | 46,430 |
|
Mortgage servicing | — |
| | 1,635 |
| | — |
| | 1,635 |
|
Interest rate swaps | — |
| | 2,647 |
| | — |
| | 2,647 |
|
Option for interest rate cap | — |
| | 76,281 |
| | — |
| | 76,281 |
|
Total return settlement | — |
| | — |
| | 30,618 |
| | 30,618 |
|
Other | — |
| | 15,625 |
| | 700 |
| | 16,325 |
|
Total financial liabilities | $ | — |
| | $ | 351,820 |
| | $ | 31,318 |
| | $ | 383,138 |
|
(1) Investment securities AFS disclosed on the Condensed Consolidated Balance Sheet at December 31, 2016 included $10.6 million of equity securities valued using net asset value as a practical expedient that are not presented within this table.
(2) LHFS disclosed on the Condensed Consolidated Balance Sheet also includes LHFS that are held at the lower of cost or fair value and are not presented within this table.
(3) The Company had total MSRs of $150.3 million as of December 31, 2016. The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or fair value and are not presented within this table.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. 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) |
June 30, 2017 | | | | | | | |
Impaired LHFI | $ | 5,148 |
| | $ | 229,196 |
| | $ | 274,479 |
| | $ | 508,823 |
|
Foreclosed assets | — |
| | 15,831 |
| | 79,922 |
| | 95,753 |
|
Vehicle inventory | — |
| | 237,525 |
| | — |
| | 237,525 |
|
LHFS | — |
| | — |
| | 2,200,792 |
| | 2,200,792 |
|
Auto loans impaired due to bankruptcy | — |
| | 77,005 |
| | — |
| | 77,005 |
|
MSRs | — |
| | — |
| | 9,703 |
| | 9,703 |
|
| | | | | | | |
December 31, 2016 | | | | | | | |
Impaired LHFI | $ | 13,147 |
| | $ | 244,986 |
| | $ | 265,664 |
| | $ | 523,797 |
|
Foreclosed assets | — |
| | 30,792 |
| | 79,721 |
| | 110,513 |
|
Vehicle inventory | — |
| | 257,659 |
| | — |
| | 257,659 |
|
LHFS | — |
| | — |
| | 2,133,040 |
| | 2,133,040 |
|
MSRs | — |
| | — |
| | 10,287 |
| | 10,287 |
|
Valuation Processes and Techniques
Impaired LHFI in the table above represents the recorded investment of impaired commercial loans for which the Company measures impairment during the period based on the fair value of the underlying collateral supporting the loan. Written offers to purchase a specific impaired loan are considered observable market inputs, which are considered Level 1 inputs. Appraisals are obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and are considered Level 2 inputs. Loans for which the value of the underlying collateral is determined using a combination of real estate appraisals, field examinations and internal calculations are classified as Level 3. The inputs in the internal calculations may include the loan balance, estimation of the collectability of the underlying receivables held by the customer used as collateral, sale and liquidation value of the inventory held by the customer used as collateral and historical loss-given-default parameters. In cases in which the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized. The net carrying value of these loans was $452.9 million and $449.5 million at June 30, 2017 and December 31, 2016, respectively. Loans previously impaired which were not marked to fair value during the periods presented are excluded from this table.
Foreclosed assets represent the recorded investment in assets taken during the period presented in foreclosure of defaulted loans, and are primarily comprised of commercial and residential real properties and generally measured at fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of market value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace.
The Company estimates the fair value of its vehicles, which are obtained either through repossession or lease termination, using historical auction rates and current market values of used cars.
The Company's LHFS portfolios that are measured at fair value on a nonrecurring basis primarily consist of personal, commercial, and RICs LHFS. The estimated fair value for these LHFS is calculated based on a combination of estimated market rates for similar loans with similar credit risks and a DCF analysis in which the Company uses significant unobservable inputs on key assumptions, including historical default rates and adjustments to reflect voluntary prepayments, prepayment rates, discount rates reflective of the cost of funding, and credit loss expectations.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. FAIR VALUE (continued)
For loans that are considered collateral-dependent, such as certain bankruptcy loans, impairment is measured based on the fair value of the collateral less its estimated cost to sell. For the underlying collateral, the estimated fair value is obtained using historical auction rates and current market levels of used car prices.
A portion of the Company's MSRs are measured at fair value on a nonrecurring basis. These MSRs are priced internally using a DCF model. The DCF model incorporates assumptions that market participants would use in estimating future net servicing income, including portfolio characteristics, prepayments assumptions, discount rates, delinquency and foreclosure rates, late charges, other ancillary revenues, cost to service and other economic factors. Due to the unobservable nature of certain valuation inputs, these MSRs are classified as Level 3.
Fair Value Adjustments
The following table presents the increases and decreases in value of certain assets that are measured at fair value on a nonrecurring basis for which a fair value adjustment has been included in the Condensed Consolidated Statements of Operations relating to assets held at period-end:
|
| | | | | | | | | | | | | | | | | |
| Statement of Operations Location | | Three-Month Period Ended June 30, | | Six-Month Period Ended June 30, |
| | | 2017 | | 2016 | | 2017 | | 2016 |
| | | (in thousands) |
Impaired loans held-for-investment | Provision for credit losses | | $ | 12,969 |
| | $ | (17,993 | ) | | $ | (32,803 | ) | | $ | (108,549 | ) |
Foreclosed assets | Miscellaneous income(1) | | (2,929 | ) | | (1,748 | ) | | (4,671 | ) | | (4,742 | ) |
LHFS | Provision for credit losses | | (13,200 | ) | | — |
| | (13,200 | ) | | — |
|
LHFS | Miscellaneous income(1) | | (95,921 | ) | | (94,767 | ) | | (162,042 | ) | | (158,980 | ) |
Auto loans impaired due to bankruptcy | Provision for credit losses | | (24,513 | ) | | — |
| | (48,113 | ) | | — |
|
Mortgage servicing rights | Mortgage banking income, net | | 102 |
| | 137 |
| | 197 |
| | 318 |
|
| | | $ | (123,492 | ) | | $ | (114,371 | ) | | $ | (260,632 | ) | | $ | (271,953 | ) |
(1) These amounts reduce Miscellaneous income.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. FAIR VALUE (continued)
Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis
The tables below present the changes in Level 3 balances for the three-month and six-month periods ended June 30, 2017 and 2016, respectively, for those assets and liabilities measured at fair value on a recurring basis. |
| | | | | | | | | | | | | | | | | | | |
Three-Month Period Ended June 30, 2017 | | | | | | | | |
| Investments Available-for-Sale | | RICs Held for Investment | | MSRs | | Derivatives | | Total |
| (in thousands) |
Balance, March 31, 2017 | $ | 573,454 |
| | $ | 202,473 |
| | $ | 149,455 |
| | $ | (27,709 | ) | | $ | 897,673 |
|
Losses in other comprehensive income | (2,059 | ) | | — |
| | — |
| | — |
| | (2,059 | ) |
Gains/(losses) in earnings | — |
| | 4,742 |
| | (1,194 | ) | | (1,409 | ) | | 2,139 |
|
Additions/Issuances | — |
| | 6,396 |
| | 2,867 |
| | — |
| | 9,263 |
|
Settlements(1) | 16,176 |
| | (6,395 | ) | | (5,037 | ) | | 98 |
| | 4,842 |
|
Balance, June 30, 2017 | $ | 587,571 |
| | $ | 207,216 |
| | $ | 146,091 |
| | $ | (29,020 | ) | | $ | 911,858 |
|
Changes in unrealized gains (losses) included in earnings related to balances still held at June 30, 2017 | $ | — |
| | $ | 4,742 |
| | $ | (1,194 | ) | | $ | 5 |
| | $ | 3,553 |
|
| | | | | | | | | |
Six-Month Period Ended June 30, 2017 | | | | | | | | |
| Investments Available-for-Sale | | RICs Held for Investment | | MSRs | | Derivatives | | Total |
| (in thousands) |
Balance, December 31, 2016 | $ | 814,567 |
| | $ | 217,170 |
| | $ | 146,589 |
| | $ | (29,000 | ) | | $ | 1,149,326 |
|
Losses in other comprehensive income | (2,678 | ) | | — |
| | — |
| | — |
| | (2,678 | ) |
Gains/(losses) in earnings | — |
| | 21,633 |
| | 263 |
| | (215 | ) | | 21,681 |
|
Additions/Issuances | — |
| | 19,727 |
| | 8,597 |
| | — |
| | 28,324 |
|
Settlements(1) | (224,318 | ) | | (51,314 | ) | | (9,358 | ) | | 195 |
| | (284,795 | ) |
Balance, June 30, 2017 | $ | 587,571 |
| | $ | 207,216 |
| | $ | 146,091 |
| | $ | (29,020 | ) | | $ | 911,858 |
|
Changes in unrealized gains (losses) included in earnings related to balances still held at June 30, 2017 | $ | — |
| | $ | 21,633 |
| | $ | 263 |
| | $ | (795 | ) | | $ | 21,101 |
|
| |
(1) | Settlements include charge-offs, prepayments, pay downs and maturities. |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. FAIR VALUE (continued)
|
| | | | | | | | | | | | | | | | | | | |
Three-Month Period Ended June 30, 2016 | | | | | | | | |
| Investments Available-for-Sale | | RICs Held for Investment | | MSRs | | Derivatives | | Total |
| (in thousands) |
Balance, March 31, 2016 | $ | 1,640,423 |
| | $ | 289,950 |
| | $ | 130,742 |
| | $ | (47,198 | ) | | $ | 2,013,917 |
|
Gains in other comprehensive income | 624 |
| | — |
| | — |
| | — |
| | 624 |
|
Gains/(losses) in earnings | — |
| | 25,313 |
| | (11,468 | ) | | 1,108 |
| | 14,953 |
|
Additions/Issuances | 220,841 |
| | 11,874 |
| | 4,801 |
| | — |
| | 237,516 |
|
Settlements(1) | (335,197 | ) | | (63,832 | ) | | (6,283 | ) | | 1,712 |
| | (403,600 | ) |
Balance, June 30, 2016 | $ | 1,526,691 |
| | $ | 263,305 |
| | $ | 117,792 |
| | $ | (44,378 | ) | | $ | 1,863,410 |
|
Changes in unrealized gains (losses) included in earnings related to balances still held at June 30, 2016 | $ | — |
| | $ | 25,313 |
| | $ | (11,468 | ) | | $ | (1,878 | ) | | $ | 11,967 |
|
| | | | | | | | | |
Six-Month Period Ended June 30, 2016 | | | | | | | | |
| Investments Available-for-Sale | | RICs Held for Investment | | MSRs | | Derivatives | | Total |
| (in thousands) |
Balance, December 31, 2015 | $ | 1,360,240 |
| | $ | 335,425 |
| | $ | 147,233 |
| | $ | (51,278 | ) | | $ | 1,791,620 |
|
Gains in other comprehensive income | 2,209 |
| | — |
| | — |
| | — |
| | 2,209 |
|
Gains/(losses) in earnings | — |
| | 53,355 |
| | (25,824 | ) | | 4,135 |
| | 31,666 |
|
Additions/Issuances | 499,527 |
| | 11,874 |
| | 8,392 |
| | — |
| | 519,793 |
|
Settlements(1) | (335,285 | ) | | (137,349 | ) | | (12,009 | ) | | 2,765 |
| | (481,878 | ) |
Balance, June 30, 2016 | $ | 1,526,691 |
| | $ | 263,305 |
| | $ | 117,792 |
| | $ | (44,378 | ) | | $ | 1,863,410 |
|
Changes in unrealized gains (losses) included in earnings related to balances still held at June 30, 2016 | $ | — |
| | $ | 53,355 |
| | $ | (25,824 | ) | | $ | (3,303 | ) | | $ | 24,228 |
|
| |
(1) | Settlements include charge-offs, prepayments, pay downs and maturities. |
The gains in earnings reported in the table above related to the RICs held for investment for which the Company elected the FVO are driven by three primary factors: 1) the recognition of interest income, 2) recoveries of previously charged-off RICs, and 3) actual performance of the portfolio since the Change in Control. Recoveries from RICs that were charged off at the Change in Control date are a direct increase to the gain recognized within the portfolio. In accordance with ASC 805, Business Combinations, the Company did not ascribe a fair value to the portfolio of sub-prime charged-off RICs at the Change in Control date. Recoveries of previously charged off loans are usually recorded as a reduction to charge-offs in the period in which the recovery is made, however, in instances where the FVO is elected, it will flow through the fair value mark. At the Change in Control date, the UPB of the previously charged-off RIC portfolio was approximately $3.0 billion.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. FAIR VALUE (continued)
Valuation Processes and Techniques - Recurring Fair Value Assets and Liabilities
The following is a description of the valuation techniques used for instruments measured at fair value on a recurring basis:
Securities 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 values. Trading securities and certain of the Company's U.S. Treasury securities are valued utilizing observable market quotes. The Company obtains vendor trading platform data (actual prices) from a number of live data sources, including active market makers and interdealer brokers. These certain investment securities are, therefore, classified as Level 1.
Actively traded quoted market prices for the majority of the investment securities 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.
Certain ABS are valued using DCF models. The DCF models are obtained from a third-party pricing vendor who uses observable market data and therefore are classified as Level 2. Other ABS that could not be valued using a third-party pricing service are valued using an internally-developed DCF model. When estimating the fair value using this model, the Company uses its best estimate of the key assumptions which include the discount rates and forward yield curves. The Company uses comparable bond indices based on industry, term, and rating to discount the expected future cash flows. Determining the comparability of assets involves significant subjectivity related to asset type differences, cash flows, performance and other inputs. The inability of the Company to corroborate the fair value of the ABS due to the limited available observable data on these ABS resulted in a fair value classification of Level 3.
Equity securities of $10.8 million, which are comprised primarily of shares of registered mutual funds, are priced using net asset value per share practical expedient, which is validated with a sufficient level of observable activity. In accordance with GAAP, these equity securities are not presented within the fair value hierarchy. The remainder of the Company's equity securities are valued at quoted market prices and are, therefore, classified as Level 1.
Gains and losses on investments are recognized in the Condensed Consolidated Statements of Operations through Net gain on sale of investment securities.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. FAIR VALUE (continued)
RICs held-for-investment
For certain RICs held-for-investment, the Company has elected the FVO. The fair values of RICs are estimated using the DCF model. In estimating the fair value using this model, the Company uses significant unobservable inputs on key assumptions, which includes historical default rates and adjustments to reflect voluntary prepayments, prepayment rates based on available data from a comparable market securitization of similar assets, discount rates reflective of the cost of funding debt issuance and recent historical equity yields, recovery rates based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. Accordingly, RICs held-for-investment for which the Company has elected FVO are classified as Level 3.
LHFS
The Company's LHFS portfolios that are measured at fair value on a recurring basis consists primarily of residential mortgage LHFS. The fair values of LHFS are estimated using published forward agency prices to agency buyers such as FNMA and FHLMC. The majority of the residential mortgage LHFS portfolio is sold to these two agencies. The fair value is determined using current secondary market prices for portfolios with similar characteristics, adjusted for servicing values and market conditions.
These loans are regularly traded in active markets, and observable pricing information is available from market participants. The prices are adjusted as necessary to include the embedded servicing value in the loans as well as the specific characteristics of certain loans that are priced based on the pricing of similar loans. These adjustments represent unobservable inputs to the valuation, and are not significant given the relative insensitivity of the value to changes in these inputs to the fair value of the loans. Accordingly, residential mortgage LHFS are classified as Level 2. Gains and losses on residential mortgage LHFS are recognized in the Condensed Consolidated Statements of Operations through Miscellaneous income. See further discussion below in the section captioned "FVO for Financial Assets and Financial Liabilities."
MSRs
The model to value MSRs estimates the present value of the future net cash flows from mortgage servicing activities based on various assumptions. These cash flows include servicing and ancillary revenue, offset by the estimated costs of performing servicing activities. Significant assumptions used in the valuation of residential MSRs include changes in anticipated loan prepayment rates ("CPRs") and the discount rate, reflective of a market participant's required return on an investment for similar assets. Other important valuation assumptions include market-based servicing costs and the anticipated earnings on escrow and similar balances held by the Company in the normal course of mortgage servicing activities. All of these assumptions are considered to be unobservable inputs. Historically, servicing costs and discount rates have been less volatile than CPR and earnings rates, both of which are directly correlated with changes in market interest rates. Increases in prepayment speeds, discount rates and servicing costs result in lower valuations of MSRs. Decreases in the anticipated earnings rate on escrow and similar balances result in lower valuations of MSRs. For each of these items, the Company makes assumptions based on current market information and future expectations. All of the assumptions are based on standards that the Company believes would be utilized by market participants in valuing MSRs and are derived and/or benchmarked against independent public sources. Accordingly, MSRs are classified as Level 3. Gains and losses on MSRs are recognized on the Condensed Consolidated Statements of Operations through Mortgage banking income, net. See further discussion on MSRs in Note 8.
Listed below are the most significant inputs that are utilized by the Company in the evaluation of residential MSRs:
A 10% and 20% increase in the CPR speed would decrease the fair value of the residential servicing asset by $5.0 million and $9.6 million, respectively, at June 30, 2017.
A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $5.0 million and $9.7 million, respectively, at June 30, 2017.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. FAIR VALUE (continued)
Significant increases (decreases) in any of those inputs in isolation would result in significantly (lower) higher fair value measurements. These sensitivity calculations are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change. Prepayment estimates generally increase when market interest rates decline and decrease when market interest rates rise. Discount rates typically increase when market interest rates increase and/or credit and liquidity risks increase, and decrease when market interest rates decline and/or credit and liquidity conditions improve.
Derivatives
The valuation of these instruments is determined using widely accepted valuation techniques, including DCF analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable and unobservable market-based inputs. The fair value represents the estimated amount the Company would receive or pay to terminate the contract or agreement, taking into account current interest rates, foreign exchange rates, equity prices and, when appropriate, the current creditworthiness of the counterparties.
The Company incorporates credit valuation adjustments in the fair value measurement of its derivatives to reflect the counterparty's nonperformance risk in the fair value measurement of its derivatives, except for those derivative contracts with associated credit support annexes which provide credit enhancements, such as collateral postings and guarantees.
The Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy. Certain of the Company's derivatives utilize Level 3 inputs, which are primarily related to mortgage banking derivatives-interest rate lock commitments and total return settlement derivative contracts.
The DCF model is utilized to determine the fair value of the mortgage banking derivatives-interest rate lock commitments and the total return settlement derivative contracts. The significant unobservable inputs for mortgage banking derivatives used in the fair value measurement of the Company's loan commitments are "pull through" percentage and the MSR value that is inherent in the underlying loan value. The pull through percentage is an estimate of loan commitments that will result in closed loans. The significant unobservable inputs for total return settlement derivative contracts used in the fair value measurement of the Company's liabilities are discount percentages, which are based on comparable financial instruments. Significant increases (decreases) in any of these inputs in isolation would result in significantly higher (lower) fair value measurements. Significant increases (decreases) in the fair value of a mortgage banking derivative asset (liability) results when the probability of funding increases (decreases). Significant increases (decreases) in the fair value of a mortgage loan commitment result when the embedded servicing value increases (decreases).
Gains and losses related to derivatives affect various line items in the Condensed Consolidated Statements of Operations. See Note 11 for a discussion of derivatives activity.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. FAIR VALUE (continued)
Level 3 Inputs - Significant Recurring Fair Value 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 June 30, 2017 | | Valuation Technique | | Unobservable Inputs | | Range (Weighted Average) |
| (in thousands) | | | | | | |
Financial Assets: | |
ABS | | | | | | | |
Financing bonds | $ | 538,504 |
| | DCF | | Discount Rate (1) | | 1.52% - 2.46% (1.88% ) |
|
Sale-leaseback securities | $ | 49,067 |
| | Consensus Pricing (2) | | Offered quotes (3) | | 124.95 | % |
RICs held-for-investment | $ | 207,216 |
| | DCF | | Prepayment rate (CPR) (4) | | 6.66 | % |
| | | | | Discount Rate (5) | | 9.5% - 14.5% (10.08% ) |
|
| | | | | Recovery Rate (6) | | 25% - 43% (30.21% ) |
|
MSRs | $ | 146,091 |
| | DCF | | Prepayment rate (CPR) (7) | | [0.26% - 51.43%] (9.40% ) |
|
| | | | | Discount Rate (8) | | 9.90 | % |
Mortgage banking interest rate lock commitments | $ | 2,896 |
| | DCF | | Pull through percentage (9) | | 78.42 | % |
| | | | | MSR value (10) | | [0.733% - 1.032%] (0.99%) |
|
Financial Liabilities: | | | | | | | |
Total return settlement | $ | 31,123 |
| | DCF | | Discount Rate (4) | | 6.40 | % |
(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.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. FAIR VALUE (continued)
Fair Value of Financial Instruments
The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company's financial instruments are as follows:
|
| | | | | | | | | | | | | | | | | | | |
| June 30, 2017 |
| Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| (in thousands) |
Financial assets: | | | | | | | | | |
Cash and amounts due from depository institutions | $ | 7,539,679 |
| | $ | 7,539,679 |
| | $ | 7,539,679 |
| | $ | — |
| | $ | — |
|
Available-for-sale investment securities(1) | 18,388,837 |
| | 18,388,837 |
| | 185,184 |
| | 17,616,082 |
| | 587,571 |
|
Held to maturity investment securities | 1,575,037 |
| | 1,549,011 |
| | — |
| | 1,549,011 |
| | — |
|
Trading securities | 10,245 |
| | 10,245 |
| | 89 |
| | 10,156 |
| | — |
|
LHFI, net | 79,003,171 |
| | 79,661,064 |
| | 5,148 |
| | 229,196 |
| | 79,426,720 |
|
LHFS | 2,503,811 |
| | 2,441,252 |
| | — |
| | 303,154 |
| | 2,138,098 |
|
Restricted cash | 3,280,999 |
| | 3,280,999 |
| | 3,280,999 |
| | — |
| | — |
|
MSRs(2) | 149,645 |
| | 155,794 |
| | — |
| | — |
| | 155,794 |
|
Derivatives | 411,090 |
| | 411,090 |
| | — |
| | 408,188 |
| | 2,902 |
|
| | | | | | | | | |
Financial liabilities: | |
| | |
| | | | |
| | |
|
Deposits | 62,956,555 |
| | 62,775,810 |
| | 56,469,380 |
| | 6,306,430 |
| | — |
|
Borrowings and other debt obligations | 43,379,055 |
| | 43,192,941 |
| | 690 |
| | 26,790,238 |
| | 16,402,013 |
|
Derivatives | 388,597 |
| | 388,597 |
| | — |
| | 356,675 |
| | 31,922 |
|
|
| | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| Carrying Value | | Fair Value | | Level 1 | | Level 2 | | Level 3 |
| (in thousands) |
Financial assets: | | | | | | | | | |
Cash and amounts due from depository institutions | $ | 10,035,859 |
| | $ | 10,035,859 |
| | $ | 10,035,859 |
| | $ | — |
| | $ | — |
|
Available-for-sale investment securities(1) | 17,013,618 |
| | 17,013,618 |
| | 225,050 |
| | 15,974,001 |
| | 814,567 |
|
Held to maturity investment securities | 1,658,644 |
| | 1,635,413 |
| | — |
| | 1,635,413 |
| | — |
|
Trading securities | 1,630 |
| | 1,630 |
| | 214 |
| | 1,416 |
| | — |
|
LHFI, net | 82,005,321 |
| | 81,955,122 |
| | 13,147 |
| | 244,986 |
| | 81,696,989 |
|
LHFS | 2,586,308 |
| | 2,586,333 |
| | — |
| | 453,293 |
| | 2,133,040 |
|
Restricted cash | 3,016,948 |
| | 3,016,948 |
| | 3,016,948 |
| | — |
| | — |
|
MSRs(2) | 150,343 |
| | 156,876 |
| | — |
| | — |
| | 156,876 |
|
Derivatives | 421,330 |
| | 421,330 |
| | — |
| | 419,012 |
| | 2,318 |
|
| | | | | | | | | |
Financial liabilities: | |
| | |
| | | | |
| | |
|
Deposits | 67,240,690 |
| | 67,141,041 |
| | 58,067,792 |
| | 9,073,249 |
| | — |
|
Borrowings and other debt obligations | 43,524,445 |
| | 43,770,267 |
| | 830 |
| | 26,132,197 |
| | 17,637,240 |
|
Derivatives | 383,138 |
| | 383,138 |
| | — |
| | 351,820 |
| | 31,318 |
|
(1) Investment securities available-for-sale disclosed on the Condensed Consolidated Balance Sheet at June 30, 2017 and December 31, 2016 included $10.8 million and $10.6 million, respectively, of equity securities valued using net asset value as a practical expedient that are not presented within these tables.
(2) The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or fair value.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. 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 Condensed Consolidated Balance Sheets:
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 June 30, 2017 and December 31, 2016, the Company had $3.3 billion and $3.0 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.
Held-to-maturity investment securities
Investment securities held-to-maturity are recorded at amortized cost and are priced by third-party pricing vendors. The third-party vendors use a variety of methods when pricing these securities that incorporate relevant observable market data to arrive at an estimate of what a buyer in the marketplace would pay for a security under current market conditions. These investment securities are, therefore, considered Level 2.
LHFI, net
The fair values of loans are estimated based on groupings of similar loans, including but not limited to stratifications by type, interest rate, maturity, and borrower creditworthiness. Discounted future cash flow analyses are performed for these loans incorporating assumptions of current and projected voluntary prepayment speeds. Discount rates are determined using the Company's current origination rates on similar loans, adjusted for changes in current liquidity and credit spreads (if necessary). Because the current liquidity spreads are generally not observable in the market and the expected loss assumptions are based on the Company's experience, these are Level 3 valuations. Impaired loans are valued at fair value on a nonrecurring basis. See further discussion under the section captioned "Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis" above.
LHFS
The Company's LHFS portfolios that are accounted for at the lower of cost or market primarily consists of RICs held-for-sale. The estimated fair value of the RICs held-for-sale is based on prices obtained in recent market transactions or expected to be obtained in the subsequent sales for similar assets.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. FAIR VALUE (continued)
Deposits
The fair value of deposits with no stated maturity, such as non-interest-bearing demand deposits, interest-bearing demand deposit accounts, savings accounts and certain money market accounts, is equal to the amount payable on demand and does not take into account the significant value of the cost advantage and stability of the Company’s long-term relationships with depositors. The fair value of fixed-maturity CDs is estimated by discounting cash flows using currently offered rates for deposits of similar remaining maturities. The related fair value measurements have generally been classified as Level 1 for core deposits, since the carrying value approximates fair value due to the short-term nature of the liabilities. All other deposits are considered to be Level 2.
Borrowings and other debt obligations
Fair value is estimated by discounting cash flows using rates currently available to the Company for other borrowings with similar terms and remaining maturities. Certain other debt obligation instruments are valued using available market quotes for similar instruments, which contemplates issuer default risk. The related fair value measurements have generally been classified as Level 2. A certain portion of debt, relating to revolving credit facilities, is classified as Level 3. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements and, therefore, they are considered to be Level 3.
Commitments to extend credit and standby letters of credit
Commitments to extend credit and standby letters of credit include the value of unfunded lending commitments and standby letters of credit, as well as the recorded liability for probable losses. The Company’s pricing of such financial instruments is based largely on credit quality and relationship, probability of funding and other requirements. Loan commitments often have fixed expiration dates and contain termination and other clauses which provide relief from funding in the event of significant deterioration in the credit quality of the customer. The rates and terms of the Company’s loan commitments and letters of credit are competitive with those of other financial institutions operating in markets served by the Company.
The liability for probable losses is estimated by analyzing unfunded lending commitments and standby letters of credit for commercial customers and segregating by risk according to the Company's internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information, result in the estimation of the reserve for probable losses.
These instruments and the related reserve are classified as Level 3. The Company believes that the carrying amounts, which are included in Other liabilities, are reasonable estimates of fair value for these financial instruments.
FVO for Financial Assets and Financial Liabilities
LHFS
The Company's LHFS portfolios that are measured using the FVO consist of residential mortgage LHFS. The adoption of the FVO on residential mortgage loans classified as held-for-sale 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.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16. FAIR VALUE (continued)
RICs 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 RICs 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 UPB of $2.6 billion with a fair value of $1.9 billion at that date.
The following table summarizes the differences between the fair value and the principal balance of LHFS and RICs measured at fair value on a recurring basis as of June 30, 2017.
|
| | | | | | | | | | | | |
| | Fair Value | | Aggregate Unpaid Principal Balance | | Difference |
| | (in thousands) |
June 30, 2017 | | | | | | |
LHFS(1) | | $ | 303,154 |
| | $ | 296,279 |
| | $ | 6,875 |
|
RICs held-for-investment | | 207,216 |
| | 262,847 |
| | (55,631 | ) |
Nonaccrual loans | | 23,073 |
| | 31,194 |
| | (8,121 | ) |
(1) LHFS disclosed on the Condensed Consolidated Balance Sheet also includes LHFS that are held at the lower of cost or fair value that are not presented within this table. There were no nonaccrual loans related to the LHFS measured using the FVO.
Interest income on the Company’s LHFS and RICs held for investment is recognized when earned based on their respective contractual rates in Interest income on loans in the Condensed Consolidated Statements of Operations. The accrual of interest is discontinued and reversed once the loans become more than 90 days past due for LHFS and more than 60 days past due for RICs held for investment.
Residential MSRs
The Company elected to account for the majority of its existing portfolio of MSRs at fair value. This election created greater flexibility with regard to risk management of the asset by aligning the accounting for the MSRs with the accounting for risk management instruments, which are also generally carried at fair value. The remainder of the MSRs are accounted for using the lower of cost or fair value and are presented above in the section captioned "Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis."
The Company's residential MSRs that are accounted for at fair value had an aggregate fair value of $146.1 million at June 30, 2017. Changes in fair value totaling a loss of $1.2 million and a gain of $0.3 million were recorded in Mortgage banking income, net in the Condensed Consolidated Statements of Operations during the three-month and six-month periods ended June 30, 2017.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17.18. BUSINESS SEGMENT INFORMATION
Business Segment Products and Services
The Company’s reportable segments are focused principally around the customers the Company serves. During the first quarter of 2018, the Chief Operating Decision Maker ("CODM") made certain changes in its business lines that drove a reorganization of its business leadership to provide enhanced customer service to its clients and to better align management teams and resources with the manner in which the CODM allocates resources and assesses business performance. Accordingly, the following changes were made within the Company's reportable segments:
The Commercial Banking and the CRE reportable segments were combined into the Commercial Banking reportable segment.
SIS, a subsidiary of SHUSA, that was formerly located within the Other category was moved to the GCB reportable segment.
The Company's internal Funds Transfer Pricing ("FTP") methodologies and cost allocations were updated to align with Santander corporate criteria for internal management reporting. These FTP and cost allocation changes impact how certain costs are allocated for all reporting segments, excluding SC.
All prior period results have been recast to conform to the new composition of reportable segments.
The Company has identified the following reportable segments:
The Consumer and Business Banking segment (formerly known as the Retail Banking segment) includes the products and services provided to Bank customers through the Bank's branch locations, including consumer deposit, business banking, residential mortgage, unsecured lending and investment services. The branch locations offer a wide range of products and services to consumers and business banking customers, including demand and interest-bearing demand deposit accounts, money market and savings accounts, CDs and retirement savings products. The branch locations also offer lending products such as credit cards, home equity loans and lines of credit, and business loans such as commercial lines of credit and business credit cards. In addition, the Bank provides investment services to its retail customers, including annuities, mutual funds, and insurance products. Santander Universities, which provides grants and scholarships to universities and colleges as a way to foster education through research, innovation and entrepreneurship, is the last component of this segment.
The Commercial Banking segment currently provides commercial lines, loans, and deposits to medium and large business banking customers as well as financing and deposits for government entities, commercial real estate loans and multifamily loans to customers, commercial loans to dealers and financing for equipment and commercial vehicles. This segment also provides financing and deposits for government entities and niche product financing for specific industries, including oil and gas and mortgage warehousing, among others.
industries.
The Commercial Real Estate segment offers commercial real estate loans and multifamily loans to customers.
The Global Corporate Banking ("GCB")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 also includes SIS, a registered broker-dealer located in New York that provides services in investment banking, institutional sales, and trading and offering research reports of Latin American and European equity and fixed income securities. GCB's offerings and strategy are based on Santander's local and global capabilities in wholesale banking.
SC is a specialized consumer finance company focused on vehicle finance and third-party servicing. SC’s primary business is the indirect origination of RICs, principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers. In conjunction with a ten-year private label financing agreement with FCA that became effective May 1, 2013, SC offers a full spectrum of auto financing products and services to FCA customers and dealers under the Chrysler Capital brand. These products and services include consumer RICs and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. SC also originates vehicle loans through a web-based direct lending program, purchases vehicle RICs from other lenders, and services automobile,
recreational and marine vehicle portfolios for other lenders. 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 Other segment. All intercompany revenue and fees between the Bank and SC are eliminated in the consolidated results of the Company.
The Other category includes certain immaterial subsidiaries such as BSI, Banco Santander Puerto Rico, SIS,BSPR, SSLLC, and SSLLC,SFS, the unallocated interest expense on the Company's borrowings and other debt obligations and certain unallocated corporate income and indirect expenses.
NOTE 18. BUSINESS SEGMENT INFORMATION (continued)
The Company’s segment results, excluding SC and the entities that have become part of the IHC, are derived from the Company’s business unit profitability reporting system by specifically attributing managed balance sheet assets, deposits and other liabilities and their related interest income or expense to each of the segments. Funds transfer pricing ("FTP")FTP methodologies are utilized to allocate a cost for funds used or a credit for funds provided to business line deposits, loans and selected other assets using a matched funding concept. The methodology includes a liquidity premium adjustment, which considers an appropriate market participant spread for commercial loans and deposits by analyzing the mix of borrowings available to the Company with comparable maturity periods.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. BUSINESS SEGMENT INFORMATION (continued)
Other income and expenses are managed directly by each reportable segment, including fees, service charges, salaries and benefits, and other direct expenses, as well as certain allocated corporate expenses, and are accounted for within each segment’s financial results. Accounting policies for the lines of business are the same as those used in preparation of the Condensed Consolidated Financial Statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business. Where practical, the results are adjusted to present consistent methodologies for the segments.
The application and development of management reporting methodologies is a dynamic process and is subject to periodic enhancements. The implementation of these enhancements to the internal management reporting methodology may materially affect the results disclosed for each segment with no impact on consolidated results. Whenever significant changes to management reporting methodologies take place, prior period information is reclassified wherever practicable.
The Chief Operating Decision Maker ("CODM"), as described by ASC 280, Segment Reporting,CODM, manages SC on a historical basis by reviewing the results of SC on a pre-Change in Control basis. The Results of Segments table discloses SC's operating information on the same basis that it is reviewed by SHUSA'sthe CODM. The adjustments column includes adjustments to reconcile SC's GAAP results to SHUSA's consolidated results.
There were no changes to the Company's reportable segments during the quarter ended June 30, 2017. The results of segments for the three-month and six-month periods ended June 30, 2016 have been recast to the current composition of the Company's reportable segments.
Results of Segments
The following tables present certain information regarding the Company’s segments.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Three-Month Period Ended | SHUSA Reportable Segments | | | | |
June 30, 2017 | Consumer & Business Banking | Commercial Banking | Commercial Real Estate | GCB | Other(2) | | SC(3) | SC Purchase Price Adjustments(4) | Eliminations(4) | | Total |
| (in thousands) |
Net interest income | $ | 317,117 |
| $ | 87,005 |
| $ | 78,213 |
| $ | 41,568 |
| $ | 22,252 |
| | $ | 1,053,673 |
| $ | 34,095 |
| $ | 7,826 |
| | $ | 1,641,749 |
|
Total non-interest income | 96,778 |
| 16,527 |
| 3,021 |
| 13,933 |
| 180,252 |
| | 432,373 |
| (3,719 | ) | (10,218 | ) | | 728,947 |
|
Provision for credit losses | 21,410 |
| 4,255 |
| (5,344 | ) | 13,635 |
| 16,051 |
| | 520,555 |
| 34,206 |
| — |
| | 604,768 |
|
Total expenses | 395,618 |
| 55,788 |
| 20,613 |
| 26,410 |
| 265,009 |
| | 617,383 |
| 11,508 |
| (6,147 | ) | | 1,386,182 |
|
Income/(loss) before income taxes | (3,133 | ) | 43,489 |
| 65,965 |
| 15,456 |
| (78,556 | ) | | 348,108 |
| (15,338 | ) | 3,755 |
| | 379,746 |
|
Intersegment revenue/(expense)(1) | 2,800 |
| 1,762 |
| 679 |
| (1,869 | ) | (3,372 | ) | | — |
| — |
| — |
| | — |
|
Total assets | 19,596,316 |
| 11,685,019 |
| 14,091,865 |
| 6,962,778 |
| 42,912,235 |
| | 39,507,482 |
| — |
| — |
| | 134,755,695 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Three-Month Period Ended | SHUSA Reportable Segments | | | | |
March 31, 2018 | Consumer & Business Banking | Commercial Banking | GCB | Other(2) | | SC(3) | SC Purchase Price Adjustments(4) | Eliminations(4) | | Total |
| (in thousands) |
Net interest income | $ | 304,819 |
| $ | 154,935 |
| $ | 32,690 |
| $ | 62,816 |
| | $ | 921,737 |
| $ | 9,895 |
| $ | 9,058 |
| | $ | 1,495,950 |
|
Total non-interest income | 82,819 |
| 33,588 |
| 50,639 |
| 113,424 |
| | 531,736 |
| 2,686 |
| (11,528 | ) | | 803,364 |
|
Provision for / (release of) credit losses | 38,389 |
| (9,741 | ) | (2,055 | ) | 6,337 |
| | 458,995 |
| 10,609 |
| — |
| | 502,534 |
|
Total expenses | 368,639 |
| 84,396 |
| 58,143 |
| 228,368 |
| | 694,870 |
| 11,729 |
| (2,621 | ) | | 1,443,524 |
|
Income/(loss) before income taxes | (19,390 | ) | 113,868 |
| 27,241 |
| (58,465 | ) | | 299,608 |
| (9,757 | ) | 151 |
| | 353,256 |
|
Intersegment revenue/(expense)(1) | 678 |
| 1,531 |
| (2,281 | ) | 72 |
| | — |
| — |
| — |
| | — |
|
Total assets | 18,857,164 |
| 24,318,734 |
| 7,062,542 |
| 38,944,263 |
| | 40,045,188 |
| — |
| — |
| | 129,227,891 |
|
| |
(1) | Intersegment revenue/(expense) represents charges or credits for funds used or provided by each of the segments and is included in net interest income. |
| |
(2) | Other includes the results of the entities transferred to the IHC, earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and the Parent 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. |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. BUSINESS SEGMENT INFORMATION (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Six-Month Period Ended | SHUSA Reportable Segments | | | | |
June 30, 2017 | Consumer & Business Banking | Commercial Banking | Commercial Real Estate | GCB | Other(2) | | SC(3) | SC Purchase Price Adjustments(4) | Eliminations(4) | | Total |
| (in thousands) |
Net interest income | $ | 620,562 |
| $ | 172,324 |
| $ | 147,711 |
| $ | 84,472 |
| $ | 35,078 |
| | $ | 2,096,600 |
| $ | 71,399 |
| $ | 16,167 |
| | $ | 3,244,313 |
|
Total non-interest income | 181,777 |
| 29,893 |
| 5,266 |
| 25,603 |
| 367,897 |
| | 867,221 |
| 1,735 |
| (22,002 | ) | | 1,457,390 |
|
Provision for credit losses | 43,861 |
| 10,257 |
| (5,960 | ) | 12,271 |
| 31,663 |
| | 1,155,568 |
| 92,554 |
| — |
| | 1,340,214 |
|
Total expenses | 780,926 |
| 110,035 |
| 42,608 |
| 49,877 |
| 506,017 |
| | 1,238,717 |
| 23,380 |
| (12,463 | ) | | 2,739,097 |
|
Income/(loss) before income taxes | (22,448 | ) | 81,925 |
| 116,329 |
| 47,927 |
| (134,705 | ) | | 569,536 |
| (42,800 | ) | 6,628 |
| | 622,392 |
|
Intersegment revenue/(expense)(1) | 6,149 |
| 2,933 |
| 1,496 |
| (4,044 | ) | (6,534 | ) | | — |
| — |
| — |
| | — |
|
Total assets | 19,596,316 |
| 11,685,019 |
| 14,091,865 |
| 6,962,778 |
| 42,912,235 |
| | 39,507,482 |
| — |
| — |
| | 134,755,695 |
|
| |
(1) | Intersegment revenue/(expense) represents charges or credits for funds used or provided by each of the segments and is included in net interest income. |
| |
(2) | Other includes the results of the entities transferred to the IHC, earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and the Parent 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. |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Three-Month Period Ended | SHUSA Reportable Segments | | | | |
June 30, 2016 | Consumer & Business Banking | Commercial Banking | Commercial Real Estate | GCB | Other(2) | | SC(3) | SC Purchase Price Adjustments(4) | Eliminations(4) | | Total |
| (in thousands) |
Net interest income | $ | 272,832 |
| $ | 89,016 |
| $ | 72,287 |
| $ | 61,269 |
| $ | (16,707 | ) | | $ | 1,129,637 |
| $ | 52,082 |
| $ | 4,470 |
| | $ | 1,664,886 |
|
Total non-interest income | 94,589 |
| 17,593 |
| 6,381 |
| 18,516 |
| 214,482 |
| | 367,329 |
| 15,487 |
| (13,836 | ) | | 720,541 |
|
Provision for credit losses | 19,842 |
| (8,808 | ) | 8,280 |
| (16,420 | ) | 13,312 |
| | 511,921 |
| 85,640 |
| — |
| | 613,767 |
|
Total expenses | 385,843 |
| 54,391 |
| 23,941 |
| 24,921 |
| 304,903 |
| | 547,482 |
| 13,898 |
| (12,389 | ) | | 1,342,990 |
|
Income/(loss) before income taxes | (38,264 | ) | 61,026 |
| 46,447 |
| 71,284 |
| (120,440 | ) | | 437,563 |
| (31,969 | ) | 3,023 |
| | 428,670 |
|
Intersegment revenue/(expense)(1) | 11,753 |
| 4,707 |
| 4,039 |
| (62 | ) | (20,437 | ) | | — |
| — |
| — |
| | — |
|
Total assets | 19,809,800 |
| 12,360,710 |
| 15,440,551 |
| 11,968,432 |
| 43,086,829 |
| | 38,490,611 |
| — |
| — |
| | 141,156,933 |
|
| |
(1) | Intersegment revenue/(expense) represents charges or credits for funds used or provided by each of the segments and is included in net interest income. |
| |
(2) | Other includes the results of the entities transferred to the IHC, earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and the Parent 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. |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17. BUSINESS SEGMENT INFORMATION (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Six-Month Period Ended | SHUSA Reportable Segments | | | | |
June 30, 2016 | Consumer & Business Banking | Commercial Banking | Commercial Real Estate | GCB | Other(2) | | SC(3) | SC Purchase Price Adjustments(4) | Eliminations(4) | | Total |
| (in thousands) |
Net interest income | $ | 495,393 |
| $ | 166,162 |
| $ | 137,043 |
| $ | 121,589 |
| $ | 37,505 |
| | $ | 2,293,215 |
| $ | 103,852 |
| $ | 5,931 |
| | $ | 3,360,690 |
|
Total non-interest income | 192,575 |
| 34,147 |
| 11,321 |
| 39,498 |
| 415,460 |
| | 720,520 |
| 29,269 |
| (25,072 | ) | | 1,417,718 |
|
Provision for credit losses | 20,343 |
| 52,848 |
| 20,960 |
| 31,376 |
| 26,808 |
| | 1,172,091 |
| 187,803 |
| — |
| | 1,512,229 |
|
Total expenses | 766,331 |
| 106,516 |
| 46,263 |
| 63,122 |
| 588,290 |
| | 1,075,139 |
| 28,629 |
| (25,325 | ) | | 2,648,965 |
|
Income/(loss) before income taxes | (98,706 | ) | 40,945 |
| 81,141 |
| 66,589 |
| (162,133 | ) | | 766,505 |
| (83,311 | ) | 6,184 |
| | 617,214 |
|
Intersegment revenue/(expense)(1) | 24,455 |
| 9,311 |
| 7,416 |
| (78 | ) | (41,104 | ) | | — |
| — |
| — |
| | — |
|
Total assets | 19,809,800 |
| 12,360,710 |
| 15,440,551 |
| 11,968,432 |
| 43,086,829 |
| | 38,490,611 |
| — |
| — |
| | 141,156,933 |
|
| |
(1) | Intersegment revenue/(expense) represents charges or credits for funds used or provided by each of the segments and is included in net interest income. |
| |
(2) | Other includes the results of the entities transferred to the IHC, earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and the Parent Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses. |
| |
(3) | Management of SHUSA manages SC by analyzing the pre-Change in Control results of SC as disclosed in this column. |
| |
(4) | Purchase Price Adjustments represents the impact that SC purchase marks had on the results of SC included within the consolidated operations of SHUSA, while eliminations eliminate intercompany transactions. |
NOTE 18. INTERMEDIATE HOLDING COMPANY
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, were required to consolidate U.S. subsidiary activities under an IHC. Due to its U.S. non-branch total consolidated asset size, Santander is subject to the Final Rule. As a result of this rule, Santander transferred substantially all of its equity interests in U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. These subsidiaries included Santander BanCorp, BSI, SIS and SSLLC, as well as other subsidiaries.
As these entities were and are solely owned and controlled by Santander prior to and after July 1, 2016, in accordance with ASC 805, the transaction has been accounted for under the common control guidance, which requires the Company to recognize the assets and liabilities transferred at their historical cost of the transferring entity at the date of the transfer. Additionally, as this transaction represented a change in reporting entity, the guidance requires retrospective combination of the entities for all periods presented in these financial statements as if the combination had been in effect since inception of common control.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 18. INTERMEDIATE HOLDING COMPANYBUSINESS SEGMENT INFORMATION (continued)
The following table summarizes the impact of the transfer to certain items within the Company's Condensed Consolidated Statement of Operations for the three months ended June 30, 2016:
|
| | | | | | | | | | | | |
Income Statement | | As Previously Reported | | Retrospective Adjustments | | As Retrospectively Adjusted |
| | (in thousands) |
Three-months Ended June 30, 2016 | | | | | | |
Total interest income | | $ | 1,941,790 |
| | $ | 87,619 |
| | $ | 2,029,409 |
|
Total interest expense | | 356,347 |
| | 8,176 |
| | 364,523 |
|
Provision for credit losses | | 597,309 |
| | 16,458 |
| | 613,767 |
|
Total fees and other income | | 584,256 |
| | 105,521 |
| | 689,777 |
|
Total general and administrative expenses | | 1,143,577 |
| | 121,295 |
| | 1,264,872 |
|
Income tax provision | | 134,590 |
| | 18,666 |
| | 153,256 |
|
Net Income | | $ | 144,646 |
| | $ | 22,296 |
| | $ | 166,942 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
For the Three-Month Period Ended | SHUSA Reportable Segments | | | | |
March 31, 2017 | Consumer & Business Banking | Commercial Banking | GCB | Other(2) | | SC(3) | SC Purchase Price Adjustments(4) | Eliminations(4) | | Total |
| (in thousands) |
Net interest income | $ | 262,732 |
| $ | 152,306 |
| $ | 42,228 |
| $ | 56,728 |
| | $ | 1,042,925 |
| $ | 37,305 |
| $ | 8,341 |
| | $ | 1,602,565 |
|
Total non-interest income | 82,534 |
| 14,923 |
| 51,336 |
| 151,107 |
| | 434,848 |
| 5,454 |
| (11,784 | ) | | 728,418 |
|
Provision for / (release of) credit losses | 22,451 |
| 5,386 |
| (1,364 | ) | 15,610 |
| | 635,013 |
| 58,349 |
| — |
| | 735,445 |
|
Total expenses | 375,021 |
| 78,339 |
| 46,608 |
| 226,034 |
| | 621,334 |
| 11,872 |
| (6,316 | ) | | 1,352,892 |
|
Income/(loss) before income taxes | (52,206 | ) | 83,504 |
| 48,320 |
| (33,809 | ) | | 221,426 |
| (27,462 | ) | 2,873 |
| | 242,646 |
|
Intersegment revenue/(expense)(1) | 878 |
| 1,301 |
| (2,397 | ) | 218 |
| | — |
| — |
| — |
| | — |
|
Total assets | 17,680,926 |
| 25,854,624 |
| 9,717,228 |
| 43,776,451 |
| | 39,061,940 |
| — |
| — |
| | 136,091,169 |
|
| |
(1) | Intersegment revenue/(expense) represents charges or credits for funds used or provided by each of the segments and is included in net interest income. |
| |
(2) | Other includes the results of the entities transferred to the IHC, earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and the Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses. |
| |
(3) | Management of SHUSA manages SC by analyzing the pre-Change in Control results of SC as disclosed in this column. |
| |
(4) | Purchase Price Adjustments represents the impact that SC purchase marks had on the results of SC included within the consolidated operations of SHUSA, while eliminations eliminate intercompany transactions. |
The following table summarizes the impact of the transfer to certain items within the Company's Condensed Consolidated Statement of Operations for the six months ended June 30, 2016:
|
| | | | | | | | | | | | |
Income Statement | | As Previously Reported | | Retrospective Adjustments | | As Retrospectively Adjusted |
| | (in thousands) |
Six-months Ended June 30, 2016 | | | | | | |
Total interest income | | $ | 3,911,295 |
| | $ | 175,884 |
| | $ | 4,087,179 |
|
Total interest expense | | 709,800 |
| | 16,689 |
| | 726,489 |
|
Provision for credit losses | | 1,479,588 |
| | 32,641 |
| | 1,512,229 |
|
Total fees and other income | | 1,155,536 |
| | 204,168 |
| | 1,359,704 |
|
Total general and administrative expenses | | 2,252,850 |
| | 237,404 |
| | 2,490,254 |
|
Income tax provision | | 199,987 |
| | 32,130 |
| | 232,117 |
|
Net Income | | $ | 158,423 |
| | $ | 46,927 |
| | $ | 205,350 |
|
74
Additionally, the Consolidated Statement of Comprehensive Income, Shareholder's Equity and Cash Flows, along with Footnotes 3, 4, 8, 11, 12, 13, 16, and 17 have been adjusted to reflect these retrospective adjustments.
Subsequent Event
On July 1, 2017, an additional Santander subsidiary, Santander Financial Services, Inc. ("SFS"), a finance company located in Puerto Rico was transferred to the Company. The contribution of SFS to the Company transferred approximately $678 million of assets which were primarily comprised of cash and cash equivalents, approximately $356 million of liabilities and approximately $322 million of equity to the Company.
Although SFS is an entity under common control, its results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company. As a result, the Company will report the results of SFS on a prospective basis beginning July 1, 2017.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")
EXECUTIVE SUMMARY
Santander Holdings USA, Inc. ("SHUSA" or the "Company") is the parent holding company of Santander Bank, National Association, (the "Bank" or "SBNA"), a national banking association, and owns approximately 59%68% of Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SC"), a specialized consumer finance company focused on vehicle finance and third-party servicing. SHUSA is headquartered in Boston, Massachusetts and the Bank's main office is in Wilmington, Delaware. SC is headquartered in Dallas, Texas. SHUSA is a wholly-owned subsidiary of Banco Santander, S.A. ("Santander"). SHUSA is also the parent company of Santander BanCorp (together with its subsidiaries, “Santander BanCorp”), a holding company headquartered in Puerto Rico which offers a full range of financial services through its wholly-owned banking subsidiary, Banco Santander Puerto Rico;Rico ("BSPR"); Santander Securities LLC (“SSLLC”), a broker-dealer headquartered in Boston; Banco Santander International (“BSI”), a financial services company located in Miami that offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; Santander Investment Securities Inc. (“SIS”), a registered broker-dealer located in New York providing services in investment banking, institutional sales, trading and offering research reports of Latin American and European equity and fixed-income securities; and several other subsidiaries.
The Bank's principal markets are in the Mid-Atlantic and Northeastern United States. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios. The Bank earns interest income on its loan and investment portfolios. In addition, the Bank generates non-interest income from a number of sources, including deposit and loan services, sales of loans and investment securities, capital markets products and bank-owned life insurance ("BOLI"). The principal non-interest expenses include employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. The financial results, of the Bank are affected by the economic environment, including interest rates and consumer and business confidence and spending, as well as the competitive conditions within the Bank's geographic footprint.
SC's primary business is the indirect origination and securitization of retail installment contracts ("RICs"), principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to subprime retail consumers. Further information about SC’s business is provided below in the “Chrysler Capital” section.
SC also originates vehicle loans through a web-based direct lending program, purchases vehicle RICs from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, SC has several relationships through which it provides personal unsecured loans, private-label credit cards and other consumer finance products.
In 2014, an initial public offering ("IPO") of shares of SC's 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. SC Common Stock is now listed for trading on the New York Stock Exchange under the trading symbol “SC”.
Immediately following the IPO, the Company owned approximately 61% of the shares of SC Common Stock. The IPO resultedhas dedicated financing facilities in a change in control and consolidation of SC (the "Change in Control").
Prior to the Change in Control, the Company accountedplace for its investmentChrysler Capital business. SC periodically sells consumer RICs through these flow agreements and, when market conditions are favorable, it accesses the asset-backed securities ("ABS") market through securitizations of consumer RICs. SC also periodically enters into bulk sales of consumer vehicle leases with a third party. SC typically retains servicing of loans and leases sold or securitized, and may also retain some residual risk in sales of leases. SC under the equity method. Following the Change in Control, the Company consolidated the financial results ofhas also entered into an agreement with a third party whereby SC in the Company’s Condensed 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).will periodically sell charged-off loans.
Chrysler Capital
SC offers a full spectrum of auto financing products and services to Chrysler customers and dealers under the Chrysler Capital brand ("Chrysler Capital"), the trade name used in providing services under the ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC ("FCA"), formerly Chrysler Group LLC, signed by SC in 2013 (the "Chrysler Agreement"). These products and services include consumer RICs and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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"OEMs'") treatment of their captive providers, primarily in regard to sales support. The failure of either party to meet its obligations under the agreement could result in the agreement being terminated. The targeted and actual penetration rates under the terms of the Chrysler Agreement are as follows:
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| | | | | | | | | | |
| | Program Year (a) |
| | 1 | | 2 | | 3 | | 4 | | 5-10 |
Retail | | 20% | | 30% | | 40% | | 50% | | 50% |
Lease | | 11% | | 14% | | 14% | | 14% | | 15% |
Total | | 31% | | 44% | | 54% | | 64% | | 65% |
| | | | | | | | | | |
Actual Penetration (b) | | 30% | | 29% | | 26% | | 19% | | 20% |
75
(a) Each program year runs from May 1 to April 30. Retail
Item 2. Management’s Discussion and lease penetration is based on a percentageAnalysis of FCA retail sales.Financial Condition and Results of Operations
(b)
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| | | | | | | | | | |
| | Program Year (1) |
| | 1 | | 2 | | 3 | | 4 | | 5-10 |
Retail | | 20% | | 30% | | 40% | | 50% | | 50% |
Lease | | 11% | | 14% | | 14% | | 14% | | 15% |
Total | | 31% | | 44% | | 54% | | 64% | | 65% |
| | | | | | | | | | |
Actual Penetration (2) | | 30% | | 29% | | 26% | | 19% | | 28% |
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(1) | Each program year runs from May 1 to April 30. Retail and lease penetration is based on a percentage of FCA retail sales. |
(2) Actual penetration rates shown for program year 1, 2, 3 and 4 are as of April 30, 2014, 2015, 2016 and 2017, respectively, the end date of each of those Program Years.program years. Actual penetration rate shown for program year 5, which ends April 30, 2018, is as of June 30,December 31, 2017.
The target penetration rate as of April 30, 2017 (the end of the third year of the Chrysler Agreement)2018 was 64%, and the target penetration rate as of April 30, 2018 is 65%. SC's actual penetration rate as of June 30, 2017March 31, 2018 was 20%, an improvement from the penetration rate of 17% as of December 31, 2016.28%. The penetration rate has been constrained due to thea more competitive landscape and low interest rates, causing itsSC's subvented loan offers not to be materially more attractive than other lenders' offers. While SC has not achieved the targeted penetration rates to date, Chrysler Capital continues to be a focal point of its strategy, SC continues to work with FCA to improve penetration rates, and SC remains committed to the Chrysler Agreement.
SC has worked strategically and collaboratively with FCA to continue to strengthen its relationship and create value within the Chrysler Capital program. SC has partnered with FCA to roll out two new pilot programs, including a dealer rewards program and a nonprime subvention program. During the six monthsthree-month period ended June 30, 2017,March 31, 2018, SC originated $3.4more than $2.0 billion in Chrysler Capital loans, which represented 43%represents approximately 46% of its total RIC originations, with an approximately even share between prime and non-prime, as well as more than $3.0$2.1 billion in Chrysler Capital leases. Since its May 1, 2013 launch, Chrysler Capital has originated $41.9more than $47.2 billion in retail loans and $20.6$25.7 billion in leases, and facilitated the origination of $3.0 billion in leases and dealer loans for the Bank. As of June 30, 2017,March 31, 2018, SC's auto RIC portfolio consisted of $7.2$7.0 billion of Chrysler Capital loans, which represents 31% of SC's auto RIC portfolio.
SC also originates vehicle loans through a web-based direct lending program, purchases vehicle RICs from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, SC has several relationships through which it has provided personal loans, private-label credit cards and other consumer finance products. In October 2015, SC announced its planned exit from the personal lending business.
SC has dedicated financing facilities in place for its Chrysler Capital business. SC periodically sells consumer RICs through these flow agreements and, when market conditions are favorable, it accesses the asset-backed securities ("ABS") market through securitizations of consumer RICs. SC also periodically enters into bulk sales of consumer vehicle leases with a third party. SC typically retains servicing of loans and leases sold or securitized, and may also retain some residual risk in sales of leases. SC has also entered into an agreement with a third party whereby SC will periodically sell charged-off loans.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
ECONOMIC AND BUSINESS ENVIRONMENT
Overview
During the secondfirst quarter of 2017,2018, unemployment declined,remained steady, while market results improvedwere mixed and the preliminary gross domestic product ("GDP") growth rate came in under expectations, marking overall mixed results forslowed from the U.S. economy.prior quarter.
The unemployment rate at June 30, 2017 decreased to 4.4%March 31, 2018 was unchanged at 4.1% compared to 4.5%4.1% at MarchDecember 31, 2017 and was down from 4.9%lower compared to 4.5% one year ago. According to the U.S. Bureau of Labor Statistics, employment increasedrose in health care, manufacturing, and professional and business services, and in mining, while retail trade lost jobs.remaining unchanged across other sectors.
The Bureau of Economic Analysis ("BEA") advance estimate indicates that real GDP grew at an annualized rate of 2.6%2.3% for the second quarter of 2017, compared to 1.4% in the first quarter of 2017.The acceleration2018, compared to 2.9% for the fourth quarter of 2017. According to the BEA, the deceleration in real GDPgrowth was affected by slowing in the second quarter is reflective of positive contributions from personal consumption expenditures, non-residential fixed investment, exports, and federal government spending. These positive contribution were partly offset by negative contributions from private residential fixed investment, private inventory investment, and state and local government spending. This was partially offset by growth in private inventory investment.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Market year-to-date returns for the following indices based on closing prices at June 30, 2017March 31, 2018 were:
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| | |
| | June 30, 2017March 31, 2018 |
Dow Jones Industrial Average | | 8.0%(2.5)% |
S&P 500 | | 8.2%(1.2)% |
NASDAQ Composite | | 14.1%2.3% |
At its July 2017March 2018 meeting, the Federal Open Market Committee decided to raise the federal funds rate target to 1% - 1.25%1.50-1.75% , indicatingreflecting that the labor market has continued to strengthen and that economic activity has continued to expand at a moderatesolid pace. InflationOverall inflation remains just below the targeted rate of 2.0%.
The 10-year Treasury bond rate at June 30, 2017March 31, 2018 was 2.3%2.74%, downup from 2.5%2.40% at December 31, 2016. Over the past twelve months, however, the 10-year Treasury bond rate increased 81 basis points.2017. Within the industry, changes within this metric isare often considered to correspond to changes in 15-year and 30-year mortgage rates.
At the time of filing this Form 10-Q, secondcurrent quarter 20172018 information was not available; however, for the firstfourth quarter of 2017, mortgage originations were downdecreased approximately 23.19%11.89% over the fourthprior quarter, of the prior year, but up 3.14%and decreased 20.61% year-over-year. Similarly, refinancing activity showed an overallincrease of approximately 1.32% over the prior quarter, but a decrease of approximately 9.7% from March 2016 to March 2017. After reaching its peak in 2009, the42.2% year-over- year.
The ratio of nonperforming loans ("NPLs") to total gross loans for U.S. banks declined for six consecutive years, to just under 1.5% in 2015. This trend confirmed an improvement in credit quality and downwardNPL trends in general allowance reserves and has continued throughout 2016 and early 2017.have remained relatively flat since that time. NPLs for U.S. commercial banks were approximately 1.17% of loans using the latest available data which was as of the fourth quarter of 2017, compared to 1.17% for the prior quarter.
Changing market conditions are considered a significant risk factor to the Company. The continued low interest rate environment presentscan present challenges in the growth of net interest income for the banking industry, which continues to rely on non-interest activities to support revenue growth. Changing market conditions and political uncertainty could have an overall impact on the Company's results of operations and financial condition. Such conditions could also impact the Company's credit risk and the associated provision for credit losses and legal expense.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Credit Rating Actions
The following table presents Moody's, and Standard & Poor's ("S&P") and Fitch credit ratings for the Bank, and BSPR, SHUSA, Santander, and the Kingdom of Spain, and Banco Santander Puerto Rico ("BSPR") as of June 30, 2017:March 31, 2018:
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| | | | | | | | | | | | | | |
| | BANK | | BSPR(1) | | SHUSA |
| | Moody's | S&P | Fitch (2) | | Moody's | S&P | Fitch (2) | | Moody's | S&P | Fitch |
Long-Term | | Baa1 | A- | BBB+ | | Baa1 | N/A | BBB+ | | Baa3 | BBB+ | BBB+ |
Short-Term | | P-1 | A-2 | F-2 | | P-1/P-2 | N/A | F-2 | | n/a | A-2 | F-2 |
Outlook | | Stable | Stable | Stable | | Stable | N/A | Stable | | Stable | Stable | Stable |
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| | | | | | | | | |
| | | SANTANDER | | SPAIN |
| Moody's | S&P | | Moody's | S&P | | Moody's | S&PFitch | | Moody's | S&P | | Moody's | S&PFitch |
Long-Term | Baa2 | BBB+ | | Baa2A-2 | N/A | | Baa3 | BBB+ | | A3 | A- | | Baa2Baa1 | BBB+A- | A- |
Short-Term | P-1 | A-2 | | P-1/P-2P-1 | N/AA-1 | | n/a | A-2F-2 | | P-2 | A-2 | | P-2 | A-2F-1 |
Outlook | Stable | Stable | | Stable | N/A | | Stable | Stable | | Stable | Stable | | Stable | Positive | Stable |
(1) P-1 Short Term Deposit Rating; P-2 Short Term Debt Rating.
(2) Short Term Debt and Short Term Deposit Ratings are both F-2.
On January 19, 2018, Fitch upgraded Spain's Long-term Foreign Currency and Local Currency rating to A- from BBB+ and upgraded Spain's Short-term Foreign Currency and Local Currency rating to F1 from F2.
On March 31, 2017,23, 2018, Standard & Poor's upgraded Spain's Long-term rating to A1- from BBB+.
On April 6, 2018, Standard & Poor's raised its outlook onSantander's long- and short-term ratings by one notch to A and A-1, respectively. Standard & Poor's also raised the long term ratings of SHUSA by one notch to BBB+ and SBNA to A-. The short-term ratings for SHUSA and SBNA were not changed.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
On April 13, 2018, Moody's upgraded Spain's sovereign credit rating to "positive"Baa1 from "stable", saying it believed the country's strong economic performance would continue over the next two years. On June 6, 2017 Standard and Poor's revised their outlook on Santander to stable from positive, saying it's stable outlook reflects limited prospects for ratings upside until we see evidence that the integration of Banco Popular is proceeding smoothly, not facing meaningful business or financial setbacks.Baa2.
During the second quarter of 2017, there were no changesOn April 17, 2018, Moody's upgraded Santander's long- and short-term ratings by one notch to SHUSA's or the Bank's ratings.A-2 and P-1, respectively.
SHUSA funds its operations independently of the other entities owned by Santander, and believes its business is not necessarily closely related to the business or outlook of other entities owned by Santander. Future changes in the credit ratings of its parent, Santander, or the Kingdom of Spain could impact SHUSA's or its subsidiaries' credit ratings, and any other change in the condition of Santander could affect SHUSA.
At this time, SC is not rated by the major credit rating agencies.
Puerto Rico Economy
On May 3, 2017, the Financial Oversight and Management Board forof Puerto Rico (“FOB”) submitted a request to the Federal District Court of Puerto Rico to apply Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) to the Commonwealth of Puerto Rico. Title III of PROMESA allows the Commonwealth of Puerto Rico to enter into a debt restructuring process notwithstanding that Puerto Rico is barred from traditional bankruptcy protection under Chapter 9 of the U.S. Bankruptcy Code.
On July 2, 2017, the Puerto Rican Electric Power Authority ("PREPA") submitted a request to the Federal District Court of Puerto Rico to apply Title III of PROMESA to PREPA.
As of June 30,, 2017,March 31, 2018, SHUSA did not have material direct credit exposure to the Commonwealth of Puerto Rico, and its exposure to Puerto Rico municipalities in total was approximately $230$220 million. As of June 30, 2017,March 31, 2018, municipalities had not been designated “covered” territorial instrumentalities subject to the requirements of PROMESA, and the municipalities were current on their debt obligations to SHUSA. Under PROMESA, the FOB has sole discretion to designate territorial instrumentalities such as municipalities as covered entities subject to PROMESA’s requirements. If the FOB determines to designate municipalities as covered entities under PROMESA, the FOB could initiate debt restructuring of municipalities that have debt obligations to SHUSA, if deemed necessary.
Impact from Hurricanes
96
Our footprint was impacted by three significant hurricanes during the third quarter of 2017, Hurricane Harvey, which struck the State of Texas and the surrounding region, Hurricane Irma, which primarily struck the State of Florida, and Hurricane Maria, which struck the island of Puerto Rico. Each of these hurricanes resulted in widespread flooding, power outages and associated damage to real and personal property in the affected areas. Our SC subsidiary headquartered in Dallas, Texas, our BSI subsidiary headquartered in Miami, Florida, and our Santander BanCorp, BSPR and SSLLC subsidiaries in Puerto Rico were most directly affected by these hurricanes. In Puerto Rico, there was significant damage to the infrastructure and the power grid on the entire island, which resulted in extended delays in BSPR returning to normal operations.
The Company assessed the potential additional credit losses related to its consumer and commercial lending exposures in the greater Texas, Florida and Puerto Rico regions. As a result, the Company's ALLL has approximately $110 million of reserves at March 31, 2018 related to the hurricanes. However, for credit exposures in Puerto Rico, given the current state in the region, the Company has had limited information with which to estimate probable credit losses. As of March 31, 2018, the Company has approximately $3.4 billion of loan exposures in Puerto Rico consisting of $1.6 billion in consumer loans, $1.8 billion in commercial loans, including $220 million in loans to municipalities. The Company will continue to monitor and assess the impact of these hurricanes on our subsidiaries’ businesses, and may establish additional reserves for losses in future periods.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
REGULATORY MATTERS
The activities of the Company and its subsidiaries, including the Bank and SC, are subject to regulation under various U.S. federal laws and regulatory agencies which impose regulations, supervise and conduct examinations, and may affect the operations and management of the Company and its ability to take certain actions, including making distributions to our parent and shareholders.
The Company is regulated on a consolidated basis by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), including the Federal Reserve Bank of Boston (the "FRB"), of Boston, and the Consumer Financial Protection Bureau (the "CFPB"). The Company's banking subsidiaries are further supervised by the Federal Deposit Insurance Corporation (the "FDIC") and the Office of the Comptroller of the Currency (the “OCC”). As a subsidiary of the Company, SC is also subject to regulatory oversight by the Federal Reserve as well as the CFPB.
Refer to the Annual Report on Form 10-K for the year ended December 31, 2016, which includes additional disclosures and discussion of laws and regulations affecting the Company, including, the Dodd-Frank Act Wall Street Reform and Consumer Protection (the "DFA"), the FDIC Improvement Act, and other regulatory matters.
Payment of Dividends
The Parent CompanySHUSA is the parent holding company of SBNA and other consolidated subsidiaries, and is a legal entity separate and distinct from its subsidiaries. In addition to those arising as a result of the Comprehensive Capital Analysis and Review (“CCAR”) process and written agreements described under the caption “Stress Tests and Capital Adequacy” below, SHUSA and SBNA are subject to various regulatory restrictions relating to the payment of dividends, including regulatory capital minimums and the requirement to remain "well-capitalized" under prompt corrective action regulations. As a consolidated subsidiary of the Company, SC is included in various regulatory restrictions relating to payment of dividends as described in the “Stress Tests and Capital Adequacy” discussion in this section.
During the three-month period ended March 31, 2018, the Company paid cash dividends on common stock of $5.0 million to its sole shareholder, Santander.
In addition, the following regulatory matters are in the process of being phased in or evaluated by the Company.
FBOsForeign Banking Organizations ("FBOs")
OnIn February 18, 2014, the Federal Reserve issued the final rule to strengthen regulatory oversightimplementing certain enhanced prudential standards (“EPS”) mandated by Section 165 of FBOsthe Dodd-Frank Wall Street Reform and Consumer Protection Act (the “FBO“DFA") (“FBO Final Rule”). Under the FBO Final Rule, FBOs with over $50 billion of U.S. non-branch assets, including Santander, mustwere required to consolidate U.S. subsidiary activities under an IHC.intermediate holding company (an “IHC"). In addition, the FBO Final Rule requiresrequired U.S. BHCsbank holding companies ("BHCs") and FBOs with at least $50 billion in total U.S. consolidated non-branch assets to be subject to EPS and heightened capital, liquidity, risk management, and stress testing requirements. Due to both its global and U.S. non-branch total consolidated asset size, Santander was subject to both of the above provisions of the FBO Final Rule. As a result of this rule, Santander has transferred substantially all of its U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. These subsidiaries include Santander BanCorp, a Puerto Rico bank holding company, Banco Santander International, a private bank headquartered in Miami ("BSI"); Santander Investment Securities, Inc., a broker-dealer located in New York ("SIS"); and Santander Securities LLC, a Puerto Rico broker-dealer ("SSLLC"). A phased-in approach is being used for the standards and requirements at both the FBO and the IHC. As a result, as discussedU.S. BHC with more than $50 billion in Note 18, on July 1, 2017, Santander also transferred ownership of an additional entity, Santander Financial Services, Inc. ("SFS"),total consolidated assets, the Company became subject to the Company.EPS on January 1, 2015. Other standards of the FBO Final Rule will be phased in through January 1, 2019.
Third Basel Accord ("Basel III")Regulatory Capital Requirements
In July 2013, the Federal Reserve, the FDIC and the OCC released final U.S. Basel III Regulatory Capital Rule Implementationregulatory capital rules implementing the global regulatory capital reforms of Basel III that are applicable to both SHUSA and the Bank. The final rules established a comprehensive capital framework that includes both the advanced approaches for the largest internationally active U.S. banks, formerly known as Basel II, and a standardized approach that applies to all banking organizations with over $500 million in assets. Subject to various transition periods, this rule became effective for SHUSA on January 1, 2015.
The rules narrow the definition of regulatory capital and establish higher minimum risk-based capital ratios and prompt corrective action thresholds that, when fully phased in, require banking organizations, including the Company and the Bank, to maintain a minimum common equity tier 1 ("CET1") capital ratio of 4.5%, a Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0% and a minimum leverage ratio, calculated as the ratio of Tier 1 capital to average consolidated assets for the quarter, of 4.0%.
A capital conservation buffer of 2.5% above these minimum ratios is being phased in over three years starting in 2016, beginning at 0.625% and increasing by that amount on each subsequent January 1, until the buffer reaches 2.5% on January 1, 2019. This buffer is required for banking institutions and BHCs to avoid restrictions on their ability to make capital distributions, including paying dividends.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The U.S. Basel III regulatory capital rules include deductions from and adjustments to common equity Tier 1 ("CET1"). Implementation of the deductions and other adjustments to CET-1 for the Company and the Bank began on January 1, 2015 and are being phased in over three years. Phased-in changesCET1. 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.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
As Implementation of June 30, 2017, the Bank'sdeductions and other adjustments to CET1 for the Company and the Company's CET1 ratios under the transitional provisions provided under Basel III, were 17.59%Bank began on January 1, 2015 and 14.64%, respectively. Under Basel III, onwas initially planned over three years, with a fully phased-in basis underrequirement of January 1, 2018. However, during 2017, the standardized approach (non-GAAP),regulatory agencies finalized changes to the Bank`scapital rules that became effective on January 1, 2018. These changes extended the current treatment and the Company`s CET1 ratios were 17.22% and 14.18%, respectively. The calculation of the CET1 ratio on both a fully phased-in and transition basis is based on management's interpretation ofwill defer the final rules adoptedtransition provision phase-in at non-advanced approach institutions for certain capital elements, and suspend the risk-weighting to 100 percent for deferred taxes and mortgage servicing assets not disallowed from capital, in lieu of advancing to 250 percent. In addition, the regulatory agencies issued a secondary proposal in 2017 to further revise the capital rule by introducing new treatment of high volatility acquisition, development and construction loans, and by modifying the Federal Reserve in July 2013. As part of the implementation of any regulations, management interprets the rules with advice from its counsel and compliance professionals. Ifcalculation for minority interest includible within capital, for which the regulators were to interpret the rules differently, there could be an impact to the results of the calculation and the CET1 ratio. The Company believes that, as of June 30, 2017, it would remain above regulatory minimums under the currently enacted capital adequacy requirements of Basel III, including when implemented onhave not released a fully phased-in basis.final decision.
See the Bank Regulatory Capital section of this Management's Discussion and Analysis of Financial Condition and Results of Operations (the "MD&A")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.
Basel III Capital Conservation BufferIf capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and, in critically undercapitalized situations, appointment of a receiver or conservator. Critically undercapitalized institutions generally may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt. All but well-capitalized institutions are prohibited from accepting brokered deposits without prior regulatory approval. Pursuant to the Federal Deposit Insurance Corporation Improvement Act (the “FDIA”) and OCC regulations, institutions which are not categorized as well-capitalized or adequately-capitalized are restricted from making capital distributions, which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital account of the institution.
A capital conservation buffer of 2.5% above these minimum ratios is being phased in over three years, which began in 2016 at 0.625% and increases by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019. This capital conservation buffer is required for banking institutions and bank holding companies ("BHCs"), and failureAt March 31, 2018, the Bank met the criteria to maintain the capital conservation buffer can lead to restrictions on the ability to make capital distributions, including paying dividends.
Basel III Liquidity Framework
The Basel III liquidity framework requires banks and BHCs to measure their liquidity against specific liquidity tests. One test, referred tobe classified 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 November 13, 2015, the Federal Reserve published a revised final LCR rule. Under this revision, the Company was required to calculate the modified US LCR (the "US LCR") on a monthly basis beginning with data as of January 31, 2016. The Company will be required to publicly disclose its US LCR results starting October 1, 2018. Based on management's interpretation of the final rule, the Company's LCR was in excess of the regulatory minimum of 90% effective on January 1, 2016, which increased to 100% on January 1, 2017.
In May 2016, the Federal Reserve issued a proposed rule for NSFR applicable to U.S. financial institutions. If finalized as proposed, the proposed rule will become a minimum standard on January 1, 2018. The Company is currently evaluating the impact this proposed rule would have on its financial position, results of operations and disclosures.“well-capitalized.”
Stress TestsTesting and Capital AdequacyPlanning
The Company is subject to written agreements with the Federal Reserve Bank (the "FRB") of Boston that address stress testing and capital adequacy:
On September 15, 2014, the Company entered into a written agreement with the FRB of Boston. 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 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.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The Company remains subject to theReserve's capital plan rule, which requires the Company and the Bank to perform stress tests and submit the results to the Federal Reserve and the OCC on an annual basis. The Company is also required to submit a mid-year stress test to the Federal Reserve. In addition, together with the annual stress test submission, the Company is required to submit a proposed capital plan to the Federal Reserve. As a consolidated subsidiary of the Company, SC is included in the Company's stress tests and capital plans.
Under the capital plan rule, the Company is considered a large and non-complex BHC. The Federal Reserve may object to the Company’s capital plan if the Federal Reserve determines that the Company has not demonstrated an ability to maintain capital above each minimum regulatory capital ratio on a pro forma basis under expected and stressful conditions throughout the planning horizon. The Company is considered a largeLarge and non-complex BHC underBHCs such as the capital rule plan, and as a result isCompany are no longer subject to the qualitative assessmentobjection criteria of the capital plan rule bywhich are applied to larger banks that fall outside the Federal Reserve.large and non-complex BHC definition.
Liquidity Rules
In June 2017, the Company announced thatSeptember 2014, the Federal Reserve, the FDIC, and the OCC finalized a rule to implement the Basel III liquidity coverage ratio (the “LCR”) for certain internationally active banks and nonbank financial companies, and a modified version of the LCR for certain depository institution holding companies that are not internationally active. The LCR is designed to ensure that a banking entity maintains an adequate level of unencumbered high-quality liquid assets ("HQLA") equal to its expected net cash outflow for a 30-day time horizon. This rule implements a phased implementation approach under which the most globally important covered companies (more than $700 billion in assets) and large regional financial institutions ($250 billion to $700 billion in assets) were required to begin phasing-in the LCR requirements in January 2015. Smaller covered companies (more than $50 billion in assets), such as partthe Company, were required to calculate the LCR monthly beginning January 2016. In November 2015, the Federal Reserve published a revised final LCR rule. Under this revision, the Company was required to calculate the modified US LCR (the "US LCR") on a monthly basis beginning with data as of January 31, 2016. There is no requirement to submit the calculation to the Federal Reserve. The Company will be required to publicly disclose its US LCR results beginning October 1, 2018.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
In October 2014, the Basel Committee on Banking Supervision issued the final standard for the net stable funding ratio (the “NSFR”). The NSFR is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon The NSFR requires banks to maintain a stable funding profile in relation to their on- and off-balance sheet activities, thereby reducing the likelihood that disruptions to a bank's regular sources of funding will erode its liquidity in a way that could increase the risk of its CCAR process,failure and potentially lead to broader systemic stress. In May 2016, the Federal Reserve issued a proposed rule for NSFR applicable to U.S. financial institutions. The proposed rule has not been finalized, and the Company is currently evaluating the impact this proposed rule would have on its financial position, results of operations and disclosures.
Resolution and Recovery Planning
The DFA requires all BHCs and FBOs with assets of $50 billion or more to prepare and regularly update resolution plans. The resolution plan must assume that the covered company is resolved under the U.S. Bankruptcy Code and that no “extraordinary support” is received from the U.S. or any other government. In addition, the insured depository resolution plan rule requires that a bank with assets of $50 billion or more develop a plan for its resolution in a manner that ensures that depositors receive rapid access to their insured deposits, maximizes the net present value return from the sale or disposition of its assets, and minimizes the amount of any loss realized by creditors in resolution. Santander and the Bank most recently submitted resolution plans in accordance with these rules in December 2015.
On January 29, 2018, the Federal Reserve and the Federal Deposit Insurance Corporation (the “FDIC”) completed their assessments of the 2015 resolution plans and provided their expectations for future resolution plans to the 19 foreign-based banking organizations, including Santander. The banking agencies did not object to Santander’s 2015 plan or provide any substantive feedback on the capitalsubmission. Instead, the banking agencies clarified their expectations for how the 2018 resolution plan submittedshould build on the 2015 submission. Importantly, the 2018 resolution plan can incorporate, by the Company as partreference, elements of the CCAR process2015 plan that have not materially changed. In addition, the banking agencies requested that the 2018 plan provide updated information on how any organizational changes as a result of forming an IHC impact the resolution strategy. The 2018 resolution plan is due by December 31, 2018.
In September 2016, the OCC issued final guidelines that requires a bank with consolidated assets of $50 billion to develop and maintain a recovery plan that is appropriate for its size, risk profile, activities, and complexity, including the capital distributions includedcomplexity of its organizational and legal entity structure. As provided in the plan. That capitalfinal rule, SBNA must complete its initial recovery plan included planned capital distributions across the following categories: (1) common stock dividends from SHUSA to Santander, (2) common stock dividends from SC, (3) redemption of the remaining balance of SHUSA's 7.908% trust preferred securities, and (4) dividends on the Company's preferred stock and payments on its trust preferred securities. On June 28, 2017, SHUSA's Board of Directors approved the following capital distributions for the third quarter of 2017: (1) a dividend payment of $0.45625 per share on the Company's preferred stock, (2) a common stock dividend payment to Santander of $5.0 million, and (3) redemption of the remaining balance of the Company's trust preferred securities. While no longer subject to the qualitative assessment of the revised capital plan rule, the Company remains subject to the written agreements with the FRB of Boston described above, and may not make or permit any subsidiary to make any capital distribution, without the prior written approval of the Federal Reserve.by July 2018.
Total Loss-Absorbing Capacity ("TLAC")TLAC
The Federal Reserve adopted a final rule in December 2016 that will requirerequires certain U.S. organizations to maintain a minimum amount of loss-absorbing instruments, including a minimum amount of unsecured long-term debt ("LTD") (the “TLAC Rule”). The TLAC Rule which amends Regulation YY, applies to U.S. global systemically important banks ("G-SIB") and to IHCs with $50 billion or more in U.S. non-branch assets that are controlled by a global systemically important FBOs.FBO. The Company is such an IHC.
Under the TLAC Rule, companies are required to maintain a minimum amount of TLAC, which consists of a minimum amount of long-term debt (“LTD”)LTD and Tier 1 capital. As a result, SHUSA will need to hold the higher of 18% of its risk-weighted assets ("RWAs") or 9% of its total consolidated assets in the form of TLAC. SHUSA must maintain a TLAC buffer composed solely of CET1 capital and will be subject to restrictions on capital distributions and discretionary bonus payments based on the size of the TLAC buffer it maintains. In addition tothe TLAC the ruleRule, requires SHUSA to hold LTD in an amount no less than the greater of at least 6% of its RWAs or 3.5% of its total consolidated assets. The final ruleTLAC Rule is effective January 1, 2019.
Volcker Rule
The DFA added new Section 13 to the BHC Act, which is commonly referred to as the “Volcker Rule.” The Volcker Rule prohibits a “banking entity” from engaging in “proprietary trading” or engaging in any of the following activities with respect to a hedge fund or a private equity fund (together, a “Covered Fund”): (i) acquiring or retaining any equity, partnership or other ownership interest in the Covered Fund; (ii) controlling the Covered Fund; or (iii) engaging in certain transactions with the fund if the banking entity or any affiliate is an investment adviser or sponsor to the Covered Fund. These prohibitions are subject to certain exemptions for permitted activities.
Because the term “banking entity” includes an insured depository institution, a depository institution holding company and any of their affiliates, the Volcker Rule has sweeping worldwide application and covers entities such as Santander, the Company, and certain of the Company’s subsidiaries (including the Bank and SC), as well as other Santander subsidiaries in the United States and abroad.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Company implemented certain policies and procedures, training programs, recordkeeping, internal controls and other compliance requirements that were necessary to comply with the Volcker Rule. As required by the Volcker Rule, the compliance infrastructure has been tailored to each banking entity based on its size and its level of trading and Covered Fund activities. SHUSA's compliance program includes, among other things, processes for prior approval of new activities and investments permitted under the Volcker Rule, testing and auditing for compliance and a process for attesting annually that the compliance program is reasonably designed to achieve compliance with the rule.
Transactions with Affiliates
Depository institutions must remain in compliance with Sections 23A and 23B of the Federal Reserve Act and FRBthe Federal Reserve's Regulation W, ("Reg. W"), which governs the activities of the Company and its banking subsidiaries with affiliated companies and individuals. Section 23A placesimposes limits on certain specified “covered transactions,” which include loans, lines, and letters of credit to affiliated companies or individuals, and investments in affiliated companies, as well as certain other transactions with affiliated companies and individuals. The aggregate of all covered transactions is limited to 10% of a bank’s capital and surplus for any one affiliate and 20% for all affiliates. Certain covered transactions also must meet collateral requirements that range from 100% to 130% depending on the type of transaction.
Section 23B of the Federal Reserve Act prohibits ana depository institution from engaging in certain transactions with affiliates unless the transactions are considered arm`s-length.arms'-length. To meet the definition of arms-length, the terms of the transaction must be the same, or at least as favorable, as those for similar transactions with non-affiliated companies.
As a U.S. domiciled subsidiary of a global parent with significant non-bank affiliates, the Company faces elevated compliance risk in this area.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Regulation AB II
In August 2014, the SEC unanimously voted to adoptSecurities and Exchange Commission (the "SEC") adopted final rules known as Regulation AB II that, among other things, expanded disclosure requirements and modified the offering and shelf registration process for asset-backed securities (“ABS”). All offerings of publicly registered ABS and all reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), for outstanding publicly-registered ABS mustwere required to comply with the new rules and disclosures on and after November 23, 2015, except for asset-level disclosures. Compliance with the new rules regarding asset-level disclosures iswas required for all offerings of publicly registered ABS on and after November 23, 2016. SC must comply with these rules, which affects the SC's public securitization platform.
Community Reinvestment Act ("CRA")
SBNA and Banco Santander Puerto RicoBSPR are subject to the requirements of the CRA, which requires the appropriate Federalfederal financial supervisory agency to assess an institution's record of helping to meet the credit needs of the local communities in which it is located. Banco Santander Puerto Rico’sBSPR’s current CRA rating is “Outstanding.” The Bank’s most recent public“Outstanding” and SBNA’s current CRA report of examination rated the Bank as “Needs to Improve” for the January 1, 2011 through December 31, 2013 evaluation period. The Bank’s rating based solely on the applicable CRA lending, service and investment tests would have been “Satisfactory.” However, the overall rating was lowered to “Needs to Improve” due to previously disclosed instances of non-compliance by the Bank that are being remediated.is "Satisfactory." The OCC takes into account the Bank’s CRA rating in considering certain regulatory applications the Bank makes, including applications related to establishing and relocating branches, and the Federal Reserve does the same with respect to certain regulatory applications the Company makes. In addition, there may be some negative impacts on aspects of the Bank’s business as a result of the downgrade. For example, certain categories of depositors are restricted from making deposits in banks with a “Needs to Improve” rating.
Other Regulatory Matters
On March 23, 2017,April 1, 2014, the CompanyBank received a civil investigative demand from the CFPB requesting information and SC entered into a written agreementdocuments in connection with the FRBBank’s marketing to consumers of Boston. Underoverdraft coverage for automated teller machine ("ATM") and onetime debit card transactions through a third-party vendor. On July 14, 2016, the terms of this written agreement, SC is required to enhance its compliance risk management program, SC’s Board and management are required to enhance their oversight of SC’s risk management program, and the Company is required to enhance, among other matters, its Board oversight of SC’s management and operations.
On February 25, 2015, weBank entered into a consent order with the DOJ,CFPB regarding these practices. Pursuant to the terms of the consent order, the Bank paid a civil money penalty (a “CMP”) of $10.0 million and agreed to validate the elections made by customers who opted in to overdraft coverage for ATM and onetime debit card transactions in connection with telemarketing by the third-party vendor. The Bank is also required to make certain changes to its third-party vendor oversight policy and its customer complaint policy. The Bank is currently executing a remediation plan and working to meet the other consent order requirements. It is possible that additional litigation could be filed as a result of these issues.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
On February 25, 2015, SC entered into a consent order with the Department of Justice (the "DOJ"), approved by the United States District Court for the Northern District of Texas, which resolves the DOJ’s claims against the CompanySC that certain of its repossession and collection activities during the period of time between January 2008 and February 2013 violated the SCRA.Servicemembers’ Civil Relief Act (the “SCRA”). The consent order requires usSC to pay a civil fine in the amount of $55,000, as well as at least $9.4 million to affected servicemembers, consisting of $10,000 per servicemember plus compensation for any lost equity (with interest) for each repossession by usSC and $5,000 per servicemember for each instance where weSC sought to collect repossession-related fees on accounts where a repossession was conducted by a prior account holder. The consent order also requires us to undertake additional remedial measures. The consent order also subjects usSC to monitoring by the DOJ for compliance with the SCRA for a period of five years.
On March 26, 2015, the Bank entered into a cease and desist order (the "SIP Consent Order") with the OCC regarding identified deficiencies in SBNA's billing practices with regard to SIP, an identity theft protection product from the Bank’s third-party vendor. Pursuant to the SIP Consent Order, the Bank paid a CMP of $6.0 million and agreed to remediate customers who paid for but may not have received certain benefits of the SIP. Prior to entering into the SIP Consent Order, the Bank made $37.3 million in remediation payments to customers, representing the total amount paid for product enrollment.
Subsequently, the Bank commenced a further review in order to remediate checking account customers who may have been charged an overdraft fee and credit card customers who may have been charged an over limit fee and/or finance charge related to SIP product fees. The approximate amount of the expected additional remediation is $5.2 million. The Bank is currently implementing plans to reimburse customers.
On July 2, 2015, the Company entered into a written agreement with the FRB of Boston. Under the terms of that written agreement, 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.
In July 2015, the CFPB notified SC that it had referred to the DOJ certain alleged violations by SC of the Equal Credit Opportunity Act (the “ECOA”) regarding (i) statistical disparities in mark-ups charged by automobile dealers to protected groups on loans originated by those dealers and purchased by SC and (ii) the treatment of certain types of income in SC's underwriting process. In September 2015, the DOJ notified SC that it had initiated an investigation under the ECOA of SC's pricing of automobile loans based on the referral from the CFPB. SC resolved the DOJ investigation pursuant to a confidential agreement with the CFPB.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Disclosure Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act
Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Securities Exchange Act of 1934, as amended (the “Exchange Act”), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.
The following activities are disclosed in response to Section 13(r) with respect to affiliates of SHUSA within the Santander Group.
During the period covered by this annual report:
(a) Santander UK plc (“Santander UK”) holds two savings accounts and one current account for two customers resident in the UK who are currently designated by the U.S. under the Specially Designated Global Terrorist ("SDGT") sanctions program. Revenues and profits generated by Santander UK on these accounts in the three-month and six-month periods ended June 30, 2017first quarter of 2018 were negligible relative to the overall profits of Santander.
(b) Santander UK holds two frozen current accounts for two UK nationals who are designated by the U.S. under the SDGT sanctions program. The accounts held by each customer have been frozen since their designation and remained frozen through the three-month and six-month periods ended June 30, 2017.first quarter of 2018. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by the Santander UKUK's Collections and& Recoveries Department. No revenues or profits were generated by Santander UK on this account in the three-month and six-month periods ended June 30, 2017.first quarter of 2018.
(c) In addition, on September 6, 2017, Santander Brasil received a payment order in an amount of €1,603.00 in favor of a Brazilian recipient from an entity based in Turkey. Upon receipt of the supporting documentation, Santander Brasil became aware of the fact that the ultimate payer was actually Iran Water and Electrical Equipments Engineering Co., an entity based in Iran and controlled by the Iranian government. Santander Brasil therefore declined to process the transaction. The intended recipient of the funds obtained an order from the Court of Justice of the State of São Paulo (Tribunal de Justiça Estado de São Paulo) requiring Santander Brasil to process the payment. Santander Brasil complied with the court order and processed the payment accordingly. Revenues and profits generated by Santander Brasil on this transaction were negligible relative to the overall profits of Santander.
The Santander Group also has certain legacy performance guarantees for the benefit of Bank Sepah and Bank Mellat (standby(stand-by letters of credit to guarantee the obligations - either under tender documents or under contracting agreements - of contractors who participated in public bids in Iran) that were in place prior to April 27, 2007.
In the aggregate, all of the transactions described above resulted in gross revenues and net profits in the three-month and six-month periods ended June 30, 2017first quarter of 2018, which were negligible relative to the overall revenues and profits of Santander. Santander has undertaken significant steps to withdraw from the Iranian market, such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit-takingdeposit- taking from Iranian entities orand issuing export letters of credit, except for the legacy transactions described above. The GroupSantander is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). Accordingly,As such, Santander 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) of the Exchange Act.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
RESULTS OF OPERATIONS
On July 1, 2016, ownership of several Santander subsidiaries, including Santander BanCorp, BSI, SIS and SSLLC, were transferred to the Company. As these entities were and are solely owned and controlled by Santander prior to and after July 1, 2016, in accordance with ASC 805, the transaction has been accounted for under the common control guidance, which requires the Company to recognize the assets and liabilities transferred at their historical cost of the transferring entity at the date of the transfer. Additionally, as this transaction represents a change in reporting entity, the guidance requires retrospective combination of the entities for all periods presented in these financial statements as if the combination had been in effect since inception of common control.
RESULTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30,MARCH 31, 2018 AND 2017 AND 2016
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| Three-Month Period Ended June 30, | | Six-Month Period Ended June 30, | | QTD Change | | YTD Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Dollar increase/(decrease) | | Percentage | | Dollar increase/(decrease) | | Percentage |
| (in thousands) | | (dollars in thousands) |
Net interest income | $ | 1,641,749 |
| | $ | 1,664,886 |
| | $ | 3,244,313 |
| | $ | 3,360,690 |
| | $ | (23,137 | ) | | (1.4 | )% | | $ | (116,377 | ) | | (3.5 | )% |
Provision for credit losses | (604,768 | ) | | (613,767 | ) | | (1,340,214 | ) | | (1,512,229 | ) | | (8,999 | ) | | (1.5 | )% | | (172,015 | ) | | (11.4 | )% |
Total non-interest income | 728,947 |
| | 720,541 |
| | 1,457,390 |
| | 1,417,718 |
| | 8,406 |
| | 1.2 | % | | 39,672 |
| | 2.8 | % |
General and administrative expenses | (1,341,636 | ) | | (1,264,872 | ) | | (2,651,475 | ) | | (2,490,254 | ) | | 76,764 |
| | 6.1 | % | | 161,221 |
| | 6.5 | % |
Other expenses | (44,546 | ) | | (78,118 | ) | | (87,622 | ) | | (158,711 | ) | | (33,572 | ) | | (43.0 | )% | | (71,089 | ) | | (44.8 | )% |
Income before income taxes | 379,746 |
| | 428,670 |
| | 622,392 |
|
| 617,214 |
| | (48,924 | ) | | (11.4 | )% | | 5,178 |
| | 0.8 | % |
Income tax provision | (91,983 | ) | | (153,256 | ) | | (170,920 | ) | | (232,117 | ) | | (61,273 | ) | | (40.0 | )% | | (61,197 | ) | | (26.4 | )% |
Net income(1) | $ | 287,763 |
| | $ | 275,414 |
| | $ | 451,472 |
| | $ | 385,097 |
| | $ | 12,349 |
| | 4.5 | % | | $ | 66,375 |
| | 17.2 | % |
(1)Includes non-controlling interest ("NCI"). |
| | | | | | | | | | | | | | | |
| | Three-Month Period Ended March 31, | | YTD Change |
(dollars in thousands) | | 2018 | | 2017 | | Dollar | | Percentage |
Net interest income | | $ | 1,495,950 |
| | $ | 1,602,565 |
| | $ | (106,615 | ) | | (6.7 | )% |
Provision for credit losses | | (502,534 | ) | | (735,445 | ) | | 232,911 |
| | 31.7 | % |
Total non-interest income | | 803,364 |
| | 728,418 |
| | 74,946 |
| | 10.3 | % |
General and administrative expenses | | (1,405,662 | ) | | (1,309,816 | ) | | (95,846 | ) | | (7.3 | )% |
Other expenses | | (37,862 | ) | | (43,076 | ) | | 5,214 |
| | 12.1 | % |
Income before income taxes | | 353,256 |
|
| 242,646 |
| | 110,610 |
| | 45.6 | % |
Income tax provision (benefit) | | 95,321 |
| | 78,937 |
| | 16,384 |
| | (20.8 | )% |
Net income | | 257,935 |
| | 163,709 |
| | 94,226 |
| | 57.6 | % |
Net income attributable to NCI | | 74,397 |
| | 50,628 |
| | 23,769 |
| | 46.9 | % |
Net income attributable to SHUSA | | $ | 183,538 |
| | $ | 113,081 |
| | $ | 70,457 |
| | 62.3 | % |
The Company reported pre-tax income of $379.7 million and $622.4$353.3 million for the three-month and six-month periodsperiod ended June 30, 2017,March 31, 2018, compared to a pre-tax income of $428.7 million and $617.2$242.6 million for the three-month and six-month periodsperiod ended June 30, 2016.March 31, 2017. Factors contributing to these changesthis increase were as follows:
Net interest income decreased $23.1 million and $116.4$106.6 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016. These decreases werefirst quarter of 2017. This decrease was primarily due to a decrease in interest income earned on loans due to declining yields on consumer loans.
loans and an increase in interest expense on Other borrowings due to the rates paid on new debt issuances.
The provision for credit losses decreased $9.0 million and $172.0$232.9 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016. These decreases werefirst quarter of 2017. This decrease was primarily due to activitya decline in loan balances, improved credit performance and stable recovery rates for the RIC and auto loan portfolio and the related provisions for these portfolios.a decrease in the Corporate Banking provision and Personal Unsecured Loans and Credit Cards as well as a decrease in the total average loans held by SHUSA.
Middle Market Commercial Real Estate ("CRE") portfolio provisions.
Total non-interest income increased $8.4 million and $39.7$74.9 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periodsfirst quarter of 2016. These increases were2017. This increase was primarily indue to lease income associated with the continued growth of the lease portfolio. This wasportfolio, an increase in gain on sale of assets coming off lease, and an increase in the gain on sale of Bank branches. These were offset by a decrease in net gains recognized on investment securities in the three-monthconsumer and six-month periods ended June 30, 2017, and a decrease in consumercommercial loan fees due to thea reduction ofin loans serviced by the Company.
Company for the three-month period ended March 31, 2018.
Total general and administrative expenses increased $76.8 million and $161.2$95.8 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016. These increases werefirst quarter of 2017. This increase was primarily due to an increase in lease depreciation expense due to the growth of the Company's leased vehicle portfolio and an increase in compensation expense due to employee headcount ,expense. These increases were offset by a decrease in outside service fees.
costs for consulting and processing services and a decrease in loan servicing expense.
Other expenses decreased $33.6 million and $71.1$5.2 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding period in 2016.first quarter of 2017. This was primarily due to a decrease in expenses associated with loss on debt repurchases.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The income tax provision decreased $61.3 million and $61.2increased $16.4 million for the three-month and six-month periodsperiod ended June 30, 2017,March 31, 2018 compared to the corresponding periodsfirst quarter of 2017. There was an increase in 2016. These decreases were primarilythe income tax provision as a result of the increase in income before income tax provision partially offset by a decrease in the effective tax rate for the three-month period ended March 31, 2018 due to discretethe reduction in the Federal corporate income tax benefits recognized.rate provided for by the TCJA as enacted on December 22, 2017 and effective January 1, 2018.
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CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS |
| THREE-MONTH PERIODS ENDED JUNE 30, 2017 AND 2016 |
| 2017 (1) | | 2016 (1) | | Interest | Change due to |
| Average Balance | | Interest | | Yield/ Rate(2) | | Average Balance | | Interest | | Yield/ Rate(2) | | Increase/(Decrease) | Volume | Rate |
| (dollars in thousands) |
EARNING ASSETS | | | | | | | | | | | | | | | |
INVESTMENTS AND INTEREST EARNING DEPOSITS | $ | 26,612,518 |
| | $ | 130,527 |
| | 1.96 | % | | $ | 30,666,476 |
| | $ | 104,140 |
| | 1.36 | % | | $ | 26,387 |
| $ | (11,176 | ) | $ | 37,563 |
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LOANS(3): | | | | | | | | | | | | | | | |
Commercial loans | 33,236,428 |
| | 307,791 |
| | 3.70 | % | | 38,159,917 |
| | 306,353 |
| | 3.21 | % | | 1,438 |
| (7,572 | ) | 9,010 |
|
Multifamily | 8,337,231 |
| | 81,807 |
| | 3.92 | % | | 9,215,850 |
| | 83,823 |
| | 3.64 | % | | (2,016 | ) | (11,622 | ) | 9,606 |
|
Total commercial loans | 41,573,659 |
| | 389,598 |
| | 3.75 | % | | 47,375,767 |
| | 390,176 |
| | 3.29 | % | | (578 | ) | (19,194 | ) | 18,616 |
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Consumer loans: | | | | | | | | | | | | | | | |
Residential mortgages | 8,123,344 |
| | 81,519 |
| | 4.01 | % | | 7,807,570 |
| | 79,009 |
| | 4.05 | % | | 2,510 |
| 3,162 |
| (652 | ) |
Home equity loans and lines of credit | 5,929,744 |
| | 57,417 |
| | 3.87 | % | | 6,100,806 |
| | 55,463 |
| | 3.64 | % | | 1,954 |
| (1,479 | ) | 3,433 |
|
Total consumer loans secured by real estate | 14,053,088 |
| | 138,936 |
| | 3.95 | % | | 13,908,376 |
| | 134,472 |
| | 3.87 | % | | 4,464 |
| 1,683 |
| 2,781 |
|
RICs and auto loans | 27,007,022 |
| | 1,169,140 |
| | 17.32 | % | | 26,806,137 |
| | 1,230,443 |
| | 18.36 | % | | (61,303 | ) | 9,301 |
| (70,604 | ) |
Personal unsecured | 2,427,266 |
| | 155,043 |
| | 25.55 | % | | 2,184,198 |
| | 149,090 |
| | 27.30 | % | | 5,953 |
| 14,073 |
| (8,120 | ) |
Other consumer(4) | 716,140 |
| | 16,201 |
| | 9.05 | % | | 941,490 |
| | 21,088 |
| | 8.96 | % | | (4,887 | ) | (5,100 | ) | 213 |
|
Total consumer | 44,203,516 |
| | 1,479,320 |
| | 13.39 | % | | 43,840,201 |
| | 1,535,093 |
| | 14.01 | % | | (55,773 | ) | 19,957 |
| (75,730 | ) |
Total loans | 85,777,175 |
| | 1,868,918 |
| | 8.72 | % | | 91,215,968 |
| | 1,925,269 |
| | 8.44 | % | | (56,351 | ) | 763 |
| (57,114 | ) |
Allowance for loan and lease losses (5) | (3,937,680 | ) | | — |
| | — | % | | (3,710,922 | ) | | — |
| | — | % | | | | |
NET LOANS | 81,839,495 |
| | 1,868,918 |
| | 9.13 | % | | 87,505,046 |
| | 1,925,269 |
| | 8.80 | % | | (56,351 | ) | 763 |
| (57,114 | ) |
Intercompany investments | 14,640 |
| | 232 |
| | 6.34 | % | | 14,640 |
| | 226 |
| | 6.17 | % | | 6 |
| — |
| 6 |
|
TOTAL EARNING ASSETS | 108,466,653 |
| | 1,999,677 |
| | 7.37 | % | | 118,186,162 |
| | 2,029,635 |
| | 6.87 | % | | (29,958 | ) | (10,413 | ) | (19,545 | ) |
Other assets(6) | 26,096,475 |
| | | | | | 26,118,517 |
| | | | | | | | |
TOTAL ASSETS | $ | 134,563,128 |
| | | | | | $ | 144,304,679 |
| | | | | | | | |
INTEREST BEARING FUNDING LIABILITIES | | | | | | | | | | | | | | | |
Deposits and other customer related accounts: | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 10,121,592 |
| | $ | 4,846 |
| | 0.19 | % | | $ | 12,317,235 |
| | $ | 14,614 |
| | 0.47 | % | | $ | (9,768 | ) | $ | (2,248 | ) | $ | (7,520 | ) |
Savings | 6,025,607 |
| | 2,815 |
| | 0.19 | % | | 6,011,086 |
| | 2,933 |
| | 0.20 | % | | (118 | ) | 7 |
| (125 | ) |
Money market | 25,789,677 |
| | 31,675 |
| | 0.49 | % | | 24,751,346 |
| | 31,397 |
| | 0.51 | % | | 278 |
| 1,145 |
| (867 | ) |
Certificates of deposit ("CDs") | 7,003,835 |
| | 19,488 |
| | 1.11 | % | | 9,974,092 |
| | 24,410 |
| | 0.98 | % | | (4,922 | ) | (9,112 | ) | 4,190 |
|
TOTAL INTEREST-BEARING DEPOSITS | 48,940,711 |
| | 58,824 |
| | 0.48 | % | | 53,053,759 |
| | 73,354 |
| | 0.55 | % | | (14,530 | ) | (10,208 | ) | (4,322 | ) |
BORROWED FUNDS: | | | | | | | | | | | | | | | |
Federal Home Loan Bank ("FHLB") advances, federal funds, and repurchase agreements | 4,292,308 |
| | 17,637 |
| | 1.64 | % | | 10,951,209 |
| | 34,785 |
| | 1.27 | % | | (17,148 | ) | (33,160 | ) | 16,012 |
|
Other borrowings | 37,780,229 |
| | 281,235 |
| | 2.98 | % | | 38,990,435 |
| | 256,384 |
| | 2.63 | % | | 24,851 |
| (7,635 | ) | 32,486 |
|
TOTAL BORROWED FUNDS (7) | 42,072,537 |
| | 298,872 |
| | 2.84 | % | | 49,941,644 |
| | 291,169 |
| | 2.33 | % | | 7,703 |
| (40,795 | ) | 48,498 |
|
TOTAL INTEREST-BEARING FUNDING LIABILITIES | 91,013,248 |
| | 357,696 |
| | 1.57 | % | | 102,995,403 |
| | 364,523 |
| | 1.42 | % | | (6,827 | ) | (51,003 | ) | 44,176 |
|
Noninterest bearing demand deposits | 15,572,982 |
| | | | | | 13,679,415 |
| | | | | | | | |
Other liabilities(8) | 4,960,554 |
| | | | | | 5,474,349 |
| | | | | | | | |
TOTAL LIABILITIES | 111,546,784 |
| | | | | | 122,149,167 |
| | | | | | | | |
STOCKHOLDER’S EQUITY | 23,016,344 |
| | | | | | 22,155,512 |
| | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 134,563,128 |
| | | | | | $ | 144,304,679 |
| | | | | | | | |
| | | | | | | | | | | | | | | |
NET INTEREST SPREAD (9) | | | | | 5.80 | % | | | | | | 5.45 | % | | | | |
NET INTEREST MARGIN (10) | | | | | 6.06 | % | | | | | | 5.64 | % | | | | |
NET INTEREST INCOME | | | $ | 1,641,749 |
| | | | | | $ | 1,664,886 |
| | | | | | |
| |
(1) | Average balances are based on daily averages when available. When daily averages are unavailable, mid-month averages are substituted. |
| |
(2) | Yields calculated using taxable equivalent net interest income. |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| |
(3) | Interest on loans includes amortization of premiums and discounts on purchased loan portfolios and amortization of deferred loan fees, net of origination costs. Average loan balances includes non-accrual loans and loans held for sale ("LHFS"). |
| |
(4) | Other consumer primarily includes recreational vehicle ("RV") and marine loans. |
| |
(5) | Refer to Note 4 to the Condensed Consolidated Financial Statements for further discussion. |
| |
(6) | Other assets primarily includes goodwill and intangibles, premise and equipment, net deferred tax assets, equity method investments, bank-owned life insurance ("BOLI"), accrued interest receivable, derivative assets, miscellaneous receivables, prepaid expenses and MSRs. Refer to Note 8 to the Condensed Consolidated Financial Statements for further discussion. |
| |
(7) | Refer to Note 10 to the Condensed Consolidated Financial Statements for further discussion. |
| |
(8) | Other liabilities primarily includes accounts payable and accrued expenses, derivative liabilities, net deferred tax liabilities and the unfunded lending commitments liability. |
| |
(9) | Represents the difference between the yield on total earning assets and the cost of total funding liabilities. |
| |
(10) | Represents annualized, taxable equivalent net interest income divided by average interest-earning assets. |
104Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS |
| SIX-MONTH PERIODS ENDED JUNE 30, 2017 AND 2016 |
| 2017 (1) | | 2016 (1) | | Interest | Change due to |
| Average Balance | | Interest | | Yield/ Rate(2) | | Average Balance | | Interest | | Yield/ Rate(2) | | Increase/(Decrease) | Volume | Rate |
| (dollars in thousands) |
EARNING ASSETS | | | | | | | | | | | | | | | |
INVESTMENTS AND INTEREST EARNING DEPOSITS | $ | 27,258,866 |
| | $ | 247,182 |
| | 1.81 | % | | $ | 30,840,755 |
| | $ | 221,063 |
| | 1.43 | % | | $ | 26,119 |
| $ | (20,367 | ) | $ | 46,486 |
|
LOANS(3): | | | | | | | | | | | | |
|
|
|
Commercial loans | 33,936,472 |
| | 605,400 |
| | 3.57 | % | | 37,623,876 |
| | 609,247 |
| | 3.24 | % | | (3,847 | ) | 103,336 |
| (107,183 | ) |
Multifamily | 8,441,496 |
| | 158,005 |
| | 3.74 | % | | 9,280,102 |
| | 167,764 |
| | 3.62 | % | | (9,759 | ) | (16,042 | ) | 6,283 |
|
Total commercial loans | 42,377,968 |
| | 763,405 |
| | 3.60 | % | | 46,903,978 |
| | 777,011 |
| | 3.31 | % | | (13,606 | ) | 87,294 |
| (100,900 | ) |
Consumer loans: | | | | | | | | | | | | | | | |
Residential mortgages | 8,141,769 |
| | 162,254 |
| | 3.99 | % | | 7,779,605 |
| | 158,552 |
| | 4.08 | % | | 3,702 |
| 7,069 |
| (3,367 | ) |
Home equity loans and lines of credit | 5,949,926 |
| | 111,898 |
| | 3.76 | % | | 6,115,332 |
| | 110,751 |
| | 3.62 | % | | 1,147 |
| (2,722 | ) | 3,869 |
|
Total consumer loans secured by real estate | 14,091,695 |
| | 274,152 |
| | 3.89 | % | | 13,894,937 |
| | 269,303 |
| | 3.88 | % | | 4,849 |
| 4,347 |
| 502 |
|
RICs and auto loans | 26,957,954 |
| | 2,318,294 |
| | 17.20 | % | | 26,430,806 |
| | 2,458,806 |
| | 18.61 | % | | (140,512 | ) | 50,368 |
| (190,880 | ) |
Personal unsecured | 2,360,993 |
| | 318,566 |
| | 26.99 | % | | 2,421,380 |
| | 317,344 |
| | 26.21 | % | | 1,222 |
| (6,644 | ) | 7,866 |
|
Other consumer(4) | 743,321 |
| | 33,439 |
| | 9.00 | % | | 971,635 |
| | 43,652 |
| | 8.99 | % | | (10,213 | ) | (10,271 | ) | 58 |
|
Total consumer | 44,153,963 |
| | 2,944,451 |
| | 13.34 | % | | 43,718,758 |
| | 3,089,105 |
| | 14.13 | % | | (144,654 | ) | 37,800 |
| (182,454 | ) |
Total loans | 86,531,931 |
| | 3,707,856 |
| | 8.57 | % | | 90,622,736 |
| | 3,866,116 |
| | 8.53 | % | | (158,260 | ) | 125,094 |
| (283,354 | ) |
Allowance for loan and lease losses (5) | (3,887,986 | ) | | — |
| | — | % | | (3,520,781 | ) | | — |
| | — | % | |
|
|
|
|
|
|
NET LOANS | 82,643,945 |
| | 3,707,856 |
| | 8.97 | % | | 87,101,955 |
| | 3,866,116 |
| | 8.88 | % | | (158,260 | ) | 125,094 |
| (283,354 | ) |
Intercompany investments | 14,640 |
| | 464 |
| | 6.34 | % | | 14,640 |
| | 451 |
| | 6.16 | % | | 13 |
| — |
| 13 |
|
TOTAL EARNING ASSETS | 109,917,451 |
| | 3,955,502 |
| | 7.20 | % | | 117,957,350 |
| | 4,087,630 |
| | 6.93 | % | | (132,128 | ) | 104,727 |
| (236,855 | ) |
Other assets(6) | 26,067,158 |
| | | | | | 25,826,114 |
| | | | | | | | |
TOTAL ASSETS | $ | 135,984,609 |
| | | | | | $ | 143,783,464 |
| | | | | | | | |
INTEREST BEARING FUNDING LIABILITIES | | | | | | | | | | | | | | | |
Deposits and other customer related accounts: | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 10,482,158 |
| | $ | 10,072 |
| | 0.19 | % | | $ | 12,246,111 |
| | $ | 29,426 |
| | 0.48 | % | | $ | (19,354 | ) | $ | (3,746 | ) | $ | (15,608 | ) |
Savings | 6,014,245 |
| | 5,719 |
| | 0.19 | % | | 5,969,907 |
| | 6,126 |
| | 0.21 | % | | (407 | ) | 46 |
| (453 | ) |
Money market | 25,880,004 |
| | 64,084 |
| | 0.50 | % | | 24,652,900 |
| | 63,994 |
| | 0.52 | % | | 90 |
| 1,211 |
| (1,121 | ) |
Certificates of deposit ("CDs") | 7,699,288 |
| | 40,943 |
| | 1.06 | % | | 10,057,512 |
| | 49,301 |
| | 0.98 | % | | (8,358 | ) | (13,096 | ) | 4,738 |
|
TOTAL INTEREST-BEARING DEPOSITS | 50,075,695 |
| | 120,818 |
| | 0.48 | % | | 52,926,430 |
| | 148,847 |
| | 0.56 | % | | (28,029 | ) | (15,585 | ) | (12,444 | ) |
BORROWED FUNDS: | | | | | | | | | | | | | | | |
Federal Home Loan Bank ("FHLB") advances, federal funds, and repurchase agreements | 4,707,459 |
| | 34,055 |
| | 1.45 | % | | 11,975,247 |
| | 83,278 |
| | 1.39 | % | | (49,223 | ) | (52,721 | ) | 3,498 |
|
Other borrowings | 37,958,104 |
| | 555,852 |
| | 2.93 | % | | 38,132,892 |
| | 494,364 |
| | 2.59 | % | | 61,488 |
| (2,255 | ) | 63,743 |
|
TOTAL BORROWED FUNDS (7) | 42,665,563 |
| | 589,907 |
| | 2.77 | % | | 50,108,139 |
| | 577,642 |
| | 2.31 | % | | 12,265 |
| (54,976 | ) | 67,241 |
|
TOTAL INTEREST-BEARING FUNDING LIABILITIES | 92,741,258 |
| | 710,725 |
| | 1.53 | % | | 103,034,569 |
| | 726,489 |
| | 1.41 | % | | (15,764 | ) | (70,561 | ) | 54,797 |
|
Noninterest bearing demand deposits | 15,504,562 |
| | | | | | 13,291,231 |
| | | | | | | | |
Other liabilities(8) | 4,889,538 |
| | | | | | 5,427,730 |
| | | | | | | | |
TOTAL LIABILITIES | 113,135,358 |
| | | | | | 121,753,530 |
| | | | | | | | |
STOCKHOLDER’S EQUITY | 22,849,251 |
| | | | | | 22,029,934 |
| | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 135,984,609 |
| | | | | | $ | 143,783,464 |
| | | | | | | | |
| | | | | | | | | | | | | | | |
NET INTEREST SPREAD (9) | | | | | 5.67 | % | | | | | | 5.52 | % | | | | |
NET INTEREST MARGIN (10) | | | | | 5.90 | % | | | | | | 5.70 | % | | | | |
NET INTEREST INCOME | | | $ | 3,244,313 |
| | | | | | $ | 3,360,690 |
| | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS |
| THREE-MONTH PERIODS ENDED MARCH 31, 2018 AND 2017 |
| 2018 (1) | | 2017 (1) | | | Change due to |
(dollars in thousands) | Average Balance | | Interest | | Yield/ Rate(2) | | Average Balance | | Interest | | Yield/ Rate(2) | | Increase/(Decrease) | Volume | Rate |
EARNING ASSETS | | | | | | | | | | | | | | | |
INVESTMENTS AND INTEREST EARNING DEPOSITS | $ | 22,641,814 |
| | $ | 128,330 |
| | 2.27 | % | | $ | 27,912,404 |
| | $ | 116,655 |
| | 1.67 | % | | $ | 11,675 |
| $ | (12,934 | ) | $ | 24,609 |
|
LOANS(3): | | | | | | | | | | | | |
|
|
|
Commercial loans | 30,469,522 |
| | 305,396 |
| | 4.01 | % | | 34,644,293 |
| | 297,608 |
| | 3.44 | % | | 7,788 |
| (208,007 | ) | 215,795 |
|
Multifamily | 8,166,086 |
| | 79,234 |
| | 3.88 | % | | 8,546,919 |
| | 76,198 |
| | 3.57 | % | | 3,036 |
| (3,200 | ) | 6,236 |
|
Total commercial loans | 38,635,608 |
| | 384,630 |
| | 3.98 | % | | 43,191,212 |
| | 373,806 |
| | 3.46 | % | | 10,824 |
| (211,207 | ) | 222,031 |
|
Consumer loans: | | | | | | | | | | | | | | | |
Residential mortgages | 9,279,002 |
| | 92,576 |
| | 3.99 | % | | 8,160,399 |
| | 80,735 |
| | 3.96 | % | | 11,841 |
| 11,221 |
| 620 |
|
Home equity loans and lines of credit | 5,769,698 |
| | 61,291 |
| | 4.25 | % | | 5,970,331 |
| | 54,481 |
| | 3.65 | % | | 6,810 |
| (1,750 | ) | 8,560 |
|
Total consumer loans secured by real estate | 15,048,700 |
| | 153,867 |
| | 4.09 | % | | 14,130,730 |
| | 135,216 |
| | 3.83 | % | | 18,651 |
| 9,471 |
| 9,180 |
|
RICs and auto loans | 26,112,393 |
| | 1,038,885 |
| | 15.91 | % | | 26,908,340 |
| | 1,149,154 |
| | 17.08 | % | | (110,269 | ) | (33,257 | ) | (77,012 | ) |
Personal unsecured | 2,349,472 |
| | 159,837 |
| | 27.21 | % | | 2,293,984 |
| | 163,523 |
| | 28.51 | % | | (3,686 | ) | 4,164 |
| (7,850 | ) |
Other consumer(4) | 596,406 |
| | 10,515 |
| | 7.05 | % | | 770,804 |
| | 17,239 |
| | 8.95 | % | | (6,724 | ) | (3,469 | ) | (3,255 | ) |
Total consumer | 44,106,971 |
| | 1,363,104 |
| | 12.36 | % | | 44,103,858 |
| | 1,465,132 |
| | 13.29 | % | | (102,028 | ) | (23,091 | ) | (78,937 | ) |
Total loans | 82,742,579 |
| | 1,747,734 |
| | 8.45 | % | | 87,295,070 |
| | 1,838,938 |
| | 8.43 | % | | (91,204 | ) | (234,298 | ) | 143,094 |
|
Intercompany investments | 4,640 |
| | 43 |
| | 3.71 | % | | 14,640 |
| | 232 |
| | 6.34 | % | | (189 | ) | (118 | ) | (71 | ) |
TOTAL EARNING ASSETS | 105,389,033 |
| | 1,876,107 |
| | 7.12 | % | | 115,222,114 |
| | 1,955,825 |
| | 6.79 | % | | (79,718 | ) | (247,350 | ) | 167,632 |
|
Allowance for loan losses(5) | (3,901,549 | ) | | | | | | (3,837,740 | ) | | | | | | | | |
Other assets(6) | 27,902,385 |
| | | | | | 26,037,135 |
| | | | | | | | |
TOTAL ASSETS | $ | 129,389,869 |
| | | | | | $ | 137,421,509 |
| | | | | | | | |
INTEREST-BEARING FUNDING LIABILITIES | | | | | | | | | | | | | | | |
Deposits and other customer related accounts: | | | | | | | | | | | | | | | |
Interest-bearing demand deposits | $ | 9,287,019 |
| | $ | 7,342 |
| | 0.32 | % | | $ | 10,846,729 |
| | $ | 5,226 |
| | 0.19 | % | | $ | 2,116 |
| $ | (563 | ) | $ | 2,679 |
|
Savings | 5,827,687 |
| | 2,623 |
| | 0.18 | % | | 6,002,756 |
| | 2,902 |
| | 0.19 | % | | (279 | ) | (99 | ) | (180 | ) |
Money market | 25,327,111 |
| | 47,750 |
| | 0.75 | % | | 25,971,334 |
| | 32,409 |
| | 0.50 | % | | 15,341 |
| (801 | ) | 16,142 |
|
Certificates of deposit ("CDs") | 5,499,654 |
| | 17,709 |
| | 1.29 | % | | 8,402,468 |
| | 21,456 |
| | 1.02 | % | | (3,747 | ) | (16,028 | ) | 12,281 |
|
TOTAL INTEREST-BEARING DEPOSITS | 45,941,471 |
| | 75,424 |
| | 0.66 | % | | 51,223,287 |
| | 61,993 |
| | 0.48 | % | | 13,431 |
| (17,491 | ) | 30,922 |
|
BORROWED FUNDS: | | | | | | | | | | | | | | | |
Federal Home Loan Bank ("FHLB") advances, federal funds, and repurchase agreements | 1,714,444 |
| | 9,581 |
| | 2.24 | % | | 5,127,222 |
| | 16,418 |
| | 1.28 | % | | (6,837 | ) | 53,932 |
| (60,769 | ) |
Other borrowings | 37,307,453 |
| | 295,109 |
| | 3.16 | % | | 38,137,956 |
| | 274,617 |
| | 2.88 | % | | 20,492 |
| (5,914 | ) | 26,406 |
|
TOTAL BORROWED FUNDS (7) | 39,021,897 |
| | 304,690 |
| | 3.12 | % | | 43,265,178 |
| | 291,035 |
| | 2.69 | % | | 13,655 |
| 48,018 |
| (34,363 | ) |
TOTAL INTEREST-BEARING FUNDING LIABILITIES | 84,963,368 |
| | 380,114 |
| | 1.79 | % | | 94,488,465 |
| | 353,028 |
| | 1.49 | % | | 27,086 |
| 30,527 |
| (3,441 | ) |
Noninterest bearing demand deposits | 15,337,560 |
| | | | | | 15,435,381 |
| | | | | | | | |
Other liabilities(8) | 5,169,285 |
| | | | | | 4,817,268 |
| | | | | | | | |
TOTAL LIABILITIES | 105,470,213 |
| | | | | | 114,741,114 |
| | | | | | | | |
STOCKHOLDER’S EQUITY | 23,919,656 |
| | | | | | 22,680,395 |
| | | | | | | | |
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY | $ | 129,389,869 |
| | | | | | $ | 137,421,509 |
| | | | | | | | |
| | | | | | | | | | | | | | | |
NET INTEREST SPREAD (9) | | | | | 5.33 | % | | | | | | 5.30 | % | | | | |
NET INTEREST MARGIN (10) | | | | | 5.68 | % | | | | | | 5.56 | % | | | | |
NET INTEREST INCOME | | | $ | 1,495,950 |
| | | | | | $ | 1,602,565 |
| | | | | | |
| |
(1) | Average balances are based on daily averages when available. When daily averages are unavailable, mid-month averages are substituted. |
| |
(2) | Yields calculated using taxable equivalent net interest income. |
| |
(3) | Interest on loans includes amortization of premiums and discounts on purchased loan portfolios and amortization of deferred loan fees, net of origination costs. Average loan balances includes non-accrual loans and loans held for sale ("LHFS"). |
| |
(4) | Other consumer primarily includes recreational vehicle ("RV") and marine loans. |
| |
(5) | Refer to Note 4 to the Condensed Consolidated Financial Statements for further discussion. |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
| |
(6) | Other assets primarily includes goodwill and intangibles, premise and equipment, net deferred tax assets, equity method investments, bank-owned life insurance ("BOLI"), accrued interest receivable, derivative assets, miscellaneous receivables, prepaid expenses and MSRs.mortgage servicing rights ("MSRs"). Refer to Note 8 to the Condensed Consolidated Financial Statements for further discussion. |
| |
(7) | Refer to Note 10 to the Condensed Consolidated Financial Statements for further discussion. |
| |
(8) | Other liabilities primarily includes accounts payable and accrued expenses, derivative liabilities, net deferred tax liabilities and the unfunded lending commitments liability. |
| |
(9) | Represents the difference between the yield on total earning assets and the cost of total funding liabilities. |
| |
(10) | Represents annualized, taxable equivalent net interest income divided by average interest-earning assets. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
NET INTEREST INCOME
| | | Three-Month Period Ended June 30, | | Six-Month Period Ended June 30, | | QTD Change | | YTD Change | | Three-Month Period Ended March 31, | | YTD Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Dollar increase/(decrease) | | Percentage | | Dollar increase/(decrease) | | Percentage | |
| (in thousands) | | (dollars in thousands) | |
(dollars in thousands) | | | 2018 | | 2017 | | Dollar increase/(decrease) | | Percentage |
INTEREST INCOME: | | | | | | | | | | | | | | | | | | | | | | | |
Interest-earning deposits | $ | 20,476 |
| | $ | 14,473 |
| | $ | 38,910 |
| | $ | 28,507 |
| | $ | 6,003 |
| | 41.5 | % | | $ | 10,403 |
| | 36.5 | % | | $ | 32,513 |
| | $ | 18,433 |
| | $ | 14,080 |
| | 76.4 | % |
Investments available-for-sale | 95,015 |
| | 81,268 |
| | 176,441 |
| | 174,973 |
| | 13,747 |
| | 16.9 | % | | 1,468 |
| | 0.8 | % | |
Investments held-to-maturity | 10,011 |
| | — |
| | 20,643 |
| | — |
| | 10,011 |
| | 100% |
| | 20,643 |
| | 100% |
| |
Investments available-for-sale ("AFS") | | | 73,505 |
| | 81,427 |
| | (7,922 | ) | | (9.7 | )% |
Investments held-to-maturity ("HTM") | | | 17,064 |
| | 10,632 |
| | 6,432 |
| | 60.5 | % |
Other investments | 5,025 |
| | 8,399 |
| | 11,188 |
| | 17,583 |
| | (3,374 | ) | | (40.2 | )% | | (6,395 | ) | | (36.4 | )% | | 5,248 |
| | 6,163 |
| | (915 | ) | | (14.8 | )% |
Total interest income on investment securities and interest-earning deposits | 130,527 |
| | 104,140 |
| | 247,182 |
| | 221,063 |
| | 26,387 |
| | 25.3 | % | | 26,119 |
| | 11.8 | % | | 128,330 |
| | 116,655 |
| | 11,675 |
| | 10.0 | % |
Interest on loans | 1,868,918 |
| | 1,925,269 |
| | 3,707,856 |
| | 3,866,116 |
| | (56,351 | ) | | (2.9 | )% | | (158,260 | ) | | (4.1 | )% | | 1,747,734 |
| | 1,838,938 |
| | (91,204 | ) | | (5.0 | )% |
Total Interest Income | 1,999,445 |
| | 2,029,409 |
| | 3,955,038 |
| | 4,087,179 |
| | (29,964 | ) | | (1.5 | )% | | (132,141 | ) | | (3.2 | )% | | 1,876,064 |
| | 1,955,593 |
| | (79,529 | ) | | (4.1 | )% |
INTEREST EXPENSE: | | | | | | | | |
| | | |
| |
| | | | | |
| |
|
Deposits and customer accounts | 58,824 |
| | 73,354 |
| | 120,818 |
| | 148,847 |
| | (14,530 | ) | | (19.8 | )% | | (28,029 | ) | | (18.8 | )% | | 75,424 |
| | 61,993 |
| | 13,431 |
| | 21.7 | % |
Borrowings and other debt obligations | 298,872 |
| | 291,169 |
| | 589,907 |
| | 577,642 |
| | 7,703 |
| | 2.6 | % | | 12,265 |
| | 2.1 | % | | 304,690 |
| | 291,035 |
| | 13,655 |
| | 4.7 | % |
Total Interest Expense | 357,696 |
| | 364,523 |
| | 710,725 |
| | 726,489 |
| | (6,827 | ) | | (1.9 | )% | | (15,764 | ) | | (2.2 | )% | | 380,114 |
| | 353,028 |
| | 27,086 |
| | 7.7 | % |
NET INTEREST INCOME | $ | 1,641,749 |
| | $ | 1,664,886 |
| | $ | 3,244,313 |
| | $ | 3,360,690 |
| | $ | (23,137 | ) | | (1.4 | )% | | $ | (116,377 | ) | | (3.5 | )% | | $ | 1,495,950 |
| | $ | 1,602,565 |
| | $ | (106,615 | ) | | (6.7 | )% |
| | | | | | | | |
| | | | | | | |
Net interest income decreased $23.1 million and $116.4$106.6 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016. These overall decreases werefirst quarter of 2017. This decrease was primarily due to a decrease in yield on interest income earned on loans and an increase in interest expense on borrowings due to lowerhigher borrowing levels and lower yield rates.rate.
Interest Income on Investment Securities and Interest-Earning Deposits
Interest income on investment securities and interest-earning deposits increased $26.4 million and $26.1$11.7 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016.first quarter of 2017. The average balance of investment securities and interest-earning deposits for the six-monththree-month period ended June 30, 2017March 31, 2018 was $27.3$22.6 billion with an average yield of 1.81%2.27%, compared to an average balance of $30.8$27.9 billion with an average yield of 1.43%1.67% for the corresponding period in 2016.first quarter of 2017. The increase in interest income on investment securities and interest-earning deposits for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 was primarily attributable to an increase of $10.0 million and $20.6$6.4 million in interest income on investments held-to-maturityHTM due to increased volume, and an increase of $13.7 million and $1.5$14.1 million in interest income on investments available-for-saleinterest-earning deposits due to an increased yield ratesof 2.19% for the three-month period ended March 31, 2018 compared to 0.93% for the corresponding periods in 2016.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
first quarter of 2017.
Interest Income on Loans
Interest income on loans decreased $56.4 million and $158.3$91.2 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periodsfirst quarter of 2017, primarily due to declines in 2016.RIC rates, which comprised $110.3 million of the decrease. The average balance of total loans was $86.5$82.7 billion with an average yield of 8.57%8.45% for the six-monththree-month period ended June 30, 2017,March 31, 2018, compared to $90.6$87.3 billion with an average yield of 8.53%8.43% for the corresponding period in 2016.first quarter of 2017. The decrease in the average balance of total loans of $4.1$4.6 billion was primarily due to a decline in the volume inbalance of the commercial loan portfolio. The average balance of commercial loans was $42.4$38.6 billion with an average yield of 3.60%3.98% for the six-monththree-month period ended June 30, 2017,March 31, 2018, compared to $46.9$43.2 billion with an average yield of 3.31%3.46% for the corresponding period in 2016. The decrease in interest income on loans was primarily due to the activity in the RIC and auto loan portfolio. Interest income on the RIC and auto loan portfolio decreased $61.3 million and $140.5 million for the three-month and six-month periods ended June 30, 2017 due to a drop in interest rates. The average interest ratefirst quarter of the portfolio decreased from 18.61% in 2016 to 17.20% in 2017.
Interest Expense on Deposits and Related Customer Accounts
Interest expense on deposits and related customer accounts decreased $14.5 million and $28.0increased $13.4 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periodsfirst quarter of 2017, primarily due to a increase in 2016.average cost of interest rates. The average balance of total interest-bearing deposits was $50.1$45.9 billion with an average cost of 0.66% for the three-month period ended March 31, 2018 compared to an average balance of $51.2 billion with an average cost of 0.48% for the six-month period ended June 30, 2017, compared to an average balancefirst quarter of $52.9 billion with an average cost2017.
Item 2. Management’s Discussion and Analysis of 0.56% for the corresponding period in 2016. The decrease in interest expense on depositsFinancial Condition and customer-related accounts during the six-month period ended June 30, 2017 was primarily due to the decrease in interest ratesResults of deposits during the year.Operations
Interest Expense on Borrowed Funds
Interest expense on borrowed funds increased $7.7 million and $12.3$13.7 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016.first quarter of 2017. The increase in interest expense on borrowed funds was due to an increase in the interest paid at higher rate paid forduring the three-month and six-month periodsperiod ended June 30, 2017.March 31, 2018. The average balance of total borrowings was $42.1 billion and $42.7$39.0 billion with an average cost of 2.84% and 2.77%3.12% for the three-month and six-month periodsperiod ended June 30, 2017, respectively,March 31, 2018, compared to an average balance of $49.9 billion and $50.1$43.3 billion with an average cost of 2.33% and 2.31%2.69% for the corresponding periods in 2016.first quarter of 2017. The average balance of borrowed funds decreased from June 30, 2016March 31, 2017 to June 30, 2017,March 31, 2018, primarily due to the decrease in FHLBFederal Home Loan Bank ("FHLB") advances as a result of maturities and terminations. The increase in interest expense on borrowed funds is due to the Company issuing $2.3 billion of long-term debt at higher fixed rates in 2017 to increase liquidity and to meet the FRB TLAC requirement.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| |
Item 2. | 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 three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 was $604.8$502.5 million, and $1.3 billion, compared to $613.8$735.4 million and $1.5 billion for the corresponding periods in 2016. This2017. The decrease for the six-monththree-month period ended June 30, 2017March 31, 2018 was primarily relateddue to decreases in the buildup of theoverall loan portfolio resulting in a decreased allowance for loan and lease losses ("ALLL") coverage ratio throughout 2016, mainly on the RIC and auto loan portfolio. The provision continues to reflect the growth ofa decline in originations, stabilizing credit performance for non-troubled debt restructuring ("TDR") loans, and recovery rates for the RIC and auto loan portfolio.
| | | Three-Month Period Ended June 30, | | Six-Month Period Ended June 30, | | Three-Month Period Ended March 31, | | YTD Change |
| 2017 | | 2016 | | 2017 | | 2016 | |
| (in thousands) | |
(in thousands) | | | 2018 | | 2017 | | Dollar | Percentage |
ALLL, beginning of period | $ | 3,922,863 |
| | $ | 3,567,864 |
| | $ | 3,814,464 |
| | $ | 3,246,145 |
| | $ | 3,911,575 |
| | $ | 3,814,464 |
| | $ | 97,111 |
| 2.5 | % |
Charge-offs: | | | | | | | | | | | | | | |
Commercial | (60,514 | ) | | (33,604 | ) | | (86,687 | ) | | (76,613 | ) | | (32,960 | ) | | (26,173 | ) | | (6,787 | ) | 25.9 | % |
Consumer | (1,128,919 | ) | | (1,032,129 | ) | | (2,366,199 | ) | | (2,174,289 | ) | | (1,218,936 | ) | | (1,237,280 | ) | | 18,344 |
| (1.5 | )% |
Total charge-offs | (1,189,433 | ) | | (1,065,733 | ) | | (2,452,886 | ) | | (2,250,902 | ) | | (1,251,896 | ) | | (1,263,453 | ) | | 11,557 |
| (0.9 | )% |
Recoveries: | | | | | | | | | | | | | | |
Commercial | 9,056 |
| | 21,373 |
| | 19,635 |
| | 47,280 |
| | 10,006 |
| | 10,580 |
| | (574 | ) | (5.4 | )% |
Consumer | 599,437 |
| | 612,110 |
| | 1,223,374 |
| | 1,219,176 |
| | 661,744 |
| | 623,937 |
| | 37,807 |
| 6.1 | % |
Total recoveries | 608,493 |
| | 633,483 |
| | 1,243,009 |
| | 1,266,456 |
| | 671,750 |
| | 634,517 |
| | 37,233 |
| 5.9 | % |
Charge-offs, net of recoveries | (580,940 | ) | | (432,250 | ) | | (1,209,877 | ) | | (984,446 | ) | | (580,146 | ) | | (628,936 | ) | | 48,790 |
| (7.8 | )% |
Provision for loan and lease losses (1) | 611,685 |
| | 630,273 |
| | 1,349,021 |
| | 1,504,188 |
| | 521,780 |
| | 737,335 |
| | (215,555 | ) | (29.2 | )% |
ALLL, end of period | $ | 3,953,608 |
| | $ | 3,765,887 |
| | $ | 3,953,608 |
| | $ | 3,765,887 |
| | $ | 3,853,209 |
| | $ | 3,922,863 |
| | $ | (69,654 | ) | (1.8 | )% |
Reserve for unfunded lending commitments, beginning of period | $ | 120,396 |
| | $ | 173,568 |
| | $ | 122,419 |
| | $ | 149,020 |
| | $ | 109,111 |
| | $ | 122,419 |
| | $ | (13,308 | ) | (10.9 | )% |
Provision for unfunded lending commitments (1) | (6,917 | ) | | (16,506 | ) | | (8,807 | ) | | 8,041 |
| |
Release of reserves for unfunded lending commitments (1) | | | (19,246 | ) | | (1,890 | ) | | (17,356 | ) | 918.3 | % |
Loss on unfunded lending commitments | (1,668 | ) | | (166 | ) | | (1,801 | ) | | (165 | ) | | — |
| | (133 | ) | | 133 |
| (100.0 | )% |
Reserve for unfunded lending commitments, end of period | 111,811 |
| | 156,896 |
| | 111,811 |
| | 156,896 |
| | 89,865 |
| | 120,396 |
| | (30,531 | ) | (25.4 | )% |
Total allowance for credit losses ("ACL"), end of period | $ | 4,065,419 |
| | $ | 3,922,783 |
| | $ | 4,065,419 |
| | $ | 3,922,783 |
| | $ | 3,943,074 |
| | $ | 4,043,259 |
| | $ | (100,185 | ) | (2.5 | )% |
(1) The provision for credit losses in the Condensed Consolidated Statement of Operations is the sum of the total provision for loan and lease losses and the provision for unfunded lending commitments.
| |
(1) | The provision for credit losses in the Condensed Consolidated Statement of Operations is the sum of the total provision for loan and lease losses and the provision for unfunded lending commitments. |
The Company's net charge-offs increased $148.7decreased $48.8 million for the three-month period ended June 30, 2017, and increased $225.4 million for the six-month period ended June 30, 2017March 31, 2018 compared to the corresponding periodsperiod in 2016.2017.
Consumer charge-offs decreased $18.3 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017. The decrease was comprised of a $15.3 million decrease in consumer auto loan charge-offs, and a $5.3 million increase in consumer loans held in Puerto Rico offset by an $2.2 million increase in home mortgage charge-offs.
Consumer recoveries increased $37.8 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017. This increase was comprised of a $38.7 million increase in consumer auto loan recoveries, offset by a $1.2 million decrease in other consumer loan recoveries.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Consumer net charge-offs as a percentage of average consumer loans were 1.3% for the three-month period ended March 31, 2018, compared to 1.4% for the corresponding period in 2017.
Commercial charge-offs increased $26.9 million and $10.1$6.8 million for the three-month and six-month periodsperiod ended June 30, 2017, respectivelyMarch 31, 2018 compared to the corresponding periodsperiod in 2016. The three-month2017. This increase was primarily due tocomprised of a $26.9 million increase in Commercial real estate charge-offs, and the six-month increase was primarily due to a $23.4$14.8 million increase in Commercial Banking charge-offs, offset by a $10.0$3.5 million decrease in Commercial Fleet charge-offs.commercial fleet charge-offs, a $3.5 million decrease in Middle Market CRE charge-offs, and a $1.5 million decrease in charge-offs for commercial loans in Puerto Rico.
Commercial recoveries decreased $12.3 million and $27.6$0.6 million for the three-month and six-month periodsperiod ended June 30, 2017, respectivelyMarch 31, 2018 compared to the corresponding periodsperiod in 2016. The three-month2017. This decrease was primarily due to a $5.8$1.2 million decrease in commercial real estate recoveries for continuing care retirement communities, and a $5.7$1.4 million decrease in commercial fleet recoveries, offset by a $2.2 million increase in corporate banking recoveries.
Commercial loan net charge-offs as a percentage of average commercial loans, including multifamily loans, were 0.12% and 0.16%was 0.06% for the three-month and six-month periodsperiod ended June 30, 2017, respectively.
Consumer charge-offs increased $96.8 million and $191.9 millionMarch 31, 2018, compared to 0.04% for the three-month and six-month periodsperiod ended June 30, 2017, respectively compared to the corresponding periods in 2016. The three-month increase was primarily due to a $96.9 million increase in Consumer Auto loan charge-offs, and the six-month increase was due to a $189.8 million increase in Consumer Auto loan charge-offs which were primarily attributable to portfolio aging and mix shift, lower realized recovery rates, and less benefit from bankruptcy sales.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Consumer recoveries decreased $12.7 million and increased $4.2 million for the three-month and six-month periods ended June 30, 2017, respectively, compared to the corresponding periods in 2016. The three-month decrease was primarily due to a $13.1 million decrease in Consumer Auto recoveries and the six-month increase was primarily due to a $7.7 million increase in Consumer Auto loan recoveries.
Consumer net charge-offs as a percentage of average consumer loans were 1.2% and 2.6% for the three-month and six-month periods ended June 30, 2017, respectively, compared to 0.9% and 2.2% for the corresponding periods in 2016.March 31, 2017.
NON-INTEREST INCOME
| | | Three-Month Period Ended June 30, | | Six-Month Period Ended June 30, | | QTD Change | | YTD Change | | Three-Month Period Ended March 31, | | YTD Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Dollar increase/(decrease) | | Percentage | | Dollar increase/(decrease) | | Percentage | |
| (in thousands) | | (dollars in thousands) | |
(dollars in thousands) | | | 2018 | | 2017 | | Dollar increase/(decrease) | | Percentage |
Consumer fees | $ | 120,047 |
| | $ | 129,802 |
| | $ | 232,113 |
| | $ | 263,271 |
| | $ | (9,755 | ) | | (7.5 | )% | | $ | (31,158 | ) | | (11.8 | )% | | $ | 101,288 |
| | $ | 112,066 |
| | $ | (10,778 | ) | | (9.6 | )% |
Commercial fees | 42,287 |
| | 50,518 |
| | 84,589 |
| | 97,726 |
| | (8,231 | ) | | (16.3 | )% | | (13,137 | ) | | (13.4 | )% | | 37,273 |
| | 42,283 |
| | (5,010 | ) | | (11.8 | )% |
Mortgage banking income, net | 15,092 |
| | 11,546 |
| | 28,266 |
| | 27,896 |
| | 3,546 |
| | 30.7 | % | | 370 |
| | 1.3 | % | |
Bank-owned life insurance | 14,052 |
| | 16,437 |
| | 31,351 |
| | 30,165 |
| | (2,385 | ) | | (14.5 | )% | | 1,186 |
| | 3.9 | % | |
Lease income | 489,043 |
| | 456,946 |
| | 985,087 |
| | 877,802 |
| | 32,097 |
| | 7.0 | % | | 107,285 |
| | 12.2 | % | | 540,896 |
| | 496,045 |
| | 44,851 |
| | 9.0 | % |
Net (losses)/gains recognized in earnings | | | (663 | ) | | 519 |
| | (1,182 | ) | | (227.7 | )% |
Miscellaneous income | 39,377 |
| | 24,528 |
| | 86,415 |
| | 62,844 |
| | 14,849 |
| | 60.5 | % | | 23,571 |
| | 37.5 | % | | 124,570 |
| | 77,505 |
| | 47,065 |
| | 60.7 | % |
Net gains recognized in earnings | 9,049 |
| | 30,764 |
| | 9,569 |
| | 58,014 |
| | (21,715 | ) | | (70.6 | )% | | (48,445 | ) | | (83.5 | )% | |
Total non-interest income | $ | 728,947 |
| | $ | 720,541 |
| | $ | 1,457,390 |
| | $ | 1,417,718 |
| | $ | 8,406 |
| | 1.2 | % | | $ | 39,672 |
| | 2.8 | % | | $ | 803,364 |
| | $ | 728,418 |
| | $ | 74,946 |
| | 10.3 | % |
Total non-interest income increased $8.4 million and $39.7$74.9 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016.first quarter of 2017. The increasesincrease for the three-month and six-month periodsperiod ended June 30, 2017 wereMarch 31, 2018 was primarily due to the increase in lease income associated with the continued growth of the lease portfolio and RICs.increases in miscellaneous income. This washese increases were offset by a decreasedecreases in net gains recognized on investment securities due to no securities sales in the three-monthconsumer and six-month periods ended June 30, 2017, and a decrease in consumercommercial loan fees due to the reduction of loans serviced by the Company.Company as well as a decrease in net gains recognized in earnings for the three-month period ended March 31, 2018.
Consumer Fees
Consumer fees decreased $9.8 million and $31.2$10.8 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018, compared to the corresponding period in 2016. Thefirst quarter of 2017. This decrease in consumer fees for the three-month and six-month periods ended June 30, 2017 was primarily due to a $23.3 million and $48.6$21.6 million decrease in loan fee income, which was attributable to thea reduction ofin loans serviced by the Company due to loan sales and payoffs and lower reserve recourse releases in 2017.2018. This was partially offset by an increase of $2.5 million in other consumer fees including credit cards and consumer deposit fees.fees for the three-month period ended March 31, 2018.
Commercial Fees
Commercial fees consists of deposit overdraft fees, deposit automated teller machine ("ATM")ATM fees, cash management fees, letter of credit fees, and loan syndication fees for commercial accounts. Commercial fees decreased $8.2 million and $13.1$5.0 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016,first quarter of 2017. This decrease was primarily due to a decreaselower capital markets income.
Lease income
Lease income increased $44.9 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This increase was the result of the growth in unused linethe Company's lease portfolio, with an average balance of credit fees$10.3 billion for the three-month period ended March 31, 2018, compared to $9.8 billion at March 31, 2017.
Net (losses)/gains recognized in earnings
The Company recognized $0.7 million in net losses on sale of $3.5investment securities for the three-month period ended March 31, 2018 compared to the net gains of $0.5 million and a decrease of $5.9 million due to a decrease in syndication fees.
for the three-month period ended March 31, 2017.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Miscellaneous Income/(loss)
|
| | | | | | | | | | | | | | | |
| | Three-Month Period Ended March 31, | | YTD Change |
(dollars in thousands) | | 2018 | | 2017 | | Dollar increase/(decrease) | | Percentage |
Net gain on sale of operating leases | | $ | 53,200 |
| | $ | 22,715 |
| | $ | 30,485 |
| | 134.2 | % |
Trust and wealth management | | 43,337 |
| | 36,501 |
| | 6,836 |
| | 18.7 | % |
Loss on sale of non-mortgage loans | | (69,804 | ) | | (74,302 | ) | | 4,498 |
| | (6.1 | )% |
Net gain/(loss) on sale of fixed assets | | 1,730 |
| | (183 | ) | | 1,913 |
| | (1,045.4 | )% |
Re-valuation adjustments for fair value option ("FVO") | | (321 | ) | | 7,425 |
| | (7,746 | ) | | (104.3 | )% |
Mortgage banking income, net | | 16,345 |
| | 13,174 |
| | 3,171 |
| | 24.1 | % |
BOLI | | 14,568 |
| | 17,299 |
| | (2,731 | ) | | (15.8 | )% |
Capital markets revenue | | 56,613 |
| | 45,817 |
| | 10,796 |
| | 23.6 | % |
Other miscellaneous income | | 8,902 |
| | 9,059 |
| | (157 | ) | | (1.7 | )% |
Total miscellaneous income/(loss) | | $ | 124,570 |
| | $ | 77,505 |
| | $ | 47,065 |
| | 60.7 | % |
Miscellaneous income increased $47.1 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. Factors contributing to this change were as follows:
An increase in the net gain on sale of operating leases of $30.5 million.
An increase in trust and wealth management income of $6.8 million
A decrease in the loss on the sale of non-mortgage loans of $4.5 million.
Net gain/(loss) on sale of fixed assets increased by $1.9 million.
A decrease of $7.7 million in re-valuation adjustments relating primarily to the change in the fair value of the loan portfolio compared to the first quarter of 2017. For further discussion, see Note 14 to the Condensed Consolidated Financial Statements.
A decrease in BOLI income of $2.7 million as a result of a decrease in death benefits received. BOLI income represents fluctuations in the cash surrender value of life insurance policies on certain employees. The Bank is the beneficiary and the recipient of the insurance proceeds.
An increase in capital markets revenue of $10.8 million due to favorable market conditions resulting in increased activity.
| | | Three-Month Period Ended June 30, | | Six-Month Period Ended June 30, | | QTD Change | | YTD Change | | Three-Month Period Ended March 31, | | YTD Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Dollar increase/(decrease) | | Percentage | | Dollar increase/(decrease) | | Percentage | |
| (dollars in thousands) | | | | | | | | | |
(dollars in thousands) | | | 2018 | | 2017 | | Dollar increase/(decrease) | | Percentage |
Mortgage and multifamily servicing fees | $ | 10,452 |
| | $ | 10,793 |
| | $ | 21,076 |
| | $ | 21,610 |
| | $ | (341 | ) | | (3.2 | )% | | $ | (534 | ) | | (2.5 | )% | | $ | 10,193 |
| | $ | 10,624 |
| | $ | (431 | ) | | (4.1 | )% |
Net gains on sales of residential mortgage loans and related securities | 1,324 |
| | 7,035 |
| | 5,676 |
| | 10,512 |
| | (5,711 | ) | | (81.2 | )% | | (4,836 | ) | | (46.0 | )% | | 6,224 |
| | 4,351 |
| | 1,873 |
| | 43.0 | % |
Net gains on sales of multifamily mortgage loans | 900 |
| | 900 |
| | 1,200 |
| | 1,300 |
| | — |
| | — | % | | (100 | ) | | (7.7 | )% | | 400 |
| | 300 |
| | 100 |
| | 33.3 | % |
Net gains on hedging activities | 8,900 |
| | 10,895 |
| | 9,946 |
| | 32,970 |
| | (1,995 | ) | | (18.3 | )% | | (23,024 | ) | | (69.8 | )% | |
Net gains/(losses) on hedging activities | | | (11,628 | ) | | 1,047 |
| | (12,675 | ) | | (1,210.6 | )% |
Net gains/(losses) from changes in MSR fair value | (1,193 | ) | | (11,468 | ) | | 263 |
| | (25,824 | ) | | 10,275 |
| | (89.6 | )% | | 26,087 |
| | (101.0 | )% | | 15,043 |
| | 1,457 |
| | 13,586 |
| | 932.5 | % |
MSR principal reductions | (5,291 | ) | | (6,609 | ) | | (9,895 | ) | | (12,672 | ) | | 1,318 |
| | (19.9 | )% | | 2,777 |
| | (21.9 | )% | | (3,887 | ) | | (4,605 | ) | | 718 |
| | (15.6 | )% |
Total mortgage banking income, net | $ | 15,092 |
| | $ | 11,546 |
|
| $ | 28,266 |
|
| $ | 27,896 |
| | $ | 3,546 |
| | 30.7 | % | | $ | 370 |
| | 1.3 | % |
| $ | 16,345 |
|
| $ | 13,174 |
| | $ | 3,171 |
| | 24.1 | % |
Mortgage banking income consisted of fees associated with servicing loans not held by the Company, as well as originations, amortization, and changes in the fair value of MSRs and recourse reserves. Mortgage banking income also included gains or losses on the sale of mortgage loans, home equity loans, home equity lines of credit, and mortgage-backed securities ("MBS"). Gains or losses on mortgage banking derivative and hedging transactions are also included in Mortgage banking income.
Mortgage banking revenue increased $3.5 million and $0.4$3.2 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016. The increasesfirst quarter of 2017. This increase for 2017 werethe period ended March 31, 2018 was primarily attributable to $10.3$13.6 million of gains related to MSR valuation and $1.9 million of higher net gains from changes in MSR fair value,related to residential mortgage sales. These gains were partially offset by $5.7$12.7 million of lower net gains on sales of residential mortgage loans and related securities.losses from hedging activities.
Since 2015, mortgage interestInterest rates have remained stable, resultingcontinued to rise in relative stability in mortgage banking fees from rate changes.the three-month period ended March 31, 2018.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table details interest rates on certain residential mortgage loans for the Bank as of the dates indicated:
|
| | | | | |
| 30-Year Fixed | | 15-Year Fixed |
December 31, 2015 | 4.13 | % | | 3.38 | % |
March 31, 2016 | 3.63 | % | | 2.88 | % |
June 30, 2016 | 3.50 | % | | 2.75 | % |
September 30, 2016 | 3.50 | % | | 2.88 | % |
December 31, 2016 | 4.38 | % | | 3.63 | % |
March 31, 2017 | 4.25 | % | | 3.50 | % |
June 30, 2017 | 4.13 | % | | 3.38 | % |
|
| | | | | |
| 30-Year Fixed | | 15-Year Fixed |
December 31, 2016 | 4.38 | % | | 3.63 | % |
March 31, 2017 | 4.25 | % | | 3.50 | % |
June 30, 2017 | 4.13 | % | | 3.38 | % |
September 30, 2017 | 3.99 | % | | 3.25 | % |
December 31, 2017 | 4.13 | % | | 3.63 | % |
March 31, 2018 | 4.50 | % | | 3.99 | % |
Other factors, such as portfolio sales, servicing, and re-purchases, have continued to affect mortgage banking revenue.
Mortgage and multifamily loan servicing fees decreased $0.3 million and $0.5$0.4 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018, compared to the corresponding periods in2016.first quarter of 2017. At June 30,March 31, 2018 and 2017, and 2016, the Company serviced mortgage and multifamily real estate loans for the benefit of others with a principal balance totaling $414.2$198.2 million and $770.4$556.6 million, respectively. The decrease in loans serviced for others iswas primarily due to pay downspay-downs received during the remainder of 20162017 and 2017.2018.
Net gains on sales of residential mortgage loans and related securities decreased $5.7 million and $4.8increased $1.9 million for the three-month and six-month periodsperiod ended June 30, 2017, respectively,March 31, 2018 compared to the corresponding periods in 2016.first quarter of 2017. For the three-month and six-month periodsperiod ended June 30, 2017,March 31, 2018, the Company sold $940.0 million$0.3 billion of mortgage loans for gains of $5.7$6.2 million, compared to $889.7 million$0.6 billion of loans sold for gains of $10.5$4.4 million for the corresponding period in 2016.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
first quarter of 2017.
The Company periodically sells qualifying mortgage loans to the Federal Home Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage Association ("GNMA") and the Federal National Mortgage Association ("FNMA") in return for MBS issued by those agencies. The Company records these transactions as sales when the transfers meet all of the accounting criteria for a sale. For those loans sold to the agencies for which the Company retains the servicing rights, the Company recognizes the servicing rights at fair value. These loans are also generally sold with standard representation and warranty provisions, which the Company recognizes at fair value. Any difference between the carrying value of the transferred mortgage loans and the fair value of the MBS, servicing rights, and representation and warranty reserves is recognized as gain or loss on sale.
The net gains on sales of multifamily mortgage loans for the three-month and six-month periods ended June 30, 2017 changed by an immaterial amount when compared to the corresponding periods in 2016. These changes were primarily due to a $0.9 million and $1.2 million release in the FNMA recourse reserve for the three-month and six-month periods ended June 30, 2017, respectively, compared to $0.9 million and $1.3 million releases for the corresponding periods in 2016.
The Company previously sold multifamily loans in the secondary market to FNMA while retaining servicing. In September 2009, the Bank elected to stop selling multifamily loans to FNMA and, since that time, has retained all production for the multifamily loan portfolio. Under the terms of the multifamily sales program with FNMA, the Company retained a portion of the credit risk associated with those loans. As a result of that agreement, the Company retains a 100% first loss position on each multifamily loan sold to FNMA under the program until the earlier to occur of (i) the aggregate approved losses on the multifamily loans sold to FNMA reaching the maximum loss exposure for the portfolio as a whole or (ii) all of the loans sold to FNMA under the program are fully paid off.
At June 30, 2017,March 31, 2018, the Company serviced loans with a principal balance of $253.5$102.6 million for FNMA, compared to $341.7$136.0 million at December 31, 2016.2017. These loans had a credit loss exposure of $34.4$12.2 million as of both June 30, 2017 andMarch 31, 2018, compared to $12.2 million as of December 31, 2016.2017. Losses, if any, resulting from representation and warranty defaults would be in addition to the Company's credit loss exposure. The servicing asset for these loans has completelyis fully amortized.
The Company has established a liability related to the fair value of the retained credit exposure for multifamily loans sold to the FNMA. This liability represents the amount the Company estimates it would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of the estimated losses the portfolio is projected to incur based upon specific internal specific information and an industry-based default curve with a range of estimated losses. As of June 30, 2017March 31, 2018 and December 31, 2016,2017, the Company had a liability of $2.6$0.9 million and $3.8$1.3 million, respectively, related to the fair value of the retained credit exposure for multifamily loans sold to the FNMA under this program.
Net gains onloss from hedging activities decreased $2.0 million and $23.0 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 was $11.6 million compared to the corresponding periodsgain of $1.0 million in 2016.the first quarter of 2017. This variance for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 was primarily due to the decrease in the mortgage loan pipeline valuation and the Company's hedging strategy in the current mortgage rate environment.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Net gains/losses and gains from changes in MSR fair value were a loss of $1.2 million and anet gain of $0.3$15.0 million for the three-month and six-month periodsperiod ended June 30, 2017 andMarch 31, 2018 as compared to a net lossgain of $11.5 million and $25.8$1.5 million for the corresponding period in 2016.2017. The value of the related MSRs carried at fair value at June 30, 2017March 31, 2018 and December 31, 20162017 was $146.1$160.1 million and $146.6$146.0 million, respectively. The MSR asset fair value changeschange for the three-month and six-month periodsperiod ended June 30, 2017 wereMarch 31, 2018 was the result of fluctuations in interest rates.
The Company recognized $5.3 million and $9.9$3.9 million of principal reductions for the three-month and six-month periodsperiod ended June 30, 2017,March 31, 2018, compared to $6.6 million and $12.7$4.6 million for the corresponding periods in 2016.first quarter of 2017. Principal reduction activity is impacted by changes in the level of prepayments and mortgage refinancing and generally follows along with interest rates.
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 and increased $1.2 million for the three-month and six-month periods ended June 30, 2017, compared to the corresponding periods in 2016.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Lease income
Lease income increased $32.1 million and $107.3 million for the three-month and six-month periods ended June 30, 2017, compared to the corresponding periods in 2016, respectively. The average leased vehicle portfolio balance as of June 30, 2017 and June 30, 2016 was $9.8 billion and $9.0 billion, respectively. These increases were the result of the growth of the Company's lease portfolio.
Miscellaneous Income
Miscellaneous income increased $14.8 million and $23.6 million for the three-month and six-month periods ended June 30, 2017, respectively, compared to the corresponding periods in 2016. This was primarily due to an increase in gain on sale of operating leases of $28.7 million and $46.5 million for the three-month and six-month periods ended June 30, 2017, respectively, and an increase in gain on sale of other assets of $48.2 million and $51.6 million for the three-month and six-month periods ended June 30, 2017, respectively, compared to the corresponding periods in 2016. This was offset by a decrease in other income of $27.4 million and $39.2 million, during the three-month and six-month periods ended June 30, 2017, respectively, compared to the corresponding periods in 2016. For further discussion, please see Note 16 to the Condensed Consolidated Financial Statements.
Net gains recognized in earnings
The Company recognized $9.0 million and $9.6 million of gains for the three-month and six-month periods ended June 30, 2017, respectively, in net gains on sales of investment securities as a result of overall balance sheet and interest rate risk management. The net gain realized for the three-month and six-month periods ended June 30, 2017 was primarily comprised of the sale of MBS with a book value of $555.6 million for a gain of $9.3 million.
The Company recognized $30.8 million and $58.0 million for the three-month and six-month periods ended June 30, 2016, respectively, in net gains on sale of investment securities as a result of overall balance sheet and interest rate risk management. The net gain realized for the three-month period ended June 30, 2016 was primarily comprised of the sale of corporate debt securities with a book value of $1.4 billion for a gain of $5.9 million, and the sale of MBS, including FHLMC swap and hold fixed rate securities and CMOs, with a book value of$1.3 billion for a gain of $24.7 million. The net gain realized for the six-month period ended June 30, 2016 was primarily comprised of the sale of U.S. Treasury securities with a book value of $3.2 billion for a gain of $7.0 million, the sale of corporate debt securities with a book value of$1.4 billion for a gain of $5.9 million, the sale of MBS, including FHLMC swap and hold fixed rate securities and CMOs, with a book value of $1.3 billion for a gain of $24.7 million, and the sale of state and municipal securities with a book value of $748.0 million for a gain of $19.9 million.refinancing.
GENERAL AND ADMINISTRATIVE EXPENSES
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three-Month Period Ended June 30, | | Six-Month Period Ended June 30, | | QTD Change | | YTD Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Dollar increase/(decrease) | Percentage | | Dollar increase/(decrease) | Percentage |
| (dollars in thousands) |
Compensation and benefits | $ | 455,616 |
| | $ | 420,319 |
| | $ | 907,857 |
| | $ | 855,951 |
| | $ | 35,297 |
| 8.4 | % | | $ | 51,906 |
| 6.1 | % |
Occupancy and equipment expenses | 163,553 |
| | 151,453 |
| | 326,264 |
| | 297,284 |
| | 12,100 |
| 8.0 | % | | 28,980 |
| 9.7 | % |
Technology expense | 66,502 |
| | 71,370 |
| | 122,275 |
| | 126,589 |
| | (4,868 | ) | (6.8 | )% | | (4,314 | ) | (3.4 | )% |
Outside services | 59,003 |
| | 68,618 |
| | 107,278 |
| | 145,011 |
| | (9,615 | ) | (14.0 | )% | | (37,733 | ) | (26.0 | )% |
Marketing expense | 36,754 |
| | 21,564 |
| | 68,218 |
| | 42,042 |
| | 15,190 |
| 70.4 | % | | 26,176 |
| 62.3 | % |
Loan expense | 95,872 |
| | 104,261 |
| | 194,217 |
| | 206,891 |
| | (8,389 | ) | (8.0 | )% | | (12,674 | ) | (6.1 | )% |
Lease expense | 369,240 |
| | 322,159 |
| | 728,032 |
| | 614,993 |
| | 47,081 |
| 14.6 | % | | 113,039 |
| 18.4 | % |
Other administrative expenses | 95,096 |
| | 105,128 |
| | 197,334 |
| | 201,493 |
| | (10,032 | ) | (9.5 | )% | | (4,159 | ) | (2.1 | )% |
Total general and administrative expenses | $ | 1,341,636 |
| | $ | 1,264,872 |
| | $ | 2,651,475 |
| | $ | 2,490,254 |
| | $ | 76,764 |
| 6.1 | % | | $ | 161,221 |
| 6.5 | % |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
| | | | | | | | | | | | | | | |
| | Three-Month Period Ended March 31, | | YTD Change |
(dollars in thousands) | | 2018 | | 2017 | | Dollar | | Percentage |
Compensation and benefits | | $ | 469,406 |
| | $ | 452,241 |
| | $ | 17,165 |
| | 3.8 | % |
Occupancy and equipment expenses | | 159,340 |
| | 162,712 |
| | (3,372 | ) | | (2.1 | )% |
Technology expense | | 152,282 |
| | 135,509 |
| | 16,773 |
| | 12.4 | % |
Loan expense | | 96,814 |
| | 98,324 |
| | (1,510 | ) | | (1.5 | )% |
Lease expense | | 424,266 |
| | 358,792 |
| | 65,474 |
| | 18.2 | % |
Other administrative expenses | | 103,554 |
| | 102,238 |
| | 1,316 |
| | 1.3 | % |
Total general and administrative expenses | | $ | 1,405,662 |
| | $ | 1,309,816 |
| | $ | 95,846 |
| | 7.3 | % |
Total general and administrative expenses increased $76.8 million and $161.2$95.8 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016.first quarter of 2017. Factors contributing to this increase were as follows:
Compensation and benefits expense increased $35.3 million and $51.9 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The primary driver of these increases was the Company's salary expense which resulted in a $13.6 million and $22.4 million expense increase for the three-month and six-month periods ended June 30, 2017, respectively. The Company also had an increase in bonus expenses of $11.4$17.2 million for the three-month period ended June 30, 2017, but a decrease in bonus expense for the six-month period ended June 30,2017March 31, 2018 compared to the corresponding periods in 2016. The decrease infirst quarter of 2017. This increase was primarily the result of salary expense increase of $17.9 million, bonus expense increase of $22.8 million and commission expense increase of $5.4 million for the six- monththree-month period ended June 30, 2017 was causedMarch 31, 2018 compared to the first quarter of 2017. These increases were offset by a $15.5decreases in benefits expense of $30.5 million bonus release made duringfor the three-month period ended March 31, 2018 compared to the first quarter of 2017.
Occupancy and equipment expenses increased $12.1 million and $29.0decreased $3.4 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016. This was primarily due to an increase in depreciation expensefirst quarter of $6.4 million and $11.7 million for the three-month and six-month periods ended June 30, 2017, respectively. These increases were due to more assets being placed in service. There were also $6.7 million and $13.0 million increases in maintenance and repair expense and other occupancy and equipment expenses for the three-month and six-month periods ended June 30, 2017, respectively, compared to the corresponding period in 2016.
Outside services decreased $9.6 million and $37.7 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016.2017. This was primarily due to a decrease in consulting service feesdepreciation expense of $7.2$2.5 million, a decrease in other expense of $1.2 million and $34.2 million which related to regulatory initiatives, including preparation for meeting the requirementsa decrease in telecommunication expense of the IHC during 2016.
Marketing expense increased $15.2 million and $26.2$0.9 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the correspondingfirst quarter of 2017. These decreases were offset by an increase of $1.8 million in maintenance and repair expense for the three-month period in 2016. These increases wereended March 31, 2018 compared to the first quarter of 2017.
Technology, outside services, and marketing expenses increased $16.8 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This increase was primarily due to expenses such as direct mail, advertisingan increase in technology services of $17.7 million and an increase in outside processing service expense of $0.2 million during 2018. This was offset by a decrease of $1.1 million in marketing associated with corporate marketing campaigns.
expenses.
Loan expense decreased $8.4 million and $12.7$1.5 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016. These decreases werefirst quarter of 2017. This decrease was primarily due to decreases of $8.5 million and $10.1$1.9 million in loan servicing expenses and $2.1 million in other loan expense. These decreases were offset by increases in origination expenses.
expense of $0.4 million and loan collection expense of $2.0 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017.
Lease expense increased $47.1 million and $113.0$65.5 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016. These decreases werefirst quarter of 2017. This increase was primarily due to the continued growth of the Company's leased vehicle portfolio and accumulation of depreciation associated with that portfolio.
Other administrative expenses decreased $10.0 million and $4.2increased $1.3 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016. These decreases werefirst quarter of 2017. This increase was primarily attributable to a decreasean increase in other administrative expenses is due to lower operational risk expenses of $8.1 million for the three-month period ended March 31, 2018 compared to the first quarter of 2017. This increase was offset by decreases in legal expense of $5.1 million and miscellaneous expensesrecruiting expense of $1.5 million for three-month and six-month periodsperiod ended June 30, 2017.March 31, 2018.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
OTHER EXPENSES
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three-Month Period Ended June 30, | | Six-Month Period Ended June 30, | | QTD Change | | YTD Change |
| 2017 | | 2016 | | 2017 | | 2016 | | Dollar (decrease)/increase | | Percentage | | Dollar (decrease)/increase | | Percentage |
| (dollars in thousands) |
Amortization of intangibles | $ | 15,424 |
| | $ | 17,754 |
| | $ | 30,915 |
| | $ | 35,686 |
| | $ | (2,330 | ) | | (13.1 | )% | | $ | (4,771 | ) | | (13.4 | )% |
Deposit insurance premiums and other expenses | 17,596 |
| | 13,505 |
| | 35,426 |
| | 39,017 |
| | 4,091 |
| | 30.3 | % | | (3,591 | ) | | (9.2 | )% |
Loss on debt extinguishment | 3,991 |
| | 45,573 |
| | 10,740 |
| | 78,445 |
| | (41,582 | ) | | (91.2 | )% | | (67,705 | ) | | (86.3 | )% |
Other miscellaneous expenses | 7,535 |
| | 1,286 |
| | 10,541 |
| | 5,563 |
| | 6,249 |
| | 485.9 | % | | 4,978 |
| | 89.5 | % |
Total other expenses | $ | 44,546 |
| | $ | 78,118 |
| | $ | 87,622 |
| | $ | 158,711 |
| | $ | (33,572 | ) | | (43.0 | )% | | $ | (71,089 | ) | | (44.8 | )% |
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
|
| | | | | | | | | | | | | | | |
| | Three-Month Period Ended March 31, | | YTD Change |
(dollars in thousands) | | 2018 | | 2017 | | Dollar (decrease)/increase | | Percentage |
Amortization of intangibles | | $ | 15,288 |
| | $ | 15,491 |
| | $ | (203 | ) | | (1.3 | )% |
Deposit insurance premiums and other expenses | | 16,761 |
| | 17,830 |
| | (1,069 | ) | | (6.0 | )% |
Loss on debt extinguishment | | 2,212 |
| | 6,749 |
| | (4,537 | ) | | (67.2 | )% |
Other miscellaneous expenses | | 3,601 |
| | 3,006 |
| | 595 |
| | 19.8 | % |
Total other expenses | | $ | 37,862 |
| | $ | 43,076 |
| | $ | (5,214 | ) | | (12.1 | )% |
Total other expenses decreased $33.6 million and $71.1$5.2 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016.first quarter of 2017. The primary factors contributing to these decreasesthis decrease were:
Amortization of intangibles decreased $2.3 million and $4.8$0.2 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016. These decreases were primarily due to a portion of the Company's core deposit intangibles becoming fully amortized in the secondfirst quarter of 2016, thereby reducing intangibles in 2017.
Deposit insurance premiums and other expenses increased $4.1 million and decreased $3.6$1.1 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016. The expense for the three-month and six-month periods ended June 30, 2016 included a $6.2 million contingent loss on a transferfirst quarter of $9 billion of unfunded credit facilities to Santander, which did not recur in 2017. This decrease was primarily attributable to decreases in costs was offset by the impairment of internally developed software during the three-month period ended June 30, 2017.
FDIC insurance premiums and assessments.
Losses on debt extinguishment decreased $41.6 million and $67.7$4.5 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periods in 2016. These expenses were primarilyfirst quarter of 2017. The Company recorded loss on debt extinguishment related to debt repurchases and early termination fees incurred by the Company in association with the terminationrepayments of FHLB advances in 2016. During$2.2 million for the three-month and six-month periodsperiod ended June 30, 2016, the Bank terminated $1.5 billion and $2.8 billion of FHLB advances, incurring costs of $45.6 million and $78.4 million. During the three-month and six-month periods ended June 30, 2017, a $4.0 million charge on the buyback of REIT preferred stock was incurred and aMarch 31, 2018. A tender offer on Bankbank debt resulted in a charge of $6.7 million.
million during the three-month period ended March 31, 2017,
Other miscellaneous expenses increased $6.2 million and $5$0.6 million for the three-month and six-month periodsperiod ended June 30, 2017, respectively,March 31, 2018 compared to the corresponding periods in 2016. These increases were primarily due to the impairmentfirst quarter of capitalized software of $6.62017. Impairment on long-lived assets increased $0.5 million infor the three-month period ended June 30,March 31, 2018 compared to the first quarter of 2017. This increase was primarily related to impairment on capitalized software assets.
INCOME TAX PROVISION
An income tax provision of $92.0 million and $170.9$95.3 million was recorded for the three-month and six-month periodsperiod ended June 30, 2017, respectively,March 31, 2018, compared to $153.3 million and $232.1an income tax provision of $78.9 million for the corresponding periodsperiod in 2016.2017. This resulted in an effective tax ratesrate ("ETR") of 24.2% and 27.5%27.0% for the three-month and six-month periodsperiod ended June 30, 2017, respectively,March 31, 2018, compared to 35.8% and 37.6%32.5% for the corresponding periodsperiod in 2016.
The decrease in the ETR for the three-month and six-month periods ending June 30, 2017 was predominantly due to the undistributed net earnings of a Puerto Rico subsidiary that will be indefinitely reinvested outside the U.S., in addition to the increase in certain tax credits.2017.
The Company's ETR in future periods will be affected by the results of operations allocated to the various tax jurisdictions in which the Company operates, any change in income tax laws or regulations within those jurisdictions, and interpretations of income tax regulations that differ from the Company's interpretations by tax authorities that examine tax returns filed by the Company or any of its subsidiaries.
LINE OF BUSINESS RESULTS
General
The Company's segments at June 30, 2017March 31, 2018 consisted of Consumer and Business Banking, Commercial Banking, Commercial Real Estate, Global Corporate Banking ("GCB"), and SC. For additional information with respect to the Company's reporting segments and changes to the segments beginning in the first quarter of 2018, see Note 1718 to the Condensed Consolidated Financial Statements.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Results Summary
Consumer and Business Banking
|
| | | | | | | | | | | | | | | |
| | Three-Month Period Ended March 31, | | YTD Change |
(dollars in thousands) | | 2018 | | 2017 | | Dollar increase/(decrease) | | Percentage |
Net interest income | | $ | 304,819 |
| | $ | 262,732 |
| | $ | 42,087 |
| | 16.0 | % |
Total non-interest income | | 82,819 |
| | 82,534 |
| | 285 |
| | 0.3 | % |
Provision for credit losses | | 38,389 |
| | 22,451 |
| | 15,938 |
| | 71.0 | % |
Total expenses | | 368,639 |
| | 375,021 |
| | (6,382 | ) | | (1.7 | )% |
Loss before income taxes | | (19,390 | ) | | (52,206 | ) | | 32,816 |
| | 62.9 | % |
Intersegment revenue | | 678 |
| | 878 |
| | (200 | ) | | (22.8 | )% |
Total assets | | 18,857,164 |
| | 17,680,926 |
| | 1,176,238 |
| | 6.7 | % |
Consumer and Business Banking reported a loss before income taxes of $19.4 million for the three-month period ended March 31, 2018 compared to a loss before income taxes of $52.2 million for the three-month period ended March 31, 2017. Factors contributing to this change were as follows:
Net interest income increased $44.3 million and $125.2$42.1 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periodsperiod in 2016. The average balances of the Consumer and Business Banking segment's gross loans were $17.0 billion and $17.0 billion for the three-month and six-month periods ended June 30, 2017, compared to $16.8 billion and $16.8 billion for the corresponding periods in 2016. The average balances of deposits were $41.9 billion and $41.6 billion for the three-month and six-month periods ended June 30, 2017, compared to $40.8 billion and $40.5 billion for the corresponding periods in 2016,2017. This increase was primarily driven by growth in non-interest-bearing deposits. deposit product margin where despite rising interest rates, costs have been managed down.
Total non-interest income increased $2.2 million and decreased $10.8$0.3 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periodsperiod in 2016. 2017 driven by a change in the shared services agreement between the Bank and SSLLC made effective in the middle of 2017.
The provision for credit losses increased $1.6 million and $23.5by $15.9 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periodsperiod in 2016. Total expenses2017, driven by the absence of reserve releases in 2017 for home equity and increased $9.8 milliondelinquency in the credit cards and $14.6personal loan portfolios.
Commercial Banking
|
| | | | | | | | | | | | | | | |
| | Three-Month Period Ended March 31, | | YTD Change |
(dollars in thousands) | | 2018 | | 2017 | | Dollar increase/(decrease) | | Percentage |
Net interest income | | $ | 154,935 |
| | $ | 152,306 |
| | $ | 2,629 |
| | 1.7 | % |
Total non-interest income | | 33,588 |
| | 14,923 |
| | 18,665 |
| | 125.1 | % |
(Release of) /provision for credit losses | | (9,741 | ) | | 5,386 |
| | (15,127 | ) | | (280.9 | )% |
Total expenses | | 84,396 |
| | 78,339 |
| | 6,057 |
| | 7.7 | % |
Income before income taxes | | 113,868 |
| | 83,504 |
| | 30,364 |
| | 36.4 | % |
Intersegment revenue | | 1,531 |
| | 1,301 |
| | 230 |
| | 17.7 | % |
Total assets | | 24,318,734 |
| | 25,854,624 |
| | (1,535,890 | ) | | (5.9 | )% |
Commercial Banking reported income before income taxes of $113.9 million for the three-month and six-month periodsperiod ended June 30, 2017,March 31, 2018, compared to income before income taxes of $83.5 million for the three-month period ended March 31, 2017. Factors contributing to this change were as follows:
Net interest income increased $2.6 million for the three-month period ended March 31, 2018 compared to the corresponding periodsperiod in 2016.2017. Total average gross loans were $24.9 billion for the three-month period ended March 31, 2018 compared to $26.1 billion for the first quarter of 2017. The decline in average gross loans is primarily related to the sale of the Mortgage Warehouse portfolio and decreases in the Middle Market and Energy Lending portfolios.
The provision for credit losses decreased $15.1 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017. The decrease in provision for the three-month period ended March 31, 2018 was due to releases totaling $6.2 million for the Mortgage Warehouse portfolio as well as other general releases.
Item 2. Management’s Discussion and Analysis of June 30, 2017 were $19.6 billion,Financial Condition and Results of Operations
GCB
|
| | | | | | | | | | | | | | | |
| | Three-Month Period Ended March 31, | | YTD Change |
(dollars in thousands) | | 2018 | | 2017 | | Dollar increase/(decrease) | | Percentage |
Net interest income | | $ | 32,690 |
| | $ | 42,228 |
| | $ | (9,538 | ) | | (22.6 | )% |
Total non-interest income | | 50,639 |
| | 51,336 |
| | (697 | ) | | (1.4 | )% |
Release of provision for credit losses | | (2,055 | ) | | (1,364 | ) | | (691 | ) | | (50.7 | )% |
Total expenses | | 58,143 |
| | 46,608 |
| | 11,535 |
| | 24.7 | % |
Income before income taxes | | 27,241 |
| | 48,320 |
| | (21,079 | ) | | (43.6 | )% |
Intersegment expense | | (2,281 | ) | | (2,397 | ) | | 116 |
| | 4.8 | % |
Total assets | | 7,062,542 |
| | 9,717,228 |
| | (2,654,686 | ) | | (27.3 | )% |
GCB reported income before income taxes of $27.2 million for the three-month period ended March 31, 2018 compared to $19.8 billionincome before income taxes of $48.3 million for the three-month period ended March 31, 2017. Factors contributing to this change were as of June 30, 2016.
Commercial Bankingfollows:
Net interest income decreased $2.0 million and increased $6.2$9.5 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periodsperiod in 2016. Total average gross loans were $11.6 billion and $11.6 billion for the three-month and six-month periods ended June 30, 2017, compared to $12.0 billion and $11.7 billion for the corresponding periods in 2016. Total non-interest income decreased $1.1 million and $4.3 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The provision for credit losses increased $13.1 million and decreased $42.6 million for the three-month and six-month periods ended June 30, 2017, compared to the corresponding periods in 2016, primarily driven by reserves for the energy finance business line that were required in 2016. Total expenses increased $1.4 million and $3.5 million for the three-month and six-month periods ended June 30, 2017, compared to the corresponding periods in 2016.
Total assets were $11.7 billion as of June 30, 2017, compared to $12.4 billion as of June 30, 2016. Total average deposits were $7.1 billion and $7.5 billion for the three-month and six-month periods ended June 30, 2017, compared to $8.1 billion and $8.5 billion for the corresponding periods in 2016.
Commercial Real Estate
Net interest income increased $5.9 million and $10.7 million during the three-month and six-month periods ended June 30, 2017, compared to the corresponding periods in 2016.2017. The average balance of this segment's gross loans decreased to $14.3was $4.5 billion and $14.4 billion duringfor the three-month and six-month periodsperiod ended June 30, 2017,March 31, 2018 compared to $15.5 billion and $15.4$7.3 billion for the corresponding periodsperiod in 2016.2017. The average balance of deposits was $898.5 million$2.0 billion for the three-month period ended March 31, 2018 compared to $2.4 billion for the corresponding period in 2017. The decrease in loan balances is attributed to the strategic goal of building a less capital-intensive U.S. franchise, which was attained by exiting less profitable relationships across all sectors, and $912.4by pro-actively reducing exposures related to the commodities and oil and gas sectors.
Total non-interest income decreased $0.7 million for the three-month and six-month periodsperiod ended June 30, 2017, compared to $818.7 million and $773.6 million for the corresponding periods in 2016. Total non-interest income decreased $3.4 million and $6.1 million for the three-month and six-month periods ended June 30, 2017March 31, 2018 compared to the corresponding periodsperiod in 2016. 2017.
The provision for credit losses decreased $13.6 million and $26.9$0.7 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periodsperiod in 2016. 2017. The provision decreased for the three-month period ended March 31, 2018 due to higher reserves required for oil and gas clients and higher reserves on a renewable energy investment that was substantially damaged by Hurricane Maria in 2017.
Total expenses decreased $3.3 million and $3.7increased $11.5 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periodsperiod in 2016. Total assets were $14.1 billion as2017, driven by higher support and personnel expenses.
Other
|
| | | | | | | | | | | | | | | |
| | Three-Month Period Ended March 31, | | YTD Change |
(dollars in thousands) | | 2018 | | 2017 | | Dollar increase/(decrease) | | Percentage |
Net interest income | | $ | 62,816 |
| | $ | 56,728 |
| | $ | 6,088 |
| | 10.7 | % |
Total non-interest income | | 113,424 |
| | 151,107 |
| | (37,683 | ) | | (24.9 | )% |
Provision for credit losses | | 6,337 |
| | 15,610 |
| | (9,273 | ) | | (59.4 | )% |
Total expenses | | 228,368 |
| | 226,034 |
| | 2,334 |
| | 1.0 | % |
Loss before income taxes | | (58,465 | ) | | (33,809 | ) | | (24,656 | ) | | (72.9 | )% |
Intersegment revenue/(expense) | | 72 |
| | 218 |
| | (146 | ) | | NM1 |
|
Total assets | | 38,944,263 |
| | 43,776,451 |
| | (4,832,188 | ) | | (11.0 | )% |
1 - not meaningful
The Other category reported losses before income taxes of June 30, 2017,$58.5 million for the three-month period ended March 31, 2018, compared to $15.4 billionlosses before income taxes of $33.8 million for the three-month period ended March 31, 2017. Factors contributing to this change were as of June 30, 2016.follows:
Net interest income increased $6.1 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017.
Total non-interest income decreased $37.7 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
GCBThe provision for credit losses decreased $9.3 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017.
Total expenses increased $2.3 million for the three-month period ended March 31, 2018 compared to the corresponding period in 2017.
SC
|
| | | | | | | | | | | | | | | |
| | Three-Month Period Ended March 31, | | YTD Change |
(dollars in thousands) | | 2018 | | 2017 | | Dollar increase/(decrease) | | Percentage |
Net interest income | | $ | 921,737 |
| | $ | 1,042,925 |
| | $ | (121,188 | ) | | (11.6 | )% |
Total non-interest income | | 531,736 |
| | 434,848 |
| | 96,888 |
| | 22.3 | % |
Provision for credit losses | | 458,995 |
| | 635,013 |
| | (176,018 | ) | | (27.7 | )% |
Total expenses | | 694,870 |
| | 621,334 |
| | 73,536 |
| | 11.8 | % |
Income before income taxes | | 299,608 |
| | 221,426 |
| | 78,182 |
| | 35.3 | % |
Intersegment revenue | | — |
| | — |
| | — |
| | 0.0% |
|
Total assets | | 40,045,188 |
| | 39,061,940 |
| | 983,248 |
| | 2.5 | % |
SC reported income before income taxes of $299.6 million for the three-month period ended March 31, 2018, compared to income before income taxes of $221.4 million for the three-month period ended March 31, 2017. Factors contributing to this change were as follows:
Net interest income decreased $19.7 million and $37.1$121.2 million for the three-month and six-month periodsperiod ended June 30, 2017 compared to the corresponding periods in 2016. The average balance of this segment's gross loans were $6.2 billion and $6.8 billion for the three-month and six-month periods ended June 30, 2017, compared to $9.8 billion and $9.9 billion for the corresponding periods in 2016. The average balance of deposits was $2.2 billion and $2.3 billion for the three-month and six-month periods ended June 30, 2017, compared to $1.9 billion for the corresponding periods in 2016. Total non-interest income decreased $4.6 million and $13.9 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The provision for credit losses increased $30.1 million and decreased $19.1 million for the three-month and six-month periods ended June 30, 2017, compared to the corresponding periods in 2016. Total expenses increased $1.5 million and decreased $13.2 million for the three-month and six-month periods ended June 30, 2017,March 31, 2018 compared to the corresponding period in 2016.
Total assets were $7.0 billion as of June 30, 2017, compared to $12.0 billion as of June 30, 2016.
Other
Net interest income increased $39.0 million and decreased $2.4 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. Total non-interest income decreased $34.2 million and $47.6 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The provision for credit losses increased $2.7 million and $4.9 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. Total expenses decreased $39.9 million and $82.3 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016.
Total assets were $42.9 billion as of June 30, 2017, compared to $43.1 billion as of June 30, 2016.
SC
Net interest income decreased $76.0 million and $196.6 million for the three-month and six-month periods ended June 30, 2017 compared to the corresponding periods in 2016. The2017. This decrease was primarily related to an increase in interest expense during the period. SC's cost of funds increased during 20172018 due to higher market rates and increased spreads.
Total non-interest income increased $65.0 million and $146.7$96.9 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periodsperiod in 2016. 2017, due to the continued growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.
The provision for credit losses increased $8.6 million and decreased $16.5$176.0 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periodsperiod in 2016. 2017. This decrease was primarily due to a lower build of the ACL as a result of the decline in originations during the three-month period ended March 31, 2018 compared to the first quarter of 2017.
Total expenses increased $69.9 million and $163.6$73.5 million for the three-month and six-month periodsperiod ended June 30, 2017March 31, 2018 compared to the corresponding periodsperiod in 2016.
Total assets were $39.5 billion as of June 30, 2017, comparedprimarily due to $38.5 billion as of June 30, 2016.the continued growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FINANCIAL CONDITION
LOAN PORTFOLIO
The Company's loanloans held for investment ("LHFI") portfolio consisted of the following at the dates indicated:
| | | June 30, 2017 | | December 31, 2016 | | June 30, 2016 | | March 31, 2018 | | December 31, 2017 | | March 31, 2017 |
(dollars in thousands) | | | Amount | | Percent | | Amount | | Percent | | Amount | | Percent |
Commercial LHFI: | | | | | | | | | | | | | |
Commercial real estate loans | | | $ | 9,072,529 |
| | 11.3 | % | | $ | 9,279,225 |
| | 11.5 | % | | $ | 9,883,926 |
| | 11.8 | % |
Commercial and industrial loans | | | 13,712,573 |
| | 17.1 | % | | 14,438,311 |
| | 17.9 | % | | 17,218,865 |
| | 20.6 | % |
Multifamily | | | 8,081,924 |
| | 10.1 | % | | 8,274,435 |
| | 10.1 | % | | 8,462,464 |
| | 10.1 | % |
Other commercial | | | 7,337,433 |
| | 9.2 | % | | 7,174,739 |
| | 8.9 | % | | 6,746,717 |
| | 8.0 | % |
Total Commercial Loans (1) | | | 38,204,459 |
| | 47.7 | % | | 39,166,710 |
| | 48.4 | % | | 42,311,972 |
| | 50.5 | % |
| Amount | | Percent | | Amount | | Percent | | Amount | | Percent | | | | | | | | | | | | |
| (dollars in thousands) | |
Commercial loans held for investment: | | | | | | | | | | | | |
Commercial real estate loans | $ | 9,799,724 |
| | 11.8 | % | | $ | 10,112,043 |
| | 11.8 | % | | $ | 10,410,998 |
| | 11.8 | % | |
Commercial and industrial loans and other commercial | 23,032,638 |
| | 27.8 | % | | 25,644,405 |
| | 29.9 | % | | 27,134,937 |
| | 30.8 | % | |
Multifamily | 8,240,516 |
| | 9.9 | % | | 8,683,680 |
| | 10.1 | % | | 9,225,985 |
| | 10.5 | % | |
Total Commercial Loans (1) | 41,072,878 |
| | 49.5 | % | | 44,440,128 |
| | 51.8 | % | | 46,771,920 |
| | 53.1 | % | |
Consumer loans secured by real estate: | | | | | | | | | | | | | | | | | | | | | | | |
Residential mortgages | 8,040,363 |
| | 9.7 | % | | 7,775,272 |
| | 9.1 | % | | 7,519,954 |
| | 8.5 | % | | 9,198,059 |
| | 11.5 | % | | 8,846,765 |
| | 11.0 | % | | 7,801,175 |
| | 9.3 | % |
Home equity loans and lines of credit | 5,903,913 |
| | 7.1 | % | | 6,001,192 |
| | 7.0 | % | | 6,078,463 |
| | 6.9 | % | | 5,788,682 |
| | 7.2 | % | | 5,907,733 |
| | 7.3 | % | | 5,941,340 |
| | 7.1 | % |
Total consumer loans secured by real estate | 13,944,276 |
| | 16.8 | % | | 13,776,464 |
| | 16.1 | % | | 13,598,417 |
| | 15.4 | % | | 14,986,741 |
| | 18.7 | % | | 14,754,498 |
| | 18.3 | % | | 13,742,515 |
| | 16.4 | % |
| | | | | | | | | | | | | |
Consumer loans not secured by real estate: | | | | | | | | | | | | | | | | | | | | | | | |
RICs and auto loans - originated | 23,466,768 |
| | 28.3 | % | | 22,104,918 |
| | 25.8 | % | | 20,903,940 |
| | 23.8 | % | | 23,583,727 |
| | 29.4 | % | | 23,081,424 |
| | 28.6 | % | | 22,729,892 |
| | 27.2 | % |
RICs and auto loans - purchased | 2,554,220 |
| | 3.1 | % | | 3,468,803 |
| | 4.0 | % | | 4,629,815 |
| | 5.3 | % | | 1,515,086 |
| | 1.9 | % | | 1,834,868 |
| | 2.3 | % | | 2,976,567 |
| | 3.6 | % |
Total RICs and auto loans | | | 25,098,813 |
| | 31.3 | % | | 24,916,292 |
| | 30.9 | % | | 25,706,459 |
| | 30.8 | % |
| | | | | | | | | | | | | |
Personal unsecured loans | 1,229,497 |
| | 1.5 | % | | 1,234,094 |
| | 1.4 | % | | 1,189,787 |
| | 1.4 | % | | 1,261,238 |
| | 1.6 | % | | 1,285,677 |
| | 1.6 | % | | 1,211,922 |
| | 1.4 | % |
Other consumer | 689,140 |
| | 0.8 | % | | 795,378 |
| | 0.9 | % | | 908,720 |
| | 1.0 | % | | 567,077 |
| | 0.7 | % | | 617,675 |
| | 0.8 | % | | 742,032 |
| | 0.9 | % |
Total Consumer Loans | 41,883,901 |
| | 50.5 | % | | 41,379,657 |
| | 48.2 | % | | 41,230,679 |
| | 46.9 | % | |
Total loans held for investment ("LHFI") | $ | 82,956,779 |
| | 100.0 | % | | $ | 85,819,785 |
| | 100.0 | % | | $ | 88,002,599 |
| | 100.0 | % | |
| | | | | | | | | | | | | |
Total consumer loans | | | 41,913,869 |
| | 52.3 | % | | 41,574,142 |
| | 51.6 | % | | 41,402,928 |
| | 49.5 | % |
Total LHFI | | | $ | 80,118,328 |
| | 100.0 | % | | $ | 80,740,852 |
| | 100.0 | % | | $ | 83,714,900 |
| | 100.0 | % |
| | | | | | | | | | | | | |
Total LHFI with: | | | | | | | | | | | | | | | | | | | | | | | |
Fixed | $ | 50,623,536 |
| | 61.0 | % | | $ | 51,752,761 |
| | 60.3 | % | | $ | 52,233,658 |
| | 59.4 | % | | $ | 51,066,020 |
| | 63.7 | % | | $ | 50,653,790 |
| | 62.7 | % | | $ | 50,822,537 |
| | 60.7 | % |
Variable | 32,333,243 |
| | 39.0 | % | | 34,067,024 |
| | 39.7 | % | | 35,768,941 |
| | 40.6 | % | | 29,052,308 |
| | 36.3 | % | | 30,087,062 |
| | 37.3 | % | | 32,892,363 |
| | 39.3 | % |
Total LHFI | $ | 82,956,779 |
| | 100.0 | % | | $ | 85,819,785 |
| | 100.0 | % | | $ | 88,002,599 |
| | 100.0 | % | | $ | 80,118,328 |
| | 100.0 | % | | $ | 80,740,852 |
| | 100.0 | % | | $ | 83,714,900 |
| | 100.0 | % |
(1)As of June 30, 2017,March 31, 2018, the Company had $263.0$214.0 million of commercial loans that were denominated in a currency other than the U.S. dollar.
Commercial
Commercial loans decreased approximately $3.4 billion,$962.3 million, or 7.6%2.5%, from December 31, 20162017 to June 30, 2017, and decreased $5.7 billion, or 12.2%, from June 30, 2016 to June 30, 2017. TheMarch 31, 2018. This decrease from December 31, 2016 to June 30, 2017 was primarily due to a decrease in commercial and industrial loans of $2.7 billion, which includes payoffs to approximately 900 loans totaling $1.5 billion.$725.7 million. Additionally, there was a decrease in multifamily loans of $443.2$192.5 million as the companyCompany switches it'sits focus to Commercial Real Estate banking. Commercial real estatefrom CRE loans. CRE loans decreased $312.3$206.7 million.
Commercial loans decreased approximately $4.1 billion, or 9.7%, from March 31, 2017 to March 31, 2018. This decrease was primarily due to a decrease in commercial and industrial loans of $3.5 billion due mainly to a decrease in Global Commercial Banking driven by strategy to reduce exposure. Additionally, there was a decrease in multifamily loans of $380.5 million offset by an increase of $70.6 million in Otheras the Company switches its focus from CRE loans to place emphasis on core commercial loans.
|
| | | | | | | | | | | | | | | |
| At June 30, 2017, Maturing |
| In One Year Or Less | | One to Five Years | | After Five Years | | Total(1) |
| (in thousands) |
Commercial real estate loans | $ | 2,396,397 |
| | $ | 5,738,352 |
|
| $ | 1,664,975 |
| | $ | 9,799,724 |
|
Commercial and industrial loans and other | 9,350,567 |
| | 11,383,353 |
|
| 2,458,970 |
| | 23,192,890 |
|
Multi-family loans | 999,929 |
| | 6,258,012 |
|
| 982,575 |
| | 8,240,516 |
|
Total | $ | 12,746,893 |
|
| $ | 23,379,717 |
|
| $ | 5,106,520 |
| | $ | 41,233,130 |
|
Loans with: | | | | | | | |
Fixed rates | $ | 4,012,904 |
| | $ | 10,539,225 |
|
| $ | 2,066,922 |
| | $ | 16,619,051 |
|
Variable rates | 8,733,989 |
| | 12,840,492 |
|
| 3,039,598 |
| | 24,614,079 |
|
Total | $ | 12,746,893 |
|
| $ | 23,379,717 |
|
| $ | 5,106,520 |
| | $ | 41,233,130 |
|
(1) Includes LHFS.business. CRE loans decreased $811.4 million.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
|
| | | | | | | | | | | | | | | | |
| | At March 31, 2018, Maturing |
(in thousands) | | In One Year Or Less | | One to Five Years | | After Five Years | | Total(1) |
CRE loans | | $ | 2,483,343 |
| | $ | 5,072,140 |
|
| $ | 1,517,046 |
| | $ | 9,072,529 |
|
Commercial and industrial loans and other | | 8,049,650 |
| | 11,308,603 |
|
| 1,887,474 |
| | 21,245,727 |
|
Multifamily loans | | 802,017 |
| | 6,139,109 |
|
| 1,140,798 |
| | 8,081,924 |
|
Total | | $ | 11,335,010 |
|
| $ | 22,519,852 |
|
| $ | 4,545,318 |
| | $ | 38,400,180 |
|
Loans with: | | | | | | | | |
Fixed rates | | $ | 3,731,787 |
| | $ | 11,143,780 |
|
| $ | 2,120,255 |
| | $ | 16,995,822 |
|
Variable rates | | 7,603,223 |
| | 11,376,072 |
|
| 2,425,063 |
| | 21,404,358 |
|
Total | | $ | 11,335,010 |
|
| $ | 22,519,852 |
|
| $ | 4,545,318 |
| | $ | 38,400,180 |
|
(1) Includes LHFS.
Consumer Loans Secured By Real Estate
Consumer loans secured by real estate increased $167.8$232.2 million, or 1.2%1.6%, from December 31, 20162017 to June 30, 2017, and increased $345.9 million, or 2.5%, from June 30, 2016 to June 30, 2017. TheMarch 31, 2018. This increase from December 31, 2016 to June 30, 2017 was comprised of an increase in the residential mortgage portfolio of $265.1$351.3 million due to an increase in new loan originations, offset by a decrease in the home equity loans and lines of credit portfolio of $97.3$119.1 million.
Consumer loans secured by real estate increased $1.2 billion, or 9.1%, from March 31, 2017 to March 31, 2018. This increase was comprised of an increase in the residential mortgage portfolio of $1.4 billion due to an increase in new loan originations, offset by a decrease in the home equity loans and lines of credit portfolio of $152.7 million.
Consumer Loans Not Secured By Real Estate
The consumer loan portfolio not secured by real estateRICs
RICs increased $336.4$182.5 million, or 1.2%0.7%, from December 31, 20162017 to June 30, 2017, and increased $307.4 million, or 1.1%, from June 30, 2016 to June 30, 2017.March 31, 2018. The increase was primarily due to the $1.4 billion increase in the RIC and auto loans - originated portfolio. The growthloan portfolio was primarily due to an increase in new originations of $502.3 million, which was partially offset by a $319.8 million decrease in RICs and auto loan portfolio-purchased. The decrease in the RIC and auto loan portfolio-purchased was due to run-off of the portfolio from normal paydown and chargeoff activity.
RICs decreased $607.6 million, or 2.4%, from March 31, 2017 to March 31, 2018. The decrease in the RIC and auto loan portfolio - purchased portfoliowas primarily due to a decrease in RICs and auto loan portfolio-purchased of $914.6 million. This$1.5 billion, which was partially offset by a $853.8 million increase in new originations. The decrease isin the RIC and auto loan portfolio-purchased was due to run-off of the portfolio.portfolio from normal paydown and chargeoff activity.
Other Consumer Loans
Other consumer loans remained relatively flat from December 31, 2017 to March 31, 2018, with a decrease of $75.0 million and from March 31, 2017 to March 31, 2018 with a decrease of $125.6 million.
As of June 30, 2017, 68.8%March 31, 2018, 83.0% of the Company's RIC and auto loan portfolio was comprised of nonprime loans (defined by the Company as customers with a FICO®Fair Isaac Corporation score of below 640) with customers who did not qualify for conventional consumer finance products as a result of, among other things, a lack of or adverse credit history, low income levels and/or the inability to provide adequate down payments. While underwriting guidelines were designed to establish that the customer would be a reasonable credit risk, nonprime loans will nonetheless experience higher default rates than a portfolio of obligations of prime customers. Additionally, higher unemployment rates, higher gasoline prices, unstable real estate values, re-sets of adjustable rate mortgages to higher interest rates, the general availability of consumer credit, and other factors that impact consumer confidence or disposable income could lead to an increase in delinquencies, defaults, and repossessions, as well as decrease consumer demand for used automobiles and other consumer products, weaken collateral values and increase losses in the event of default. Because SC's historical focus for such credit has been predominantly on nonprime consumers, the actual rates of delinquencies, defaults, repossessions, and losses on these loans could be more dramatically affected by a general economic downturn.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Company's automated originations process for these credits reflects a disciplined approach to credit risk management to mitigate the risks of nonprime customers. The Company's robust historical data on both organically originated and acquired loans provides it with the ability to perform advanced loss forecasting. Each applicant is automatically assigned a proprietary custom score using information such as FICO® scores, debt-to-income ("DTI") ratios, loan-to-value ("LTV") ratios, and over 30 other predictive factors, placing the applicant in one of 100 pricing tiers. The pricing in each tier is continuously monitored and adjusted to reflect market and risk trends. In addition to the Company's automated process, it maintains a team of underwriters for manual review, consideration of exceptions, and review of deal structures with dealers.
|
| | | | | | | | | | | | |
| | June 30, 2017 | | December 31, 2016 |
Credit Score Range(2) | | RICs and auto loans(3) | | RICs and auto loans(3) |
| | Standard file(4) | | Non-Standard file(5) | | Standard file(4) | | Non-Standard file(5) |
| | | | | | | | |
No FICO®(1) | | 5.2 | % | | 59.2 | % | | 5.5 | % | | 61.7 | % |
<600 | | 60.9 | % | | 20.6 | % | | 60.1 | % | | 20.6 | % |
600-639 | | 19.0 | % | | 9.0 | % | | 19.4 | % | | 7.9 | % |
>=640 | | 14.9 | % | | 11.2 | % | | 15.0 | % | | 9.8 | % |
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 include $1.1 billion and $924.7 million of LHFS at June 30, 2017 and December 31, 2016, 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.
At June 30, 2017,March 31, 2018, a typical RIC was originated with an average annual percentage rate of 15.6%16.1% and was purchased from the dealer at a discount of 0.3%. All of the Company's RICs and auto loans are fixed-rate loans.
Nonprime RICs and personal unsecured loans have a higher inherent risk of loss than prime loans. The Company records an ALLL to cover its estimate of inherent losses on its RICs incurred as of the balance sheet date. As of June 30, 2017,March 31, 2018, SC's personal unsecured portfolio was held for sale and thus does not have a related allowance.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
As a result of the strategic evaluation of SC's personal lending portfolio, in the third quarter of 2015, SC began reviewing strategic alternatives for exiting its personal loan portfolios. In connection with this review, on October 9, 2015, SC delivered a 90-day notice of termination of its loan purchase agreement with LendingClub. On February 1, 2016, SC completed the sale of substantially all of its LendingClub loans to a third-party buyer at an immaterial premium to par value. On April 14, 2017, SC sold the remaining portfolio, comprised of personal installment loans, to a third-party buyer.
SC's other significant personal lending relationship is with Bluestem. SC continues to perform in accordance with the terms and operative provisions of the agreements under which it is obligated to purchase personal revolving loans originated by Bluestem for a term ending in 2020, or 2022 if extended at Bluestem's option. The Bluestem loan portfolio is carried as held for sale in our Condensed Consolidated Financial Statements. Accordingly, the Company has recorded lower-of-cost-or-market adjustments on this portfolio, and there may be further such adjustments required in future periods' financial statements. Management is currently evaluating alternatives for the Bluestem portfolio.
CREDIT RISK MANAGEMENT
Extending credit to customers exposes the Company to credit risk, which is the risk that contractual principal and interest due on loans will not be collected due to the inability or unwillingness of the borrower to repay the loan. The Company manages credit risk in its loan portfolio through adherence to consistent standards, guidelines, and limitations established by the Company’s Board of Directors as set forth in its Board-approved Risk Appetite Statement. Written loan policies establish underwriting standards, lending limits, and other standards or limits deemed necessary and prudent. Various approval levels based on the amount of the loan and other key credit attributes have also been established. To ensure consistency andcredit quality, loans are executed in accordance with the Company'sCompany’s credit and governance standards authority to approve loans is shared jointly between the businesses and the Creditconsistent with its Enterprise Risk Review group.Management Framework. Loans over certain dollar thresholds require approval by the Company's credit committees, with higher balance loans requiring approval by more senior level committees.
The Credit Risk Review group conducts ongoing independent reviews of the credit quality of the Company’s loan portfolios and credit management processes to ensure the accuracy of the risk ratings and adherence to established policies and procedures, verify compliance with applicable laws and regulations, provide objective measurement of the risk inherent in the loan portfolio, and ensure that proper documentation exists. The results of these periodic reviews are reported to business line management, Risk Management and the Audit Committee of both the Company and the Bank. The Company maintains a classification system for loans that identifies those requiring a higher level of monitoring by management because of one or more factors, including borrower performance, business conditions, industry trends, the natureliquidity and value of the collateral, collateral margin, economic conditions, or other factors. Loan credit quality is subject to scrutiny by business unit management, credit risk professionals, and Internal Audit.
The following discussion summarizes the underwriting policies and procedures for the major categories within the loan portfolio and addresses SHUSA’s strategies for managing the related credit risk. Additional credit risk management related considerations are discussed further in the "Allowance for Loan and Lease Losses" section of this MD&A.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Commercial Loans
Commercial loans principally represent commercial real estate loans (including multifamily loans), loans to commercial and industrial customers, and automotive dealer floor plan loans. Credit risk associated with commercial loans is primarily influenced by prevailing and expected economic conditions and the level of underwriting risk SHUSA is willing to assume. To manage credit risk when extending commercial credit, the Company focuses on assessing the borrower’s capacity and willingness to repay and obtaining sufficient collateral. Commercial and industrial loans are generally secured by the borrower’s assets and by personal guarantees. Commercial real estate loans are originated primarily within the Mid-Atlantic, New York, and New England market areas and are secured by real estate at specified LTV ratios and often by a guarantee of the borrower.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Consumer Loans Secured by Real Estate
Credit risk in the direct and indirect consumer loan portfolio is controlled by strict adherence to underwriting standards that consider DTI levels, the creditworthiness of the borrower, and collateral values. In the home equity loan portfolio, combined LTV ("CLTV") ratios are generally limited to 90% for both first and second liens. SHUSA originates and purchases fixed-rate and adjustable rate residential mortgage loans that are secured by the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the creditworthiness of the borrower, including debt-to-equity ratios, credit scores, and adherence to underwriting policies that emphasize conservative LTV ratios of generally no more than 80%. Residential mortgage loans originated or purchased in excess of an 80% LTV ratio are generally insured by private mortgage insurance, unless otherwise guaranteed or insured by the Federal, state, or local government. SHUSA also utilizes underwriting standards which comply with those of the FHLMC or FNMA. Credit risk is further reduced, since a portion of the Company’s fixed-rate mortgage loan production is sold to investors in the secondary market without recourse.
Consumer Loans Not Secured by Real Estate
The Company’s consumer loans not secured by real estate include RICs acquired from manufacturer-franchised dealers in connection with their sale of used and new automobiles and trucks, as well as acquired consumer marine, RV and credit card loans. Credit risk is mitigated to the extent possible through early and robust collection practices, which includes the repossession of vehicles.
Collections
The Company closely monitors delinquencies as another means of maintaining high asset quality. Collection efforts generally begin within 15 days after a loan payment is missed by attempting to contact all borrowers and offer a variety of loss mitigation alternatives. If these attempts fail, the Company will attempt to gain control of collateral in a timely manner in order to minimize losses. While liquidation and recovery efforts continue, officers continue to work with the borrowers, if appropriate, to recover all money owed to the Company. The Company monitors delinquency trends at 30, 60, and 90 days past due. These trends are discussed at monthly management Credit Risk Review Committee meetings and at the Company's and the Bank's Board of Directors' meetings.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
NON-PERFORMING ASSETS
The following table presents the composition of non-performing assets at the dates indicated:
| | | June 30, 2017 | | December 31, 2016 | | Three-Month Period Ended | | YTD Change |
| (dollars in thousands) | |
(dollars in thousands) | | | March 31, 2018 | | December 31, 2017 | | Dollar | | Percentage |
Non-accrual loans: | | | | | | | | | | | |
Commercial: | | | | | | | | | | | |
Commercial real estate | $ | 126,357 |
| | $ | 179,220 |
| |
Commercial and industrial loans and other commercial | 286,729 |
| | 193,465 |
| |
CRE | | | $ | 132,941 |
| | $ | 139,236 |
| | $ | (6,295 | ) | | (4.5 | )% |
Commercial and industrial loans | | | 203,738 |
| | 230,481 |
| | (26,743 | ) | | (11.6 | )% |
Multifamily | 6,212 |
| | 8,196 |
| | 10,569 |
| | 11,348 |
| | (779 | ) | | (6.9 | )% |
Other commercial | | | 79,474 |
| | 83,468 |
| | (3,994 | ) | | (4.8 | )% |
Total commercial loans | 419,298 |
| | 380,881 |
| | 426,722 |
| | 464,533 |
| | (37,811 | ) | | (8.1 | )% |
Consumer: | |
| | |
| |
| | | | | | | | | |
Consumer loans secured by real estate: | | | |
| | |
| | | | |
Residential mortgages | 265,454 |
| | 287,140 |
| | 257,995 |
| | 265,436 |
| | (7,441 | ) | | (2.8 | )% |
Consumer loans secured by real estate | 118,860 |
| | 120,065 |
| |
Home equity loans and lines of credit | | | 131,036 |
| | 134,162 |
| | (3,126 | ) | | (2.3 | )% |
Consumer loans not secured by real estate: | | | | | | |
|
| |
|
|
RICs and auto loans - originated | 1,284,957 |
| | 1,045,587 |
| | 1,644,605 |
| | 1,816,226 |
| | (171,621 | ) | | (9.4 | )% |
RICs - purchased | 260,759 |
| | 284,486 |
| | 207,328 |
| | 256,617 |
| | (49,289 | ) | | (19.2 | )% |
Personal unsecured and other consumer | 16,004 |
| | 17,895 |
| |
Total RICs and Auto loans | | | 1,851,933 |
| | 2,072,843 |
| | (220,910 | ) | | (10.7 | )% |
| | | | | | | | | |
Personal unsecured loans | | | 2,820 |
| | 2,366 |
| | 454 |
| | 19.2 | % |
Other consumer | | | 11,118 |
| | 10,657 |
| | 461 |
| | 4.3 | % |
Total consumer loans | 1,946,034 |
| | 1,755,173 |
| | 2,254,902 |
| | 2,485,464 |
| | (230,562 | ) | | (9.3 | )% |
Total non-accrual loans | 2,365,332 |
| | 2,136,054 |
| | 2,681,624 |
| | 2,949,997 |
| | (268,373 | ) | | (9.1 | )% |
| | | | | | | | | | | |
Other real estate owned | 108,046 |
| | 116,705 |
| | 126,714 |
| | 130,777 |
| | (4,063 | ) | | (3.1 | )% |
Repossessed vehicles | 161,020 |
| | 173,754 |
| | 171,359 |
| | 210,692 |
| | (39,333 | ) | | (18.7 | )% |
Other repossessed assets | 1,834 |
| | 3,838 |
| | 1,324 |
| | 2,190 |
| | (866 | ) | | (39.5 | )% |
Total other real estate owned and other repossessed assets | 270,900 |
| | 294,297 |
| |
Total other real estate owned ("OREO") and other repossessed assets | | | 299,397 |
| | 343,659 |
| | (44,262 | ) | | (12.9 | )% |
Total non-performing assets | $ | 2,636,232 |
| | $ | 2,430,351 |
| | $ | 2,981,021 |
| | $ | 3,293,656 |
| | $ | (312,635 | ) | | (9.5 | )% |
| | | | | | | | | | | |
Past due 90 days or more as to interest or principal and accruing interest | $ | 143,984 |
| | $ | 93,846 |
| | $ | 81,455 |
| | $ | 96,461 |
| | n/a | | n/a |
Annualized net loan charge-offs to average loans (1) | 2.8 | % | | 2.7 | % | | 2.8 | % | | 3.0 | % | | n/a | | n/a |
Non-performing assets as a percentage of total assets | 2.0 | % | | 1.8 | % | | 2.3 | % | | 2.6 | % | | n/a | | n/a |
Non-performing loans ("NPLs") as a percentage of total loans | 2.8 | % | | 2.4 | % | |
NPLs as a percentage of total loans | | | 3.3 | % | | 3.5 | % | | n/a | | n/a |
ALLL as a percentage of total NPLs | 167.1 | % | | 178.6 | % | | 143.7 | % | | 132.6 | % | | n/a | | n/a |
(1) Annualized net loan charge-offs to average loans is calculated as annualized net loan charge-offs divided by the average loan balance for the year-to-date period ended June 30, 2017.March 31, 2018.
No commercial loans were 90 days or more past due and still accruing interest as of June 30, 2017. 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 $137.2$186.9 million and $120.7$112.3 million at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively. Potential problem consumer loans amounted to $3.3 billion and $4.2 billion and $4.3 billion at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively. Management has included these loans in its evaluation and reserved for them during the respective periods.
Non-performing assets increased during the period to $2.6$3.0 billion, or 2.0%2.3% of total assets, at June 30, 2017,March 31, 2018, compared to $2.4$3.3 billion, or 1.8%2.6% of total assets, at December 31, 2016,2017, primarily attributable to an increase in NPLs in the commercial and industrial and RIC auto loan portfolios, offset by a decreaseportfolios. The increase in the mortgagenon-accrual commercial and home equityindustrial NPL portfolio was driven by obligors that experienced credit difficulties during the year. The increase in the other commercial NPL portfolio was primarily driven by one obligor located in Puerto Rico that experienced business disruptions due to Hurricane Maria.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The increase in RIC non-accrual loans as of March 31, 2018 was the result of the Company classifying $837.3 million of RIC TDR loans that were less than 60 days past due, but for which repayment was not reasonably assured, as non-accrual. Until repayment is reasonably assured, the Company is applying the cost recovery method to this RIC portfolio, which accelerated the reduction of the outstanding RIC balance and correspondingly reduced the required allowance and decreased the allowance for loan portfolios.losses as a percentage of the NPL ratio. In addition, the purchased RIC ALLL/NPL portfolio decreased primarily due to a $0.3 billion, or 17.4%, decline in the portfolio as it is in run-off.
General
Non-performing assets consist of NPLs, which represent loans and leases no longer accruing interest, other real estate owned ("OREO")OREO properties, and other repossessed assets. When interest accruals are suspended, accrued but uncollected interest income is reversed, with accruals charged against earnings. The Company generally places all commercial loans and consumer loans secured by real estate on non-performing status at 90 days past due for interest, principal or maturity, or earlier if it is determined that the collection of principal or interest on the loan is in doubt. For certain individual portfolios, including the RIC portfolio, non-performing status will begin atwhen the RICs are more than 60 days past due. Personal unsecured loans, including credit cards, generally continue to accrue interest until they are 180 days delinquent, at which point they are charged-off and all accrued but uncollected interest is removed from interest income.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
In general, when the borrower's ability to make required interest and principal payments has resumed and collectability is no longer believed to be in doubt, the loan or lease is returned to accrual status. Generally, commercial loans categorized as non-performing remain in non-performing status until the payment status is current and an event occurs that fully remediates the impairment or the loan demonstrates a sustained period of performance without a past due event, and there is reasonable assurance as to the collectability of all amounts due. Within the residential mortgage and home equity portfolios, accrual status is generally systematically driven, so that if the customer makes a payment that brings the loan below 90 days past due, the loan automatically returns to accrual status.
Commercial
Commercial NPLs increased $38.4decreased $37.8 million from December 31, 20162017 to June 30, 2017. At June 30, 2017, commercialMarch 31, 2018. Commercial NPLs accounted for 1.0% of commercial LHFI, compared to 0.9%1.1% and 1.2% of commercial LHFI at March 31, 2018 and December 31, 2016.2017, respectively. The increasedecrease in commercial NPLs was comprised of an $81.8a $30.7 million increasedecrease in the commercial and industrial portfolio, primarily with customers related to the energy sector, offset byNPLs, and a $6.3 million decrease of $52.9 million in the commercial real estateCRE portfolio.
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 June 30, 2017 and December 31, 2016, respectively:
|
| | | | | | | | | | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| Residential mortgages | | Home equity loans and lines of credit | | Residential mortgages | | Home equity loans and lines of credit |
| (dollars in thousands) |
NPLs | $ | 265,454 |
| | $ | 118,860 |
| | $ | 287,140 |
| | $ | 120,065 |
|
Total LHFI | 8,040,363 |
| | 5,903,913 |
| | 7,775,272 |
| | 6,001,192 |
|
NPLs as a percentage of total LHFI | 3.3 | % | | 2.0 | % | | 3.7 | % | | 2.0 | % |
NPLs in foreclosure status | 55.6 | % | | 34.0 | % | | 58.6 | % | | 38.4 | % |
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.
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 (i.e., 61 days past due) with respect to principal or interest. Except for loans accounted for using the FVO, at the time a loan is placed on non-performing status, previously accrued and uncollected interest is reversed against interest income. When an account is 60 days or less past due, it is returned to 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.
RIC TDRs are placed on non-accrual status when the Company believes repayment under the revised terms is not reasonably assured and, at the latest, when the account becomes past due more than 60 days. For loans on non-accrual status, interest income is recognized on a cash basis, however, the Company continues to assess the recognition of cash received on those loans in order to identify whether certain of those loans should also be placed on a cost recovery basis. For TDR loans on non-accrual status, the accrual of interest is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due. However, for TDR loans placed on cost recovery basis, the Company returns to accrual when a sustained period of repayment performance has been achieved. Based on deteriorating TDR vintage performance, beginning January 1, 2017, the Company believes repayment under the revised terms is not reasonably assured for a RIC that is already on non-accrual status (i.e., more than 60 days past due) and has received a modification or deferment that qualifies as a TDR event. In addition, any TDR that subsequently receives a third deferral is placed on non-accrual status. Further, the Company has determined that certain of these loans should also be placed on a cost recovery basis.
Interest is accrued when earned in accordance with the terms of the RIC. For certain RICs originated prior to January 1, 2017, the Company considers 50% of a single payment due sufficient to qualify as a payment for past due classification purposes. For RICs originated after January 1, 2017, the required minimum payment is 90% of the scheduled payment, regardless of through which origination channel the receivable was originated through.originated. The Company aggregates partial payments in determining whether a full payment has been missed in computing past due status.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
NPLs in the RIC and auto loan portfolio increased $215.6decreased $220.9 million from December 31, 20162017 to June 30, 2017. The increase was comprised of a $239.4 million increase in RICs and auto loans-originated offset by a $23.7 million decrease in RICs - purchased.March 31, 2018. At June 30, 2017,March 31, 2018, non-performing RICs and auto loans accounted for 5.9%7.4% of total RIC and auto loans held for investment,LHFI, compared to 5.2%8.3% of total RICs and auto loans at December 31, 2016. 2017.
NPLs in the unsecured and other consumer loan portfolio decreased $1.9increased $0.9 million from December 31, 20162017 to June 30, 2017.March 31, 2018. At June 30, 2017March 31, 2018 and December 31, 2016,2017, non-performing personal unsecured and other consumer loans accounted for 0.8% and 0.9%0.7% of total unsecured and other consumer loans, respectively.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Consumer Loans Secured by Real Estate
Foreclosure Activity
The percentagefollowing table shows NPLs compared to total loans outstanding for the residential mortgage and home equity portfolios as of NPLs in foreclosure status decreased from 58.6% atMarch 31, 2018 and December 31, 2016 to 55.6% at June 30, 2017, for residential mortgages and from 38.4% at December 31, 2016 to 34.0% at June 30, 2017 for Home Equity loans.respectively:
The dollar value of NPLs in foreclosure status decreased from $168.2 million at December 31, 2016 to $147.5 million at June 30, 2017 for residential mortgages and from $46.2 million at December 31, 2016 to $40.4 million at June 30, 2017 for Home Equity loans. |
| | | | | | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
(dollars in thousands) | | Residential mortgages | | Home equity loans and lines of credit | | Residential mortgages | | Home equity loans and lines of credit |
NPLs | | $ | 257,995 |
| | $ | 131,036 |
| | $ | 265,436 |
| | $ | 134,162 |
|
Total LHFI | | 9,198,059 |
| | 5,788,682 |
| | 8,846,765 |
| | 5,907,733 |
|
NPLs as a percentage of total LHFI | | 2.8 | % | | 2.3 | % | | 3.0 | % | | 2.3 | % |
NPLs in foreclosure status | | 48.3 | % | | 51.5 | % | | 48.8 | % | | 52.2 | % |
The NPL ratio is significantly higher for the Company's residential mortgage loan portfolio compared to its consumer loans secured by real estate portfolio due to a number of factors, including:including the prolonged workout and foreclosure resolution processes for residential mortgage loans;loans, differences in risk profiles;profiles, and mortgage loans located outside the Northeast and Mid-Atlantic United States.
Foreclosure Activity
The percentage of NPLs in foreclosure status decreased from 48.8% at December 31, 2017 to 48.3% at March 31, 2018 for residential mortgages and decreased from 52.2% at December 31, 2017 to 51.5% at March 31, 2018 for home equity loans.
In recent years, select states and territories within the Bank’s footprint have experienced delays in the foreclosure process and therefore, impact NPL volume. Counties in New Jersey have historically displayed significant delays in foreclosure sale timelines and New York has been experiencing similar court delays which impacts foreclosure inventory outflow.
Puerto Rico’s economy remains immerse in an economic and fiscal crisis that has already extended for 11-years.11 years. The island’s economy continues experiencing adjustments related to the aftermath of the housing market crisis, to the banking industry consolidation in 2010;2010 and to multiple rounds of austerity measures implemented in recent years in an attempt to stabilize the public sector fiscal crisis. These circumstances have eroded confidence and prolonged the contraction in economic activity.activity prior to the impact of 2017's hurricanes. Refer to the "Economic and Business Environment" section of this MD&A for additional information on the impact of Hurricane Maria on Puerto Rico.
The following table represents the concentration of foreclosures by state and U.S territoriesU.S. territory for the Company as a percentage of total foreclosures at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively:
| | | June 30, 2017 | | December 31, 2016 | | | | |
| | | March 31, 2018 | | December 31, 2017 |
Puerto Rico | 54.2% | | 60.0% | | 54.1% | | 53.5% |
New Jersey | | | 10.0% | | 13.7% |
New York | 12.3% | | 10.7% | | 9.7% | | 6.4% |
Pennsylvania | | | 5.5% | | 10.9% |
Massachusetts | 10.8% | | 7.0% | | 10.9% | | 5.8% |
All other states(1) | 22.7% | | 22.3% | | 9.8% | | 9.7% |
(1)States included in this category individually represent less than 10% of total foreclosures.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The foreclosure closings issue has a greater impact on the residential mortgage portfolio than the consumer real estate secured portfolio due to the larger volume of loans in first lien position in that portfolio which have equity upon which to foreclose. Exclusive of Chapter 7 bankruptcy NPL accounts, approximately 98.6% of the 90+ day delinquent loan balances in the residential mortgage portfolio are secured by a first lien, while only 53.8%53.5% of the 90+ day delinquent loan balances in the consumer real estate secured portfolio are secured by a first lien. Consumer real estate secured NPLs may get charged off more quickly due to the lack of equity to foreclose from a second lien position.
Alt-A Loans
The Alt-A segment consists of loans with limited documentation requirements and a portion of which were originated through independent parties ("Brokers") outside the Bank's geographic footprint. At June 30, 2017March 31, 2018 and December 31, 2016,2017, the residential mortgage portfolio included the following Alt-A loans:
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| (dollars in thousands) |
| | | |
Alt-A loans | $ | 431,579 |
| | $ | 476,229 |
|
Alt-A loans as a percentage of the residential mortgage portfolio(1) | 5.2 | % | | 5.8 | % |
Alt-A loans in NPL status | $ | 42,501 |
| | $ | 48,189 |
|
Alt-A loans in NPL status as a percentage of residential mortgage NPLs | 16.0 | % | | 16.8 | % |
(1) Includes residential mortgage held for sale
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
|
| | | | | | | | |
(dollars in thousands) | | March 31, 2018 | | December 31, 2017 |
Alt-A loans | | $ | 366,724 |
| | $ | 386,412 |
|
Alt-A loans as a percentage of the residential mortgage portfolio(1) | | 3.9 | % | | 4.3 | % |
Alt-A loans in NPL status | | $ | 30,050 |
| | $ | 33,534 |
|
Alt-A loans in NPL status as a percentage of residential mortgage NPLs | | 11.6 | % | | 12.6 | % |
| |
Item 2.(1) | Management’s Discussion and Analysis of Financial Condition and Results of OperationsIncludes residential mortgage held for sale |
The performance of the Alt-A segment has remained poor, averaging a 9.8%an 8.2% NPL ratio in 2017.2018. Alt-A mortgage originations were discontinued in 2008 and have continued to run off at an average rate of 2.0% per month.2008. Alt-A NPL balances represented 64.6% of the total residential mortgage loan portfolio NPL balance at the end of the first quarter of 2009, when the portfolio was placed in run-off, compared to 16.0%11.6% at June 30, 2017.March 31, 2018. As the Alt-A segment runs off and higher quality residential mortgages are added to the portfolio, the shift in product mix is expected to lower NPL balances.balances as a percentage of the residential mortgage portfolio.
Troubled Debt Restructurings ("TDRs")Delinquencies
At March 31, 2018 and December 31, 2017, the Company's delinquencies consisted of the following:
|
| | | | | | | | | | | | |
| | March 31, 2018 | | December 31, 2017 |
(dollars in thousands) | | Consumer Loans Secured by Real Estate | RICs and auto loans | Personal unsecured and Other Consumer Loans | Commercial Loans | Total | | Consumer Loans Secured by Real Estate | RICs and auto loans | Personal unsecured and Other Consumer Loans | Commercial Loans | Total |
Total delinquencies | | $515,717 | $3,217,540 | $224,357 | $349,851 | $4,307,465 | | $571,229 | $4,225,517 | $229,547 | $295,138 | $5,321,431 |
Total loans(1) | | $15,163,758 | $25,718,981 | $2,796,104 | $38,400,180 | $82,079,023 | | $14,964,668 | $26,017,340 | $2,965,442 | $39,315,888 | $83,263,338 |
Delinquencies as a % of Loans | | 3.4% | 12.5% | 8.0% | 0.9% | 5.2% | | 3.8% | 16.2% | 7.7% | 0.8% | 6.4% |
Overall, total delinquencies decreased by $1.0 billion, or 19.1%, from December 31, 2017 to March 31, 2018 primarily driven by RICs and auto loan delinquencies which decreased $1.0 billion. Delinquencies in the RIC and auto loan portfolio at December 31, 2017 were primarily a result of a decline in the credit quality of the 2015 vintage RICs, which have a higher percentage of loans with no FICO scores. Due to payments and charge-offs on 2015 vintage RICs that continued in 2018, the 2015 vintage RICs had a lower impact on delinquencies at March 31, 2018 than December 31, 2017. Commercial loan delinquencies increased by $54.7 million from December 31, 2017 to March 31, 2018, primarily related to commercial and industrial loans located in Puerto Rico due to overall economic conditions on the island.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
TDRs
TDRs are loans that have been modified as the Company has agreed to make certain concessions to both meet the needs of the customers and maximize its ultimate recovery on the loans. TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified with terms that would otherwise not be granted to the borrower. The types of concessions granted are generally interest rate reductions, limitations on accrued interest charged, term extensions, and deferments of principal.
TDRs are generally placed in nonaccrual status upon modification, unless the loan was performing immediately prior to modification. For most portfolios, TDRs may return to accrual status after demonstrating at least six consecutive months of sustained payments following modification, as long as the Company believes the principal and interest of the restructured loan will be paid in full. RIC TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured, and considered for return to accrual when a sustained period of repayment performance has been achieved. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on the operation of the collateral, the loan may be returned to accrual status based on the foregoing parameters. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on disposal of the collateral, the loan may not be returned to accrual status.
The following table summarizes TDRs at the dates indicated:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2018 |
(in thousands) | | Commercial | % | | Consumer loans secured by real estate | % | | RICs and auto loans | % | | Other consumer | % | | Total TDRs |
Performing | | $ | 145,800 |
| 51.9 | % | | $ | 273,604 |
| 69.5 | % | | $ | 5,264,200 |
| 91.5 | % | | $ | 127,797 |
| 75.7 | % | | $ | 5,811,401 |
|
Non-performing | | 135,265 |
| 48.1 | % | | 120,314 |
| 30.5 | % | | 489,414 |
| 8.5 | % | | 40,965 |
| 24.3 | % | | 785,958 |
|
Total | | $ | 281,065 |
| 100.0 | % | | $ | 393,918 |
| 100.0 | % | | $ | 5,753,614 |
| 100.0 | % | | $ | 168,762 |
| 100.0 | % | | $ | 6,597,359 |
|
| | | | | | | | | | | | | | |
% of loan portfolio | | 0.7 | % | n/a |
| | 2.6 | % | n/a |
| | 22.4 | % | n/a |
| | 6.0 | % | n/a |
| | 8.0 | % |
(1) Includes LHFS | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | As of December 31, 2017 |
(in thousands) | | Commercial | % | | Consumer loans secured by real estate | % | | RICs and auto loans | % | | Other consumer | % | | Total TDRs |
Performing | | $ | 146,808 |
| 54.4 | % | | $ | 292,634 |
| 70.8 | % | | $ | 5,270,507 |
| 88.3 | % | | $ | 114,355 |
| 74.7 | % | | $ | 5,824,304 |
|
Non-performing | | 123,266 |
| 45.6 | % | | 120,458 |
| 29.2 | % | | 700,461 |
| 11.7 | % | | 38,683 |
| 25.3 | % | | 982,868 |
|
Total | | $ | 270,074 |
| 100.0 | % | | $ | 413,092 |
| 100.0 | % | | $ | 5,970,968 |
| 100.0 | % | | $ | 153,038 |
| 100.0 | % | | $ | 6,807,172 |
|
| | | | | | | | | | | | | | |
% of loan portfolio | | 0.7 | % | n/a |
| | 2.8 | % | n/a |
| | 22.9 | % | n/a |
| | 5.2 | % | n/a |
| | 8.2 | % |
|
| | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| (in thousands) |
Performing | | | |
Commercial | $ | 165,108 |
| | $ | 214,474 |
|
Residential mortgage | 278,114 |
| | 268,777 |
|
RICs and auto loans | 4,981,017 |
| | 4,556,770 |
|
Other consumer | 129,786 |
| | 129,767 |
|
Total performing | 5,554,025 |
| | 5,169,788 |
|
Non-performing | | | |
Commercial | 203,562 |
| | 148,038 |
|
Residential mortgage | 122,896 |
| | 139,274 |
|
RICs and auto loans | 596,401 |
| | 604,864 |
|
Other consumer | 44,594 |
| | 44,951 |
|
Total non-performing | 967,453 |
| | 937,127 |
|
Total | $ | 6,521,478 |
| | $ | 6,106,915 |
|
Performing TDRs totaled $5.6 billion at June 30, 2017, an increase of $384.2 million compared to December 31, 2016. Non-performing TDRs totaled $1.0 billion at June 30, 2017, an increase of $30.3 million compared to December 31, 2016.(1) Includes LHFS.
The following table provides a summary of TDR activity:
|
| | | | | | | | | | | | | | | | |
| | Six-Month Period Ended June 30, 2017 | | Six-Month Period Ended June 30, 2016 |
| | RICs and auto loans | | All other loans(1) | | RICs and auto loans | | All other loans(1) |
| | (in thousands) |
TDRs, beginning of period | | $ | 5,161,935 |
| | $ | 944,981 |
| | $ | 3,866,235 |
| | $ | 800,220 |
|
New TDRs(2) | | 2,062,608 |
| | 163,156 |
| | 1,597,316 |
| | 213,608 |
|
Charged-Off TDRs | | (1,091,066 | ) | | (132,541 | ) | | (691,772 | ) | | (40,844 | ) |
Sold TDRs | | — |
| | (7,252 | ) | | — |
| | (3,321 | ) |
Payments on TDRs | | (556,121 | ) | | (24,222 | ) | | (317,734 | ) | | (50,454 | ) |
TDRs, end of period | | $ | 5,577,356 |
| | $ | 944,122 |
| | $ | 4,454,045 |
| | $ | 919,209 |
|
(1) Excludes SC personal unsecured loans, which amounted to $28.5 million and $21.7 million at June 30, 2017 and 2016, respectively, which were reclassified to LHFS during the third quarter of 2015.
(2) New TDRs includes drawdowns on lines of credit that have previously been classified as TDRs.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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| | | | | | | | | | | | | | | | |
| | Three-Month Period Ended March 31, 2018 | | Three-Month Period Ended March 31, 2017 |
(in thousands) | | RICs and auto loans | | All other loans | | RICs and auto loans | | All other loans(1) |
TDRs, beginning of period | | $ | 5,975,512 |
| | $ | 831,660 |
| | $ | 5,161,935 |
| | $ | 944,980 |
|
New TDRs(1) | | 518,317 |
| | 52,028 |
| | 1,127,860 |
| | 47,688 |
|
Charged-Off TDRs | | (455,031 | ) | | (16,537 | ) | | (579,097 | ) | | (24,814 | ) |
Sold TDRs | | (190 | ) | | (2,255 | ) | | — |
| | (3,223 | ) |
Payments on TDRs | | (284,994 | ) | | (21,151 | ) | | (289,696 | ) | | (6,440 | ) |
TDRs, end of period | | $ | 5,753,614 |
| | $ | 843,745 |
| | $ | 5,421,002 |
| | $ | 958,191 |
|
| |
Item 2.(1) | Management’s Discussion and AnalysisNew TDRs includes drawdowns on lines of Financial Condition and Results of Operationscredit that have previously been classified as TDRs. |
Commercial
Performing commercial TDRs were $165.1 million, or 44.8% of total commercial TDRs at June 30, 2017 compared to $214.5 million, or 59.2% of total commercial TDRs at December 31, 2016. The change in performing commercial TDRs is primarily attributable to payoffs from two material borrowers who were current and performing. The increase in non-performing commercial TDRs can be attributed to four material new obligors being modified during the period, comprising $75.3 million of the increase.
Residential Mortgages
Performing residential mortgage TDRs increased from $268.8 million, or 65.9% of total residential mortgage TDRs at December 31, 2016, to $278.1 million, or 69.4% of total residential TDRs at June 30, 2017.
RICs
The RIC and auto loan held for investment portfolio is primarily comprised of nonprime loans (68.8% at June 30, 2017), 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 20.2% of the Company’s total RIC and auto loan portfolio at December 31, 2016 and 21.4% at June 30, 2017. 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 either pay off or charge-off.
In accordance with its policies and guidelines, the Company at times offers payment deferrals to borrowers on its RICs, under which the consumer is allowed to move up to three delinquent payments to the end of the loan. More than 90% of deferrals granted are for two months. The policies and guidelines limit the number and frequency of deferrals that may be granted to one deferral every six months and eight months over the life of a loan, while some marine and RV contracts have a maximum of twelve months in extensions to reflect their longer term. Additionally, the Company generally limits the granting of deferrals on new accounts until a requisite number of payments has been received. During the deferral period, the Company continues to accrue and collect interest on the loan in accordance with the terms of the deferral agreement.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
At the time a deferral is granted, all delinquent amounts may be deferred or paid, resulting in the classification of the loan as current and therefore not considered a delinquent account. Thereafter, the account is aged based on the timely payment of future installments in the same manner as any other account. TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured, and considered for return to accrual when a sustained period of repayment performance has been achieved.
The Company evaluates the results of its deferral strategies based upon the amount of cash installments that are collected on accounts after they have been deferred compared to the extent to which the collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation, the Company believes that payment deferrals granted according to its policies and guidelines are an effective portfolio management technique and result in higher ultimate cash collections from the portfolio.
Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts used in the determination of the adequacy of the ALLL for loans classified as TDRs are also impacted. Increased use of deferrals may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio and therefore increase the ALLL and related provision for loan and lease losses. Changes in these ratios and periods are considered in determining the appropriate level of the ALLL and related provision for loan and lease losses. For loans that are classified as TDRs, the Company generally compares the present value of expected cash flows to the outstanding recorded investment of TDRs to determine the amount of allowance and related provision for credit losses that should be recorded. For loans that are considered collateral-dependent, such as certain bankruptcy modifications, impairment is measured based on the fair value of the collateral, less its estimated costs to sell.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Other Consumer Loans
Performing other consumer loan TDRs increased from $129.8 million, or 74.3% of total other consumer loan TDRs at December 31, 2016 to $129.8 million, or 74.4% of total other consumer loan TDRs, at June 30, 2017. 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 compared to overall TDR activity.
Delinquencies
At June 30, 2017 and December 31, 2016, the Company's delinquencies consisted of the following:
|
| | | | | | | | | | | |
| June 30, 2017 | | December 31, 2016 |
| Consumer Loans Secured by Real Estate | RICs and auto loans | Other Consumer Loans | Commercial Loans | Total | | Consumer Loans Secured by Real Estate | RICs and auto loans | Other Consumer Loans | Commercial Loans | Total |
| (dollars in thousands) |
Total Delinquencies | $515,091 | $4,139,265 | $238,950 | $266,821 | $5,160,127 | | $568,517 | $4,261,192 | $245,588 | $257,152 | $5,332,449 |
Total Loans(1) | $14,262,290 | $27,074,623 | $2,890,547 | $41,233,130 | $85,460,590 | | $14,239,357 | $26,498,469 | $3,107,074 | $44,561,193 | $88,406,093 |
Delinquencies as a % of Loans | 3.6% | 15.3% | 8.3% | 0.6% | 6.0% | | 4.0% | 16.1% | 7.9% | 0.6% | 6.0% |
(1) Includes LHFS.
Overall, total delinquencies decreased by $172.3 million, or 3.2%, from December 31, 2016 to June 30, 2017. Consumer loans secured by real estate delinquencies decreased $53.4 million, primarily due to improvements in credit quality in the residential mortgage portfolio. RICs and auto loan and other consumer loan delinquencies decreased $121.9 million and decreased $6.6 million, respectively, primarily due to seasonality in the RIC and auto loan portfolio, where delinquencies tend to be highest during the holiday months of November to January. Commercial delinquencies increased $9.7 million.
ALLOWANCE FOR CREDIT LOSSES ("ACL")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 FICO® scores and CLTV, internal risk ratings, economic conditions and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the ACL may be necessary if conditions differ substantially from the assumptions used in making the evaluations.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The following table presents the allocation of the ALLL and the percentage of each loan type to total LHFI at the dates indicated:
| | | June 30, 2017 | | December 31, 2016 | | March 31, 2018 | | December 31, 2017 |
| Amount | | % of Loans to Total HFI Loans | | Amount | | % of Loans to Total HFI Loans | |
| (dollars in thousands) | |
(dollars in thousands) | | | Amount | | % of Loans to Total LHFI | | Amount | | % of Loans to Total LHFI |
Allocated allowance: | | | | | | | | | | | | | | | |
Commercial loans | $ | 428,248 |
| | 49.5 | % | | $ | 449,837 |
| | 51.8 | % | | $ | 462,074 |
| | 47.7 | % | | $ | 443,796 |
| | 48.4 | % |
Consumer loans | 3,478,337 |
| | 50.5 | % | | 3,317,604 |
| | 48.2 | % | | 3,344,112 |
| | 52.3 | % | | 3,420,756 |
| | 51.6 | % |
Unallocated allowance | 47,023 |
| | n/a |
| | 47,023 |
| | n/a |
| | 47,023 |
| | n/a |
| | 47,023 |
| | n/a |
|
Total ALLL | 3,953,608 |
| | 100.0 | % | | 3,814,464 |
| | 100.0 | % | | 3,853,209 |
| | 100.0 | % | | 3,911,575 |
| | 100.0 | % |
Reserve for unfunded lending commitments | 111,811 |
| | | | 122,418 |
| | | | 89,865 |
| | | | 109,111 |
| | |
Total ACL | $ | 4,065,419 |
| | | | $ | 3,936,882 |
| | | | $ | 3,943,074 |
| | | | $ | 4,020,686 |
| | |
General
The ACL increased $128.5decreased $77.6 million from December 31, 20162017 to June 30, 2017.March 31, 2018. The increase in the overall ACL was primarily attributable to continued growth inthe increased amount of TDR's within SC's RIC and auto loan portfolio.
Management regularly monitors the condition of the Company's portfolio, considering factors such as historical loss experience, trends in delinquencies and NPLs, changes in risk composition and underwriting standards, the experience and ability of staff, and regional and national economic conditions and trends.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Generally, the Company’s LHFI are carried at amortized cost, net of ALLL, which includes the estimate of any related net discounts that are expected at the time of charge-off. In the case of loans purchased in a bulk purchase or business combination, the entire discount on the loan portfolio is considered as available to absorb the credit losses when determining the ALLL. For these loans, the Company records provisions for credit losses when incurred losses exceed the unaccreted purchase discount.
The risk factors inherent in the ACL are continuously reviewed and revised by management when conditions indicate that the estimates initially applied are different from actual results. The Company also performs a comprehensive analysis of the ACL on a quarterly basis. In addition, the Company performs a review each quarter of allowance levels based on nationally published statistics is conducted quarterly.
The ACL is subjectand trends by major portfolio against the levels of peer banking institutions to review by banking regulators. The Company’s primary regulators regularly conduct examinations of the ACLbenchmark our allowance and make assessments regarding its adequacy and the methodology employed in its determination.industry norms.
Commercial
For the commercial loan portfolio excluding small business loans (businesses with annual sales of up to $3.0 million), the Company has specialized credit officers, a monitoring unit, and workout units that identify and manage potential problem loans. Changes in management factors, financial and operating performance, company behavior, industry factors and external events and circumstances are evaluated on an ongoing basis to determine whether potential impairment is evident and/or additional analysis is needed. For the commercial loan portfolios, risk ratings are assigned to each loan to differentiate risk within the portfolio, reviewed on an ongoing basis by credit risk management and revised, if needed, to reflect the borrower’s current risk profile and the related collateral position. The risk ratings consider factors such as financial condition, debt capacity and coverage ratios, market presence and quality of management. Generally, credit officers reassess a borrower’s risk rating on at least an annual basis, and more frequently if warranted. This reassessment process is managed by credit officers and is overseen by the credit monitoring group to ensure consistency and accuracy in risk ratings, as well as the appropriate frequency of risk rating reviews by the Company’s credit officers. The Company’s Credit Risk Review Committee assesses whether the Company’s Credit Risk Review Framework and risk management guidelines established by the Company’s Board and applicable laws and regulations are being followed, and reports key findings and relevant information to the Board. The Company’s Credit Risk Review group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings. When credits are downgraded below a certain level, the Company’s Workout Department becomes responsible for managing the credit risk. Risk rating actions are generally reviewed formally by one or more credit committees depending on the size of the loan and the type of risk rating action being taken. Detailed analyses are completed that support the risk rating and management’s strategies for the customer relationship going forward.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay (e.g., less than 90 days) or insignificant shortfall in the amount of payments does not necessarily result in the loan being identified as impaired. Impaired commercial loans are comprised of all TDRs plus non-accrual loans in excess of $1 million that are not TDRs. In addition, the Company may perform a specific reserve analysis on loans that fail to meet this threshold if the nature of the collateral or business conditions warrant. The Company performs a specific reserve analysis on certain loans regardless of loan size. If a loan is identified as impaired and is collateral-dependent, an initial appraisal is obtained to provide a baseline to determine the property’s fair market value. The frequency of appraisals depends on the type of collateral being appraised. If the collateral value is subject to significant volatility (due to location of the asset, obsolescence, etc.), an appraisal is obtained more frequently. At a minimum, updated appraisals for impaired loans are obtained within a 12-month period if the loan remains outstanding for that period of time.
If a loan is identified as impaired and is not collateral-dependent, impairment is measured based on a discounted cash flow ("DCF")DCF methodology.
When the Company determines that the value of an impaired loan is less than its carrying amount, the Company recognizes impairment through a provision estimate or a charge-off to the allowance. Management performs these assessments on at least a quarterly basis. For commercial loans, a charge-off is recorded when a loan, or a portion thereof, is considered uncollectible and of such little value that its continuance on the Company’s books as an asset is not warranted. Charge-offs are recorded on a monthly basis, and partially charged-off loans continue to be evaluated on at least a quarterly basis, with additional charge-offs or loan and lease loss provisions taken on the remaining loan balance, if warranted, utilizing the same criteria.
The portion of the ALLL related to the commercial portfolio was $428.2$462.1 million at June 30, 2017 (1.0%March 31, 2018 (1.2% of commercial LHFI) and $449.8$443.8 million at December 31, 2016 (1.0%2017 (1.1% of commercial LHFI). The primary factor resulting in the decreasedincreased ACL allocated to the commercial portfolio is, in part, due to the current economic environment impacting our commercial customers, primarilya decline in the energy sector. Management recorded additional reserves for this portfolio duringoverall balance of the first quartercommercial loan portfolio.
Item 2. Management’s Discussion and Analysis of 2016.Financial Condition and Results of Operations
Consumer
The consumer loan and small business loan portfolios are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV ratios, and internal and external credit scores. Management evaluates the consumer portfolios throughout their life cycles on a portfolio basis. When problem loans are identified that are secured with collateral, management examines the loan files to evaluate the nature and type of collateral. Management documents the collateral type, the date of the most recent valuation, and whether any liens exist to determine the value to compare against the committed loan amount.
Residential mortgages not adequately secured by collateral are generally charged-off to fair value less cost to sell when deemed to be uncollectible or are delinquent 180 days or more, whichever comes first, unless it can be clearly demonstrated that repayment will occur regardless of the delinquency status. Examples that would demonstrate repayment likelihood include a loan that is secured by collateral and is in the process of collection, a loan supported by a valid guarantee or insurance, or a loan supported by a valid claim against a solvent estate.
For residential mortgage loans, loss severity assumptions are incorporated into the loan and lease loss reserve models to estimate loan balances that will ultimately charge-off. These assumptions are based on recent loss experience within various CLTV bands in these portfolios. CLTVs are refreshed quarterly by applying Federal Housing Finance Agency Home Price Index changes at a state-by-state level to the last known appraised value of the property to estimate the current CLTV. The Company's ALLL incorporates the refreshed CLTV information to update the distribution of defaulted loans by CLTV as well as the associated loss given default for each CLTV band. Reappraisals at the individual property level are not considered cost-effective or necessary on a recurring basis; however, reappraisals are performed on certain higher risk accounts to support line management activities and default servicing decisions, or when other situations arise for which the Company believes the additional expense is warranted.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
A home equity loan or line of credit not adequately secured by collateral is treated similarly to the way residential mortgages are treated. The Company incorporates home equity loan or line of credit loss severity assumptions into the loan and lease loss reserve model following the same methodology as for residential mortgage loans. To ensure the Company has captured losses inherent in its home equity portfolios, the Company estimates its ALLL for home equity loans and lines of credit by segmenting its portfolio into sub-segments based on the nature of the portfolio and certain risk characteristics such as product type, lien positions, and origination channels. Projected future defaulted loan balances are estimated within each portfolio sub-segment by incorporating risk parameters, including the current payment status as well as historical trends in delinquency rates. Other assumptions, including prepayment and attrition rates, are also calculated at the portfolio sub-segment level and incorporated into the estimation of the likely volume of defaulted loan balances. The projected default volume is stratified across CLTV ratio bands, and a loss severity rate for each CLTV band is applied based on the Company's historical net credit loss experience. This amount is then adjusted, as necessary, for qualitative considerations to reflect changes in underwriting, market, or industry conditions, or changes in trends in the composition of the portfolio, including risk composition, seasoning, and underlying collateral.
The Company considers the delinquency status of its senior liens in cases in which the Company services the lien. The Company currently services the senior lien on 25.5%25.0% of its junior lien home equity principal balances. Of the junior lien home equity loan and line of credit balances that are current, 1.0%1.5% have a senior lien that is one or more payments past due. When the senior lien is delinquent but the junior lien is current, allowance levels are adjusted to reflect loss estimates consistent with the delinquency status of the senior lien. The Company also extrapolates these impacts to the junior lien portfolio when the senior lien is serviced by another investor and the delinquency status of that senior lien is unknown.
Depository and lending institutions in the U.S. generally are expected to experience a significant volume of home equity lines of credit that will be approaching the end of their draw periods over the next several years, following the growth in home equity lending experienced during 2003 through 2007. As a result, many of these home equity lines of credit will either convert to amortizing loans or have principal due as balloon payments. The Company's home equity lines of credit generated after 2007 are generally open-ended, revolving loans with fixed-rate lock options and draw periods of up to 10 years, along with amortizing repayment periods of up to 20 years. The Company currently monitors delinquency rates for amortizing and non-amortizing lines, as well as other credit quality metrics, including FICO® credit scoring model scores and LTV ratios. The Company's home equity lines of credit are generally underwritten considering fully drawn and fully amortizing levels. As a result, the Company currently does not anticipate a significant deterioration in credit quality when these home equity lines of credit begin to amortize.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
For RICs and personal unsecured loans at SC, the Company estimatesmaintains an ALLL for the ALLLCompany's held-for-investment portfolio not classified as TDRs at a level consideredestimated to be adequate to cover probableabsorb credit losses of the recorded investment inherent in the non-TDR portfolio, based on a holistic assessment, including both quantitative and recordsqualitative considerations. For TDR loans, the allowance is comprised of impairment on the TDR portfoliomeasured using a DCF model. RICs and personal unsecured loans are considered separately in assessing the required ALLL using product-specific allowance methodologies applied on a pooled basis. For RICs,
The quantitative framework is supported by credit models that consider several credit quality indicators including, but not limited to, historical loss experience and current portfolio trends. The transition-based Markov model provides data on a granular and disaggregated/segment basis as it utilizes recently observed loan transition rates from various loan statuses to forecast future losses. Transition matrices in the Company segregates the portfolioMarkov model are categorized based on homogeneity into pools basedaccount characteristics such as delinquency status, TDR type (e.g., deferment, modification, etc.), internal credit risk, origination channel, months on source, then further stratifies each pool by vintagebook, thin/thick file and custom loss forecasting score. For each vintage and risk segment,time since TDR event. The credit models utilized differ among the Company's vintage model predictsRIC and personal loan portfolios. The credit models are adjusted by management through qualitative reserves to incorporate information reflective of the timing of unit losses and the loan balances at the time of default. current business environment.
Auto loans are charged off when an account becomes 120 days delinquent if the Company has not repossessed the vehicle. The Company writes the vehicle down to the estimated recovery amount of the collateral when the automobile is repossessed and legally available for disposition.
The Company considers changes in the used vehicle index when forecasting recovery rates to apply to the gross losses forecasted by the vintage model. Its models do not include other macro-economic factors. Instead, the ALLL 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 ALLL process to arrive at a provision that reflects all relevant information, including both quantitative model outputs and qualitative overlays.
The allowance for consumer loans was $3.5$3.3 billion and $3.3$3.4 billion at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively. The allowance as a percentage of held-for-investment consumer loans was 8.3%8.0% at June 30, 2017March 31, 2018 and 8.0%8.2% at December 31, 2016.2017. The increase in the allowance for consumer loans was primarily attributable to SC's RIC and auto loan portfolio growth.
The Company's allowance models and reserve levels are back-tested on a quarterly basis to ensure that both remain within appropriate ranges. As a result, management believes that the current ALLL is maintained at a level sufficient to absorb inherent losses in the consumer portfolios.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Unallocated
Additionally, theThe Company reserves for certain inherent but undetected, losses that are probable within the loan and lease portfolios. This is considered to be reasonably sufficient to absorb imprecisions of models orand to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolios. These imprecisions may include loss factors inherent in the loan portfolio that may not have been discreetly contemplated in the general and specific components of the allowance, as well as potential variability in estimates. Period-to-period changes in the Company's historical unallocated allowance for loan and lease lossALLL positions are considered in light of these factors. The unallocated ALLL was $47.0 million at June 30, 2017both March 31, 2018 and December 31, 2016.2017.
Reserve for Unfunded Lending Commitments
In addition to the ALLL, the Company estimates probable losses related to unfunded lending commitments. The reserve for unfunded lending commitments consists of two elements: (i) an allocated reserve, which is determined by an analysis of historical loss experience and risk factors, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information, and (ii) an unallocated reserve to account for a level of imprecision in management's estimation process. Additions to the reserve for unfunded lending commitments are made by charges to the provision for credit losses, and this reserve is classified within Other liabilities on the Company's Condensed Consolidated Balance Sheet.Sheets. Once an unfunded lending commitment becomes funded and is carried as a loan, the corresponding reserves are transferred to the ALLL.
The reserve for unfunded lending commitments decreased from $122.4$109.1 million at December 31, 20162017 to $111.8$89.9 million at June 30, 2017. This change was primarily due to a reduction during 2016 in off-balance sheet lending commitments.March 31, 2018. During the three-month and six-month periodsperiod ended June 30, 2017,March 31, 2018, SBNA transferred $6.6$6.3 billion of unfunded commitments to extend credit to an unconsolidated related party.party, which reduced the required reserve for unfunded commitments. The net impact of the change in the reserve for unfunded lending commitments to the overall ACL was immaterial.
INVESTMENT SECURITIES
Investment securities consist primarily of U.S. Treasuries, MBS, ABS and stock in the FHLB and FRB. MBS consist of pass-through, collateralized mortgage obligations ("(“CMOs"), and adjustable rate mortgages issued by federal agencies. The Company’s MBS are either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by S&P and Moody’s Investor Service at the date of issuance. The Company’s available-for-saleAFS investment strategy is to purchase liquid fixed-rate and floating-rate investments to manage the Company's liquidity position and interest rate risk adequately.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Total investment securities available-for-sale increased $1.4AFS decreased $1.1 billion to $18.4$13.3 billion at June 30, 2017,March 31, 2018, compared to $17.0$14.4 billion at December 31, 2016.2017. During the six-monththree-month period ended June 30, 2017,March 31, 2018, the composition of the Company's investment portfolio changed due to increase in MBS, which were offset by a decrease in ABS. MBS and ABS, offset by an increase in U.S Treasury Securities. MBS decreased by $1.4 billion primarily due to a transfer to HTM for $1.2 billion and $563.7 million of principal paydowns and maturities. U.S. Treasuries increased by $1.8 billion$377.0 million primarily due to investment purchases of $3.6 billion, offset by $1.8 billion of principal paydowns and maturities.$350 million. ABS securities decreased $446.9$19.9 million, primarily due to $223.8$17.5 million of principal paydowns .paydowns. For additional information with respect to the Company’s investment securities, see Note 3 to the Condensed Consolidated Financial Statements.
Debt securities for which the Company has the positive intent and ability to hold the securities until maturity are classified as held-to-maturityHTM securities. Held-to-maturityHTM securities are reported at cost and adjusted for amortization of premium and accretion of discount. Total investment securities held-to-maturityHTM were $1.6$2.9 billion at June 30, 2017.March 31, 2018. The Company had 2266 investment securities classified as held-to-maturityHTM as of June 30, 2017.
Total trading securities increased $8.6 million to $10.2 million at June 30, 2017, compared to $1.6 million at DecemberMarch 31, 2016.2018.
Total gross unrealized losses decreasedon investments in debt securities - AFS increased by $44.2$143.6 million to $189.4$361.1 million during the six-monththree-month period ended June 30,March 31, 2018 compared to the three-month period ended March 31, 2017. The majorityincrease is comprised of the decreaseincreases in unrealized losses was in the MBS portfolios. The unrealized losses decreased within the MBS portfolios by $43.2 million. Referof $36.7 million on GNMA residential securities and $87.2 million on FNMA/FHLMC residential securities primarily due to Note 3 to the Condensed Consolidated Financial Statements for additional details.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
rising interest rates.
Other investments, which consists primarily of FHLB stock and FRB stock, decreasedincreased from $730.8$658.9 million at December 31, 20162017 to $723.2$765.0 million at June 30, 2017,March 31, 2018, primarily due to an increase in CDs greater than 90 days to maturity of $99.4 million. Also, the Company redeeming $117.1redeemed $25.9 million of FHLB stock at par, that was partially offset by the Company's purchase of $88.8$10.2 million of FHLB stock at par. There was no gain or loss associated with these redemptions. During the period ended June 30, 2017,March 31, 2018, the Company did not purchase any FRB stock.
The average life of the available-for-saleAFS investment portfolio (excluding certain ABS) at June 30, 2017March 31, 2018 was approximately 4.594.69 years. The average effective duration of the investment portfolio (excluding certain ABS) at June 30, 2017March 31, 2018 was approximately 3.103.40 years. The actual maturities of MBS available-for-saleAFS will differ from contractual maturities because borrowers may have the right to prepay obligations without prepayment penalties.
The following table presents the fair value of investment securities by obligor at the dates indicated:
| | | June 30, 2017 | | December 31, 2016 | |
| (in thousands) | |
Investment securities available-for-sale: | | | | |
(in thousands) | | | March 31, 2018 | | December 31, 2017 |
Investment securities AFS: | | | | | |
U.S. Treasury securities and government agencies | $ | 8,401,318 |
| | $ | 8,163,027 |
| | $ | 6,158,655 |
| | $ | 7,042,828 |
|
FNMA and FHLMC securities | 9,026,086 |
| | 7,639,823 |
| | 6,672,963 |
| | 6,840,696 |
|
State and municipal securities | 27 |
| | 30 |
| | 21 |
| | 23 |
|
Other securities (1) | 972,159 |
| | 1,221,345 |
| | 489,955 |
| | 529,636 |
|
Total investment securities available-for-sale | 18,399,590 |
| | 17,024,225 |
| |
Investment securities held-to-maturity: | | | | |
Total investment securities AFS | | | 13,321,594 |
| | 14,413,183 |
|
Investment securities HTM: | | | | | |
U.S. government agencies | 1,575,037 |
| | 1,658,644 |
| | 2,877,357 |
| | 1,799,808 |
|
Total investment securities held-to-maturity (2) | 1,575,037 |
| | 1,658,644 |
| |
Trading securities | 10,245 |
| | 1,630 |
| |
Total investment securities HTM(2) | | | 2,877,357 |
| | 1,799,808 |
|
Other investments | 723,201 |
| | 730,831 |
| | 765,041 |
| | 658,863 |
|
Total investment portfolio | $ | 20,708,073 |
| | $ | 19,415,330 |
| | $ | 16,963,992 |
| | $ | 16,871,854 |
|
(1) Other securities primarily include corporate debt securities and ABS.
(2) Held-to-maturity | |
(1) | Other securities primarily include corporate debt securities and ABS. |
| |
(2) | HTM securities are measured and presented at amortized cost. |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following table presents the securities of single issuers (other than obligations of the United States and its political subdivisions, agencies, and corporations) having an aggregate book value in excess of 10% of the Company's stockholder's equity that were held by the Company at June 30, 2017:
March 31, 2018:
|
| | | | | | | |
| June 30, 2017 |
| Amortized Cost | | Fair Value |
| (in thousands) |
FNMA | $ | 4,811,677 |
| | $ | 4,760,280 |
|
FHLMC | 4,327,452 |
| | 4,265,806 |
|
Government National Mortgage Association (1) | 8,348,481 |
| | 8,272,903 |
|
Government - Treasuries | 1,678,867 |
| | 1,677,426 |
|
Total | $ | 19,166,477 |
| | $ | 18,976,415 |
|
(1) Includes U.S government agency MBS.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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| | | | | | | | |
| | March 31, 2018 |
(in thousands) | | Amortized Cost | | Fair Value |
FNMA | | $ | 3,776,113 |
| | $ | 3,008,203 |
|
FHLMC | | 3,125,761 |
| | 3,664,760 |
|
GNMA (1) | | 7,772,192 |
| | 7,581,248 |
|
Government - Treasuries | | 1,388,611 |
| | 1,375,105 |
|
Total | | $ | 16,062,677 |
| | $ | 15,629,316 |
|
| |
Item 2.(1) | Management’s Discussion and Analysis of Financial Condition and Results of OperationsIncludes U.S. government agency MBS. |
GOODWILL
The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired less the fair value of liabilities assumed as goodwill. Consistent with ASC 350, the Company does not amortize goodwill, and reviews the goodwill recorded for impairment on an annual basis or more frequently when events or changes in circumstances indicate the potential for goodwill impairment. At June 30, 2017,March 31, 2018, goodwill totaled $4.5$4.4 billion and represented 3.3%3.4% of total assets and 19.5%18.6% of total stockholder's equity. The following table shows goodwill by reporting units at June 30, 2017March 31, 2018:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Consumer and Business Banking | | Commercial Real Estate | | Commercial Banking | | Global Corporate Banking | | SC | | Santander BanCorp | | Total |
| | (in thousands) |
Goodwill at June 30, 2017 | | $ | 1,880,303 |
| | $ | 870,411 |
| | $ | 542,584 |
| | $ | 131,130 |
| | $ | 1,019,960 |
| | $ | 10,537 |
| | $ | 4,454,925 |
|
|
| | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Consumer and Business Banking | | Commercial Banking | | GCB | | SC | | Total |
Goodwill at March 31, 2018 | | $ | 1,880,304 |
| | $ | 1,412,995 |
| | $ | 131,130 |
| | $ | 1,019,960 |
| | $ | 4,444,389 |
|
During the first quarter of 2018, the reportable segments (and reporting units) formerly known as Commercial Banking and CRE were combined and presented as Commercial Banking. Refer to Note 18 for further discussion on the change in reportable segments. There were no additions or removals of underlying lines of business in connection with the reporting change. As a result, goodwill assigned to these former reporting units of $542.6 million and $870.4 million, for Commercial Banking and CRE, respectively, have been combined. There were no additions or impairments of goodwill for the three-month period ended March 31, 2018.
The Company conducted its annual goodwill impairment tests as of October 1, 20162017 using generally accepted valuation methods. After conducting an analysis of the fair value of each reporting unit as of October 1, 2016, the Company determined that no impairments of goodwill were identified as a result of the annual impairment tests.
The Company completes a quarterly review for impairment indicators over each of its reporting units, which includes consideration of economic and organizational factors that could impact the fair value of the Company's reporting units. At the completion of the secondfirst quarter review, the Company did not identify any indicators which resulted in the Company's conclusion that an interim impairment test would be required to be completed.
DEFERRED TAXES AND OTHER TAX ACTIVITY
The Company'sCompany had a net deferred tax liability balance of $238.5 million at March 31, 2018 (consisting of a deferred tax asset balance of $962.8$799.4 million and a deferred tax liability balance of $1.6 billion$1.0 billion), compared to a net deferred tax liability balance of $198.3 million at June 30,December 31, 2017 compared to(consisting of a deferred tax asset balance of $989.8$771.7 million and a deferred tax liability balance of $1.4 billion at December 31, 2016.$970.0 million). The $159.9$40.2 million increase ofin net deferred liabilities for the six-monththree-month period ended June 30, 2017March 31, 2018 was primarily due to a $136.9 milliondecrease in deferred tax assets related to net operating losses; a decrease in deferred tax assets on loans marked to market for income tax purposes and an increase in the deferred tax asset valuation allowance offset by a decrease in deferred tax liabilities related to accelerated depreciation onfrom leasing transactions; a $23.7 million decrease in deferred tax assets for unrealized gains and losses included in other comprehensive income; a $23.9 million decrease in deferred tax assets related to employee benefits; and a $15.1 million decrease in deferred tax assets established for SC loan mark-to-market adjustments under Internal Revenue Code ("IRC") Section 475; a $10.5 million increase in net deferred tax liabilities related to other temporary differences; and a $4.9 million decrease in deferred tax assets related to the ALLL, partially offset by a $37.6 million increase in deferred tax assets related to net operating loss carryforwards and tax credits; and a $17.6 million decrease in deferred tax liabilities related to unremitted foreign earnings of a subsidiary of SC. The IRC Section 475 mark-to-market adjustment deferred tax asset is related to SC's business as a dealer in auto and other consumer loans. The mark-to-market adjustment is required under IRC Section 475 for tax purposes, but is not required for book purposes.transactions.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Company filed a lawsuit against the United States in 2009 in Federal District Court in Massachusetts relating to the proper tax consequences of two financing transactions with an international bank through which the Company borrowed $1.2 billion. As a result of these financing transactions, the Company paid foreign taxes of $264.0 million during the years 2003 through 2007 and claimed a corresponding foreign tax credit for foreign taxes paid during those years, which the Internal Revenue Service ("IRS"(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.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.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
OnIn November 13, 2015, the Federal District Court issued a written opinion in favor ofgranted the Company on all contested issues,Company’s motions for summary judgment and in a judgment issued on January 13, 2016,later ordered amounts assessed by the IRS for the years 2003 through 2005 to be refunded to the Company. The IRS appealed that judgment. On December 15, 2016,and the U.S. Court of Appeals for the First Circuit partially reversed the judgment of the Federal District Court. Pursuant to the First Circuit's decision,Court, finding that the Company is not entitled to claim the foreign tax credits it claimed but will be allowed to exclude from income $132.0 million (representing half of the U.K. taxes the Company paid) and will be allowed to claim the interest expense deductions. The First Circuit ordered the case to behas been remanded to the Federal District Court for further proceedings to determine, among other issues, whether penalties should be sustained. On March 16, 2017,remand, the parties are awaiting the Court’s decision on motions for summary judgment filed by the Company filed a petition requestingregarding the U.S. Supreme Court to hear its appeal of the First Circuit Court’s decision. On June 26, 2017 the U.S. Supreme Court denied the Company’s request, and the case has now been remanded to the Federal District Court as ordered by the Court of Appeals.remaining issues.
In response to the First Circuit's decision, the Company, at December 31, 2016, the Company used its previously established $230.1 million tax reserve to write off the deferred tax assets and a portion of the receivable that would not be realized under the Court's decision. Additionally, the Company established a $36.0$36.8 million tax reserve in relation to items that have not yet been determined by the courts, including potential penalties. The Company believes that this 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 $36.0$36.8 million to no change.
OFF-BALANCE SHEET ARRANGEMENTS
See further discussion of the Company's off-balance sheet arrangements in Note 6 and Note 1416 to the Condensed Consolidated Financial Statements, and the Liquidity and Capital Resources section of this MD&A.
PREFERRED STOCK
In April 2006, the Company’s Board of Directors authorized 8,000 shares of Series C Preferred Stock, and granted the Company authority to issue fractional shares of the Series C Preferred Stock. Dividends on each share of Series C Preferred Stock are payable quarterly, on a non-cumulative basis, at an annual rate of 7.30%, when and if declared by the Company's Board of Directors. In May 2006, the Company issued 8,000,000 depository shares of Series C Preferred Stock for net proceeds of $195.4 million. Each depository share represents 1/1000th ownership interest in a share of Series C Preferred Stock. As a holder of depository shares, the depository shareholder is entitled to all proportional rights and preferences of the Series C Preferred Stock. The Company’s Board of Directors paid cash dividends to preferred stockholders totaling $7.3 million and $7.8 million for the six-month periods ended June 30, 2017 and 2016, respectively.
The shares of Series C Preferred Stock are redeemable in whole or in part for cash, at the Company’s option, at a redemption price of $25,000 per share (equivalent to $25 per depository share), subject to the prior approval of the FRB. As of June 30, 2017, no shares of the Series C Preferred Stock had been redeemed.
On June 28, 2017, the Company's Board of Directors declared a cash dividend on the Company's preferred stock of $3.7 million, which is payable on August 15, 2017 to shareholders of record as of the close of business on August 1, 2017.
In August 2010, Santander BanCorp, a subsidiary of the Company, issued 3.0 million shares of Series B preferred stock, $25 par value, designated as the 8.75% noncumulative preferred stock, to an affiliate. The shares of the Series B preferred stock were redeemable in whole or in part for cash on or after September 30, 2015, and semiannually thereafter on each March 31 and September 30 at the option of Santander BanCorp, with the consent of the FDIC and any other applicable regulatory authority. Dividends on the Series B preferred stock were payable when, as and if declared by the Board of Directors of Santander BanCorp.
On January 29, 2016, Banco Santander Puerto Rico redeemed the outstanding $75.0 million of Series B preferred stock. In accordance with the notice of full redemption, each share of preferred stock was redeemed at the redemption price, corresponding to $25 per preference share, plus any unpaid dividends in respect of the most recent dividend period.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
BANK REGULATORY CAPITAL
The Company's capital priorities are to support client growth and business investment while maintaining appropriate capital in light of economic uncertainty and the Basel III framework. The Company continues to improve its capital levels and ratios through the retention of quarterly earnings and risk-weighted asset ("RWA")RWA optimization.
The Company is subject to the regulations of certain federal, state, and foreign agencies and undergoes periodic examinations by those regulatory authorities. At June 30, 2017March 31, 2018 and December 31, 2016,2017, based on the Bank’s capital calculations, the Bank was considered well-capitalized under the applicable capital framework. In addition, the Company's capital levels as of June 30, 2017March 31, 2018 and December 31, 2016,2017, based on the Company’s capital calculations, exceeded the required capital ratios for BHCs.
For a discussion of Basel III, which became effective for SHUSA and the Bank on January 1, 2015, including the standardized approach and related future changes to the minimum U.S. regulatory capital ratios, see the section captioned "Regulatory Matters" in this MD&A.
Federal banking laws, regulations and policies also limit the Bank's ability to pay dividends and make other distributions to the Company. The Bank must obtain prior OCC approval to declare a dividend or make any other capital distribution if, after such dividend or distribution: (1) the Bank's total distributions to SHUSA within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years; (2) the Bank would not meet capital levels imposed by the OCC in connection with any order; or (3) the Bank is not adequately capitalized at the time. The OCC's prior approval would be required if the Bank were notified by the OCC that it is a problem institution or in troubled condition.
Any dividend declared and paid or return of capital has the effect of reducing capital ratios. The Bank did not declare and pay any return of capital to SHUSA duringDuring the three-month period ended March 31, 2018, the Company paid cash dividends of $5.0 million to its common stock shareholder and six-month periods ended June 30, 2017.cash dividends to preferred shareholders of $3.7 million.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following schedule summarizes the actual capital balances of SHUSA and the Bank at June 30, 2017:March 31, 2018:
|
| | | | | | | | | |
| | SHUSA |
| | | | | | |
| | June 30, 2017 | | Well-capitalized Requirement(1) | | Minimum Requirement(2) |
CET1 capital ratio | | 14.64 | % | | 6.50 | % | | 4.50 | % |
Tier 1 capital ratio | | 16.31 | % | | 8.00 | % | | 6.00 | % |
Total capital ratio | | 18.07 | % | | 10.00 | % | | 8.00 | % |
Leverage ratio | | 12.96 | % | | 5.00 | % | | 4.00 | % |
(1) As defined by Federal Reserve regulations. Presentation under a Basel III phased in basis.
|
| | | | | | | | | |
| | BANK |
| | | | | | |
| | June 30, 2017 | | Well-capitalized Requirement(2) | | Minimum Requirement(1) |
CET1 capital ratio | | 17.59 | % | | 6.50 | % | | 4.50 | % |
Tier 1 capital ratio | | 17.59 | % | | 8.00 | % | | 6.00 | % |
Total capital ratio | | 18.68 | % | | 10.00 | % | | 8.00 | % |
Leverage ratio | | 13.43 | % | | 5.00 | % | | 4.00 | % |
(2) As defined by OCC regulations. Presentation under a Basel III transitional basis.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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| | | | | | | | | |
| | SHUSA |
| | | | | | |
| | March 31, 2018 | | Well-capitalized Requirement(1) | | Minimum Requirement(1) |
CET1 capital ratio | | 16.65 | % | | 6.50 | % | | 4.50 | % |
Tier 1 capital ratio | | 18.25 | % | | 8.00 | % | | 6.00 | % |
Total capital ratio | | 19.92 | % | | 10.00 | % | | 8.00 | % |
Leverage ratio | | 14.36 | % | | 5.00 | % | | 4.00 | % |
| |
Item 2.(1) | Management’s Discussion and Analysis of Financial Condition and Results of OperationsAs defined by Federal Reserve regulations. The Company's ratios are presented under a Basel III phasing in basis. |
|
| | | | | | | | | |
| | BANK |
| | | | | | |
| | March 31, 2018 | | Well-capitalized Requirement(2) | | Minimum Requirement(2) |
CET1 capital ratio | | 18.71 | % | | 6.50 | % | | 4.50 | % |
Tier 1 capital ratio | | 18.71 | % | | 8.00 | % | | 6.00 | % |
Total capital ratio | | 19.90 | % | | 10.00 | % | | 8.00 | % |
Leverage ratio | | 14.23 | % | | 5.00 | % | | 4.00 | % |
| |
(2) | As defined by OCC regulations. The Bank's ratios are presented under a Basel III phasing in basis. |
In June 2017, the Company announced that the Federal Reserve did not object to the planned capital actions described in the Company’s capital plan submitted as part of the CCAR process. That capital plan included planned capital distributions across the following categories: (1) common stock dividends from SHUSA to Santander, (2) common stock dividends from SC, (3) redemption of the remaining balance of SHUSA’s 7.908% trust preferred securities, and (4) dividends on the Company’s preferred stock and payments on its trust preferred securities. On June 28, 2017, SHUSA’s Board of Directors approved the following capital distributions for the third quarter of 2017: (1) a dividend payment of $0.45625 per share on the Company’s preferred stock, (2) a common stock dividend payment to Santander of $5.0 million, and (3) redemption of the remaining balance of the Company’s trust preferred securities. The Company remains subject to a written agreement with the FRB of Boston under which 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.
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'sCompany's Asset/Liability Committee reviews and approves the Company's liquidity policy and guidelines on a regular basis. This process includes reviewing all available wholesale liquidity sources. The Company also forecasts future liquidity needs and develops strategies to ensure adequate liquidity is available at all times. SHUSA conducts monthly liquidity stress test analyses to manage its liquidity under a variety of scenarios, all of which demonstrate that the Company has ample liquidity to meet its short-term and long-term cash requirements.
Further changes to the credit ratings of SHUSA, Santander and its affiliates or the Kingdom of Spain could have a material adverse effect on SHUSA's business, including its liquidity and capital resources. The credit ratings of SHUSA have changed in the past and may change in the future, which could impact its cost of and access to sources of financing and liquidity. Any reductions in the long-term or short-term credit ratings of SHUSA would increase its borrowing costs, require it to replace funding lost due to the downgrade, which may include the loss of customer deposits, and limit its access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements. See further discussion on the impacts of credit ratings actions in the Economic and Business Environment section of this MD&A.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Sources of Liquidity
Company and Bank
The Company and the Bank have several sources of funding to meet liquidity requirements, including the Bank's core deposit base, liquid investment securities portfolio, ability to acquire large deposits, FHLB borrowings, wholesale deposit purchases, and federal funds purchased, as well as through securitizations in the ABS market and committed credit lines from third-party banks and Santander. The Company has the following major sources of funding to meet its liquidity requirements: dividends and returns of investments from its subsidiaries, short-term investments held by non-bank affiliates, and access to the capital markets.
On September 15, 2014, the Company entered into a written agreement with the FRB of Boston. 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 anothera 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.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
SC
SC requires a significant amount of liquidity to originate and acquire loans and leases and to service debt. SC funds its operations through its lending relationships with 13 third-party banks, SHUSA and Santander, as well as through securitizations in the ABS market and large flow agreements. SC seeks to issue debt that appropriately matches the cash flows of the assets that it originates.
SC has over $5.6$6.7 billion of stockholders’ equity that supports its access to the securitization markets, credit facilities, and flow agreements.
During the six-monththree-month period ended June 30, 2017,March 31, 2018, SC completed on-balance sheet funding transactions totaling approximately $9.1$3.8 billion, including:
two securitizationsa securitization on its Santander Drive Auto Receivables Trust ("SDART") platform for $2.2$1.1 billion;
issuance of twoa retained bondsbond on its SDART platform for $155.0$92.0 million;
three securitizationsa securitization on its Drive Auto Receivables Trust (“DRIVE"), deeper subprime platform for $3.1 billion;$880.0 million;
issuance of a retained bond on its DRIVE platform for $113.0$58.0 million;
threeone private amortizing lease facilitiesfacility for $1.0 billion;$650.0 million; and
six top-ups of private amortizing loan andone lease facilitiessecuritization on its Santander Retail Auto Lease Trust ("SRT") platform for $2.5$1.0 billion.
SC also completed $1.5 billion in asset sales which consisted of $261.0 million of recurring monthly sales with its third-party flow partners and $1.2to Santander.
In addition, SC completed another on-balance sheet securitization on the SDART platform for approximately $1.1 billion in sales to Santander under the new Santander Prime Auto Issuing Note ("SPAIN") securitization platform, which was effective in March 2017.April 2018.
For information regarding SC's debt, see Note 10 to the Condensed Consolidated Financial Statements.
IHC
SIS entered into a two-year revolving subordinated loan agreement with Santander effective June 8, 2015, not to exceed $290.0 million in the aggregate, which matured on June 8, 2017. SHUSAOn June 6, 2017, SIS entered into a revolving subordinated loan agreement with SHUSA not to exceed $290.0 million for a similar amount with SIS for an additional two-year term to mature in 2019. On September 13, 2017, the revolving subordinated loan agreement with SHUSA was increased to $350.0 million and on October 6, 2017, it was increased to $495.0 million.
As needed, SIS will draw down from a another subordinated loan in the amount of $525.0 million with Santander in order to enable SIS to underwrite certain large transactions in excess of the foregoing subordinated loan. At June 30, 2017, theMarch 31, 2018, there was no outstanding balance of this loan was $525.0 million, which was repaid in full in July 2017.on the subordinated loan.
BSI's primary sources of liquidity are from customer deposits and deposits from affiliated banks.
BSPR's primary sources of liquidity include core deposits, FHLB borrowings, wholesale and broker deposits, and liquid investment securities.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Institutional borrowings
The Company regularly projects its funding needs under various stress scenarios, and maintains contingency plans consistent with the Company’s access to diversified sources of contingent funding. The Company maintains a substantial level of total available liquidity in the form of on-balance sheet and off-balance sheet funding sources. These include cash, unencumbered liquid assets, and capacity to borrow at the FHLB and the FRB’s discount window.
Available Liquidity
As of June 30, 2017,March 31, 2018, the Bank had approximately $20.5$20.8 billion in committed liquidity from the FHLB and the FRB. Of this amount, $14.3$18.8 billion was unused and therefore provides additional borrowing capacity and liquidity for the Company. At June 30, 2017March 31, 2018 and December 31, 2016,2017, liquid assets (cash and cash equivalents and LHFS), and securities available-for-saleAFS exclusive of securities pledged as collateral) totaled approximately $20.7$19.0 billion and $21.1$18.4 billion, respectively. These amounts represented 32.9%30.7% and 31.4%30.3% of total deposits at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively. As of June 30, 2017,March 31, 2018, the Bank, Banco Santander InternationalBSI and Banco Santander Puerto RicoBSPR had $1.1 billion, $2.5$1.8 billion, and $1.1$1.4 billion, respectively, in cash held at the FRB. Management believes that the Company has ample liquidity to fund its operations.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
BSPR has $905.4$812.5 million in committed liquidity from the FHLB, all of which was unused as of June 30, 2017March 31, 2018, as well as $249.9$385.0 million in liquid assets aside from cash unused as of June 30, 2017.March 31, 2018.
Cash, and cash equivalents, and restricted cash
As of January 1, 2018, the classification of restricted cash within the Company's SOCF has changed. Refer to Note 1 for additional details.
|
| | | | | | | | |
| | Six-Month Period Ended June 30, |
| | 2017 | | 2016 |
| | (in thousands) |
Net cash provided by operating activities | | $ | 2,231,758 |
| | $ | 1,516,036 |
|
Net cash used in investing activities | | (309,324 | ) | | (1,249,062 | ) |
Net cash used in financing activities | | (4,418,614 | ) | | (1,852,385 | ) |
|
| | | | | | | | |
| | Three-Month Period Ended March 31, |
(in thousands) | | 2018 | | 2017 |
Net cash flows from operating activities | | $ | 1,963,089 |
| | $ | 1,615,055 |
|
Net cash flows from investing activities | | (979,224 | ) | | (169,177 | ) |
Net cash flows from financing activities | | 388,930 |
| | (2,644,840 | ) |
Cash provided byflows from operating activities
Net cash provided byflow from operating activities was $2.2$2.0 billion for the six-monththree-month period ended June 30, 2017,March 31, 2018, which was primarily comprised of net income of $451.5$257.9 million, $2.5$1.8 billion in proceeds from sales of LHFS, and $436.0$437.5 million in depreciation, amortization and accretion, and $502.5 million of provision for credit losses, partially offset by $2.4$1.2 billion of originations of LHFS, net of repayments.
Net cash provided byflow from operating activities was $1.5$1.6 billion for the six-monththree-month period ended June 30, 2016,March 31, 2017, which was comprised of net income of $385.1$163.7 million, $2.4$1.6 billion in proceeds from sales of LHFS, and $0.5 billion$349.7 million in depreciation, amortization and accretion, and ,$735.4 million of provisions for credit losses, partially offset by $3.4$1.2 billion of originations of LHFS, net of repayments.
Cash used inflows from investing activities
For the six-monththree-month period ended June 30, 2017,March 31, 2018, net cash used inflow from investing activities was $309.3$(979.2) million, primarily due to $5.1 billion$421.2 million in normal loan activity, $840.9 million of purchases of investment securities available-for-saleAFS, and $3.1$2.2 billion in operating lease purchases and originations, partially offset by $1.7 billion in normal loan activity, $3.5 billion$644.7 million of available-for-saleAFS investment securities sales, maturities and prepayments, $2.1 billion in proceeds from sales and terminations of operating leases, and $551.1$681.8 million in manufacturer incentives.
For the six-month period ended June 30, 2016, net cash used in investing activities was $1.2 billion, primarily due to $8.7 billion of purchases of investment securities available-for-sale, $2.0 billion in normal loan activity, and $3.3 billion in operating lease purchases and originations, partially offset by $10.4 billion of available-for-sale investment securities sales, maturities and prepayments, $1.1 billion in proceeds from sales of LHFI, and $1.1$1.2 billion in proceeds from sales and terminations of operating leases.
For the three-month period ended March 31, 2017, net cash flow from investing activities was $(169.2) million, primarily due to $2.8 billion of purchases of investment securities AFS and $1.6 billion in operating lease purchases and originations, partially offset by $1.3 billion of AFS investment securities sales, maturities and prepayments, $1.4 billion in normal loan activity, $940.9 million in proceeds from sales and terminations of operating leases, and $257.9 million in proceeds from sales of LHFI.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cash used inflows from financing activities
For the six-monththree-month period ended June 30, 2017,March 31, 2018, net cash used inflow from financing activities was $4.4$388.9 million, which was primarily due to a $1.0 billion increase in deposits, partially offset by a decrease in net borrowing activity of $664.2 million.
Net cash flow from financing activities for the three-month period ended March 31, 2017 was $(2.6) billion, which was primarily due to a decrease in net borrowing activity of $153.6 million$2.1 billion and a $4.3 billion$639.5 million decrease in deposits.
Net cash used in financing activities for the six-month period ended June 30, 2016 was $1.9 billion, which was primarily due to a decrease in net borrowing activity of $2.4 billion, partially offset by a $616.0 million increase in deposits.
See the Condensed Consolidated Statements of Cash Flows ("SCF") for further details on the Company's sources and uses of cash.
Credit Facilities
Third-Party Revolving Credit Facilities
Warehouse Facilities
SC uses warehouse lines to fund its originations. Each line specifies the required collateral characteristics, collateral concentrations, credit enhancement, and advance rates. SC's warehouse lines generally are backed by auto RICs and, in some cases, leases or personal loans. These credit lines generally have one- or two-year commitments, staggered maturities and floating interest rates. SC maintains daily funding forecasts for originations, acquisitions, and other large outflows, such as tax payments in order to balance the desire to minimize funding costs with its liquidity needs.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
SC's warehouse lines generally have net spread, delinquency, and net loss ratio limits. Generally, these limits are calculated based on the portfolio collateralizing the respective line; however, for certain of SC's warehouse lines, delinquency and net loss ratios are calculated with respect to its serviced portfolio as a whole. Failure to meet any of these covenants could trigger increased overcollateralization requirements or, in the case of limits calculated with respect to the specific portfolio underlying certain credit lines, result in an event of default under these agreements. If an event of default occurred under one of these agreements, the lenders could elect to declare all amounts outstanding under the agreement be immediately due and payable, enforce their interests against collateral pledged under the agreement, restrict SC's ability to obtain additional borrowings under the agreement, and/or remove SC as servicer. SC has never had a warehouse line terminated due to failure to comply with any ratio or meet any covenant. A default under one of these agreements can be enforced only with respect to the impacted warehouse line.
SC has two credit facilities with eightseven banks providing an aggregate commitment of $3.9$4.2 billion for the exclusive use of supplying short-term liquidity needs to support Chrysler Capital retail financing. As of June 30, 2017March 31, 2018 and December 31, 2016,2017, there were outstanding balances on these facilities of $2.8$2.1 billion and $3.7$2.0 billion, respectively. One of the facilities can be used exclusively for loan financing, and the other for lease financing. Both facilities require reduced advance rates in the event of delinquency, credit loss, or residual loss ratios exceeding specified thresholds.
Repurchase Facilities
SC also obtains financing through four investment management agreements under which it pledges retained subordinated bonds on its own securitizations as collateral for repurchase agreements with various borrowers and at renewable terms ranging up to 365 days. As of June 30, 2017March 31, 2018 and December 31, 2016,2017, there were outstanding balances of $699.0$709.6 million and $743.3$744.5 million, respectively, under these repurchase facilities.
Santander Credit Facilities
Santander historically has provided, and continues to provide, SC's business with significant funding support in the form of committed credit facilities. Through Santander’s New York branch (“("Santander NY"), Santander provides SC with $3.3$1.8 billion of long-term committed revolving credit facilities.
The facilities offered through Santander NY are structured as three- and five-year floating rate facilities, with a current maturity datesdate of December 31, 2017 and 2018. These facilities currently permit unsecured borrowing, but generally are collateralized by RICs as well as securitization notes payable and residuals owned by SC. Any secured balances outstanding under the facilities at the time of their maturity will amortize to match the maturities and expected cash flows of the corresponding collateral.
The Company also provides SC with $3.0 billion of committed revolving credit that can be drawn on an unsecured basis maturing in March 2019. The Company also provides SC with $1.5$3.0 billion in various term loans with maturities ranging from March 2019 to MarchDecember 2022. These loans eliminate in the consolidation of SHUSA.
On August 3, 2017, the Company entered into a $650.0 million loan with SC. Interest accrues on this loan at the rate116
Item 2. Management’s Discussion and Analysis of 3.44%. The note has a maturity dateFinancial Condition and Results of August 3, 2021. This loan will eliminate in the consolidation of SHUSA.Operations
Santander also serves as the counterparty for many of SC's derivative financial instruments, with outstanding notional amounts of $4.5$2.5 billion and $7.3$3.7 billion at June 30, 2017March 31, 2018 and December 31, 2016,2017, respectively.
In August 2015, under a newUnder an agreement with Santander, SC agreed to begin payingpays Santander a fee of 12.5 basis points per annum on certain warehouse facilities, as they renew, for which Santander provides a guarantee of SC's servicing obligations. For revolving commitments, the guarantee fee will be paid on the total committed amount and for amortizing commitments, the guarantee fee is paid against each month's ending balance. The guarantee fee only applies to additional facilities upon the execution of the counter-guaranty agreement related to a new facility or if reaffirmation is required on existing revolving or amortizing commitments as evidenced by a duly executed counter-guaranty agreement. SC recognized guarantee fee expense of $2.0 million and $1.5 million for the three-month periods ended March 31, 2018 and 2017, respectively.
Secured Structured Financings
SC's secured structured financings primarily consist of public, SEC-registered securitizations. SC also executes private securitizations under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”), and privately issues amortizing notes. The CompanySC has completed sevenfive securitizations year-to-date in 20172018, and currently has 3934 securitizations outstanding in the market with a cumulative ABS balance of approximately $17$17.0 billion.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Flow Agreements
In addition to SC's credit facilities and secured structured financings, SC has a flow agreement in place with a third party for charged-off assets. Previously, SC also had flow agreements with Bank of America and CBP. However, those agreements were terminated effective January 31 and May 1, 2017, respectively.
Loans and leases sold under these flow agreements are not on SC's balance sheet but provide a stable stream of servicing fee income and may also provide a gain or loss on sale. SC continues to actively seek additional such flow agreements.
Off-Balance Sheet Financing
Beginning in March 2017, SC has had the option to sell a contractually determined amount of eligible prime loans to Santander, through the SPAIN securitization platform.platforms. As all of the notes and residual interests in the securitizationsecuritizations are issued toacquired by Santander, SC recorded these transactions as true sales of the RICs securitized, and removed the sold assets from its Condensed Consolidated Balance Sheets.
SC also continues to periodically executesexecute Chrysler Capital-branded securitizations under Rule 144A of the Securities Act. Historically, asUpon transferring all of the notes and residual interests in these securitizations were issued to third parties, SC recordedrecords these transactions as true sales of the RICs securitized, and removedremoves the sold assets from its Condensed Consolidated Balance Sheets.
Uses of Liquidity
The Company uses liquidity for debt service and repayment of borrowings, as well as for funding loan commitments and satisfying deposit withdrawal requests.
SIS uses liquidity primarily to support underwriting transactions.
The primary use of liquidity for BSI is to meet customer liquidity requirements, such as loan financing, maturing deposits, investment activities, fund transfers, and payment of its operating expenses.
Banco Santander Puerto RicoBSPR uses liquidity for funding loan commitments, satisfying deposit withdrawal requests, and repayments of borrowings.
Dividends and Stock Issuances
At June 30, 2017,March 31, 2018, the Company's liquidity to meet debt payments, debt service and debt maturities was in excess of 12 months.
There were no dividends paid duringDuring the six-monththree-month period ended June 30, 2017March 31, 2018, the Company paid dividends of $5.0 million to its sole shareholder, Santander.
During the three-month period ended March 31, 2018, Santander contributed $5.7 million to the Company.
As of March 31, 2018, the Company had 530,391,043 shares of common stock outstanding.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
During the three-month period ended March 31, 2018 the Company paid dividends of $3.7 million, on the Company's commonits preferred stock. On January 19, 2017, SHUSA's Board of Directors declared a cash dividend on the Company's Preferred Stock of $0.45625 per share, which was paid on February 15, 2017 to shareholders of record as of the close of business on February 1, 2017.
On April 19, 2017, SHUSA's Board of Directors declared a cash dividend on the Company's preferred stock of $0.45625 per share, which was paid on May 15, 2017 to shareholders of record as of the close of business on May 1, 2017. On June 28, 2017,3, 2018, SHUSA’s Board of Directors declared a cash dividend on the Company’s preferred stock of $0.45625 per share, which is payable on AugustMay 15, 20172018 to shareholders of record as of the close of business on AugustMay 1, 2017, and2018.
SC has declared a cash dividend of $5.0 million$0.05 per share, to be paid on its common stockMay 14, 2018, to Santander.shareholders of record as of the close of business on May 4, 2018.
As of June 30, 2017,During 2018, SHUSA's subsidiaries had the Company had 530,391,043 of common stock outstanding.following dividend activity which eliminated in consolidation:
The Bank declared and paid $50.0 million in dividends to SHUSA; and
139BSI declared and paid $5.0 million in dividends to SHUSA; and
SHUSA contributed $20.0 million to SSLLC.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
CONTRACTUAL OBLIGATIONS
The Company enters into contractual obligations in the normal course of business as a source of funds for its asset growth and asset/liability management and to meet required capital needs. These obligations require the Company to make cash payments over time as detailed in the table below.
| | | Payments Due by Period | | 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) | |
(in thousands) | | | Total | | Less than 1 year | | Over 1 yr to 3 yrs | | Over 3 yrs to 5 yrs | | Over 5 yrs |
FHLB advances (1) | $ | 5,410,571 |
| | $ | 4,396,306 |
| | $ | 1,014,265 |
| | $ | — |
| | $ | — |
| | $ | 1,521,819 |
| | $ | 1,219,840 |
| | $ | 301,979 |
| | $ | — |
| | $ | — |
|
Notes payable - revolving facilities | 7,899,440 |
| | 2,194,858 |
| | 5,054,582 |
| | 650,000 |
| | — |
| | 5,438,558 |
| | 1,385,197 |
| | 4,053,361 |
| | — |
| | — |
|
Notes payable - secured structured financings | 23,796,457 |
| | 785,083 |
| | 7,012,187 |
| | 11,285,964 |
| | 4,713,223 |
| | 22,921,443 |
| | 481,731 |
| | 7,219,787 |
| | 10,866,345 |
| | 4,353,580 |
|
Other debt obligations (1) (2) | 9,643,250 |
| | 2,398,560 |
| | 4,563,600 |
| | 1,375,342 |
| | 1,305,748 |
| | 11,364,724 |
| | 1,741,538 |
| | 4,141,735 |
| | 2,994,031 |
| | 2,487,420 |
|
Junior subordinated debentures due to capital trust entities (1) (2) | 238,148 |
| | 238,148 |
| | — |
| | — |
| | — |
| | 151,957 |
| | 151,731 |
| | 48 |
| | 49 |
| | 129 |
|
CDs (1) | 6,382,492 |
| | 4,048,843 |
| | 1,341,425 |
| | 975,139 |
| | 17,085 |
| | 5,754,909 |
| | 3,266,982 |
| | 1,943,622 |
| | 536,479 |
| | 7,826 |
|
Non-qualified pension and post-retirement benefits | 128,328 |
| | 12,903 |
| | 26,203 |
| | 25,396 |
| | 63,826 |
| | 131,197 |
| | 13,918 |
| | 26,123 |
| | 26,330 |
| | 64,826 |
|
Operating leases(3) | 751,439 |
| | 120,064 |
| | 240,504 |
| | 159,909 |
| | 230,962 |
| | 726,008 |
| | 128,751 |
| | 220,337 |
| | 174,362 |
| | 202,558 |
|
Total contractual cash obligations | $ | 54,250,125 |
| | $ | 14,194,765 |
| | $ | 19,252,766 |
| | $ | 14,471,750 |
| | $ | 6,330,844 |
| | $ | 48,010,615 |
| | $ | 8,389,688 |
| | $ | 17,906,992 |
| | $ | 14,597,596 |
| | $ | 7,116,339 |
|
| |
(1) | Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based on interest rates in effect at June 30, 2017.March 31, 2018. The contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid. |
| |
(2) | Includes all carrying value adjustments, such as unamortized premiums and discounts and hedge basis adjustments. |
| |
(3) | Does not include future expected sublease income. |
Excluded from the above table are deposits of $56.556.3 billion that are due on demand by customers.
The Company is a party to financial instruments and other arrangements with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and manage its exposure to fluctuations in interest rates. See further discussion on these risks in Note 1112 and Note 1416 to the Condensed Consolidated Financial Statements.
Lending Arrangements
SC is obligated to make purchase price holdback payments to a third-party originator of auto loans that SC has purchased, when losses are lower than originally expected. SC iswas also obligated to make total return settlement payments to this third-party originator in 2017 if returns on the purchased loans arewere greater than originally expected. These obligations are accounted for as derivatives.
SC has extended revolving lines of credit to certain auto dealers. Under these arrangements, SC is committed to lend up to each dealer's established credit limit. At June 30, 2017 and December 31, 2016, there were outstanding balances of $26,000 and $2.5 million, respectively, and a committed amount of $26,000 and $2.9 million.
As a result of the strategic evaluation of its personal lending portfolio, in the third quarter of 2015, SC began reviewing strategic alternatives for exiting the personal loan portfolios. On February 1, 2016, SC completed the sale of substantially all LendingClub loans to a third-party buyer at an immaterial premium to par value. On April 14, 2017, SC sold the remaininganother portfolio comprised of personal installment loans to a third-party buyer.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
SC's other significant personal lending relationship is with Bluestem. SC continues to perform in accordance with the terms and operative provisions of agreements under which it is obligated to purchase personal revolving loans originated by Bluestem for a term ending in 2020, or 2022 if extended at Bluestem's option. The Bluestem portfolio is carried as held for sale in SC's condensed consolidated financial statements.Consolidated Financial Statements. Accordingly, SC has recorded$154recorded $70.5 million year-to-dateand $66.1 million during the first quarter of 2018 and 2017, respectively, in lower of cost or market adjustments on this portfolio, and there may be further such adjustments required in future periods' financial statements. SC is currently evaluating alternatives for sale of the Bluestem portfolio, which had a carrying value of $971.9 million$1.0 billion at June 30, 2017.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Employment and Other Agreements
On July 2, 2015, SC announced the departure of Mr. 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, he became entitled to receive certain payments and benefits under his employment agreement. The separation agreement also provided for the modification of terms for certain other equity-based awards. Certain of the payments, agreements to make payments and benefits may be effective only upon receipt of certain required regulatory approvals.
As of June 30, 2017, SC has not made any payments to Mr. Dundon, nor recorded any liability or obligation, arising from or pursuant to the terms of the separation agreement. Discussions with respect to this matter are ongoing, and, if all applicable conditions are satisfied, including receipt of required regulatory approvals and satisfaction of any conditions thereto, SC will be obligated to make a cash payment to Mr. Dundon of up to $115.1 million. This amount would be recorded as compensation expense in its Consolidated Statement of Income and Comprehensive Income.
The Company entered into an agreement with Mr. Dundon, Dundon DFS LLC ("DDFS"), and Santander related to Mr. Dundon’s
departure from SC. Pursuant to the separation agreement the Company was deemed to have delivered an irrevocable notice to exercise its option to acquire all of the 34,598,506 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 (the "Shareholders Agreement"). 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 June 30, 2017 and DecemberMarch 31, 2016 had a UPB of approximately $290.0 million. Pursuant to the loan agreement, 29,598,506 shares of SC common stock owned by DDFS LLC are pledged as collateral under a related pledge agreement (the “Pledge Agreement”). The Shareholders Agreement further provides that Santander may, at its option, become the direct beneficiary of the Call Option, and Santander has exercised this option. If consummated in full, DDFS LLC would receive $905.4 million plus interest that has accrued since the Call End Date. To date, the Call Transaction has not been consummated.
Pursuant to the loan agreement, if at any time the value of SC Common Stock pledged under the pledge agreement is less than 150% of the aggregate principal amount outstanding under the loan agreement, DDFS has an obligation to either (a) repay a portion of the outstanding principal amount such that the value of the pledged collateral is equal to at least 200% of the outstanding principal amount, or (b) pledge additional shares of SC Common Stock such that the value of the additional shares of SC Common Stock, together with the 29,598,506 shares already pledged under the pledge agreement, is equal to at least 200% of the outstanding principal amount. The value of the pledged collateral is less than 150% of aggregate principal amount outstanding under the loan agreement, and DDFS has not taken any of the collateral posting actions described in clauses (a) or (b) above.
In connection with, and pursuant to, the separation agreement, on July 2, 2015, DDFS LLC and Santander entered into amendments to the loan agreement and the Pledge Agreement that provide, among other things, the outstanding balance under the loan agreement will become due and payable upon the consummation of the Call Transaction and that the amount otherwise payable to DDFS under the Call Transaction will be reduced by the amount outstanding under the loan agreement, including principal, interest and fees, and further that any net cash proceeds received by DDFS on account of sales of SC Common Stock after the Call End Date are applied to the outstanding balance under the loan agreement.
On April 17, 2017, the Loan Agreement matured and became due and payable with a UPB of approximately $290 million as of that date. Because the borrower failed to pay obligations under the loan agreement on April 17, 2017, the borrower is in default and is currently being charged the default interest rate as defined by the loan agreement. The loan agreement generally defines the default interest rate as the Base Rate plus 2%. The Base Rate as defined in the Loan Agreement is the higher of (i) the federal funds rate plus ½ of 1% or (ii) the prime rate, which is the annual rate of interest publicly announced by the New York Branch of Santander from time to time. As of April 21, 2017, the prime rate as announced by the New York Branch of Santander was 4%.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
The parties continue in discussions on these matters. Completion of the transactions with Mr. Dundon is subject to receipt of applicable regulatory approvals.2018.
ASSET AND LIABILITY MANAGEMENT
Interest Rate Risk
Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in market interest rates, and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. Interest rate risk is managed by the Company's Treasury group and measured by its Market Risk Department, with oversight by the Asset/Liability Committee. In managing interest rate risk, the Company seeks to minimize the variability of net interest income across various likely scenarios, while at the same time maximizing net interest income and the net interest margin. To achieve these objectives, the Treasury group works closely with each business line in the Company. The Treasury group also uses various other tools to manage interest rate risk, including wholesale funding maturity targeting, investment portfolio purchase strategies, asset securitizations/sales, and financial derivatives.
Interest rate risk focuses on managing four elements of risk associated with interest rates: basis risk, repricing risk, yield curve risk and option risk. Basis risk stems from rate index timing differences with rate changes, such as differences in the extent of changes in Federal funds rates compared with the three-month London Interbank Offered Rate ("LIBOR"). Repricing risk stems from the different timing of contractual repricing, such as one-month versus three-month reset dates, as well as the related maturities. Yield curve risk stems from the impact on earnings and market value resulting from different shapes and levels of yield curves. Option risk stems from prepayment or early withdrawal risk embedded in various products. These four elements of risk are analyzed through a combination of net interest income and balance sheet valuation simulations, shocks to those simulations, and scenario and market value analyses, and the subsequent results are reviewed by management. Numerous assumptions are made to produce these analyses, including assumptions about new business volumes, loan and investment prepayment rates, deposit flows, interest rate curves, economic conditions and competitor pricing.
Net Interest Income Simulation Analysis
The Company utilizes a variety of measurement techniques to evaluate the impact of interest rate risk, including simulating the impact of changing interest rates on expected future interest income and interest expense, to estimate the Company's net interest income sensitivity. This simulation is run monthly and includes various scenarios that help management understand the potential risks in the Company's net interest income sensitivity. These scenarios include both parallel and non-parallel rate shocks as well as other scenarios that are consistent with quantifying the four elements of risk described above. This information is used to develop proactive strategies to ensure that the Company’s risk position remains within SHUSA Board of Directors-approved limits so that future earnings are not significantly adversely affected by future interest rates.
The table below reflects the estimated sensitivity to the Company’s net interest income based on interest rate changes at June 30, 2017March 31, 2018 and December 31, 2016:
2017:
| | | | The following estimated percentage increase/(decrease) to net interest income would result | | The following estimated percentage increase/(decrease) to net interest income would result |
If interest rates changed in parallel by the amounts below | | June 30, 2017 | | December 31, 2016 | | March 31, 2018 | | December 31, 2017 |
Down 100 basis points | | (1.78 | )% | | (2.14 | )% | | (3.15 | )% | | (3.33 | )% |
Up 100 basis points | | 2.03 | % | | 2.36 | % | | 2.75 | % | | 2.88 | % |
Up 200 basis points | | 3.34 | % | | 4.36 | % | | 5.29 | % | | 5.48 | % |
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Market Value of Equity ("MVE") Analysis
The Company also evaluates the impact of interest rate risk by utilizing MVE modeling. This analysis measures the present value of all estimated future cash flows of the Company over the estimated remaining life of the balance sheet. MVE is calculated as the difference between the market value of assets and liabilities. The MVE calculation utilizes only the current balance sheet, and therefore does not factor in any future changes in balance sheet size, balance sheet mix, yield curve relationships or product spreads, which may mitigate the impact of any interest rate changes.
Management examines the effect of interest rate changes on MVE. The sensitivity of MVE to changes in interest rates is a measure of longer-term interest rate risk, and highlights the potential capital at risk due to adverse changes in market interest rates. The following table discloses the estimated sensitivity to the Company’s MVE at June 30, 2017March 31, 2018 and December 31, 2016.
2017.
| | | | The following estimated percentage increase/(decrease) to MVE would result | | The following estimated percentage increase/(decrease) to MVE would result |
If interest rates changed in parallel by the amounts below | | June 30, 2017 | | December 31, 2016 | | March 31, 2018 | | December 31, 2017 |
Down 100 basis points | | (1.08 | )% | | (1.23 | )% | | (1.80 | )% | | (2.55 | )% |
Up 100 basis points | | (1.24 | )% | | (0.76 | )% | | (0.37 | )% | | (0.04 | )% |
Up 200 basis points | | (3.84 | )% | | (2.50 | )% | | (1.77 | )% | | (1.62 | )% |
As of June 30, 2017,March 31, 2018, the Company’s MVE profile showed a decrease of 1.08%1.80% for downward parallel interest rate shocks of 100 basis points and a decrease of 1.24%0.37% for upward parallel interest rate shocks of 100 basis points. The asymmetrical sensitivity between up 100 and down 100 shock is due to the negative convexity as a result of the prepayment option embedded in mortgage-related products, the impact of which is not fully offset by the behavior of the funding base (largely non-maturity deposits ("NMDs")).
In downward parallel interest rate shocks, mortgage-related products’ prepayments increase, their duration decreases and their market value appreciation is therefore limited. At the same time, with deposit rates already close to zero, the Company cannot effectively transfer interest rate declines to its NMD customers. For upward parallel interest rate shocks, extension risk weighs on a sizable portion of the Company’s mortgage-related products, which are predominantly long-term and fixed-rate; and for larger shocks, the loss in market value is not offset by the change in NMD.
Limitations of Interest Rate Risk Analyses
Since the assumptions used are inherently uncertain, the Company cannot predict precisely the effect of higher or lower interest rates on net interest income or MVE. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, the difference between actual experience and the assumed volume, characteristics of new business, behavior of existing positions, and changes in market conditions and management strategies, among other factors.
Uses of Derivatives to Manage Interest Rate and Other Risks
To mitigate interest rate risk and, to a lesser extent, foreign exchange, equity and credit risks, the Company uses derivative financial instruments to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows.
Through the Company’s capital markets and mortgage banking activities, it is subject to price risk. The Company employs various tools to measure and manage price risk in its portfolios. In addition, SHUSA's Board of Directors has established certain limits relative to positions and activities. The level of price risk exposure at any point in time depends on the market environment and expectations of future price and market movements, and will vary from period to period.
Management uses derivative instruments to mitigate the impact of interest rate movements on the fair value of certain liabilities, assets and highly probable forecasted cash flows. These instruments primarily include interest rate swaps that have underlying interest rates based on key benchmark indices and forward sale or purchase commitments. The nature and volume of the derivative instruments used to manage interest rate risk depend on the level and type of assets and liabilities on the balance sheet and the risk management strategies for the current and anticipated interest rate environments.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Prior to 2017, the Company entered into cross-currency swaps to hedge its foreign currency exchange risk on certain Euro-denominated investments, which were sold in 2016.Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The Company's derivativederivatives portfolio includes mortgage banking interest rate lock commitments, forward sale commitments and interest rate swaps. As part of its overall business strategy, the Bank originates fixed-rate residential mortgages. It sells a portion of this production to the FHLMC, the FNMA, and private investors. The Company uses forward sales as a means of hedging against the economic impact of changes in interest rates on the mortgages that are originated for sale and on interest rate lock commitments.
The Company typically retains the servicing rights related to residential mortgage loans that are sold. The majority of the Company's residential MSRs are accounted for at fair value. As deemed appropriate, the Company economically hedges MSRs, using interest rate swaps and forward contracts to purchase MBS. For additional information on MSRs, see Note 8 to the Condensed Consolidated Financial Statements.
The Company uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. Foreign exchange contracts, which include spot and forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Exposure to gains and losses on these contracts increase or decrease over their respective lives as currency exchange and interest rates fluctuate.
The Company also utilizes forward contracts to manage market risk associated with certain expected investment securities sales and equity options, which manage its market risk associated with certain customer deposit products.
For additional information on foreign exchange contracts, derivatives and hedging activities, see Note 1112 to the Condensed Consolidated Financial Statements.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference from Part I, Item 2 , MD&A of Financial Condition and Results of Operations — Asset"Asset and Liability ManagementManagement" above.
ITEM 4 - CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls
Our management, with the participation of our CEOChief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), has evaluated the effectiveness of our disclosure controls and procedures (asas defined in Rules 13a- 15(e) and 15d- 15(e) under the Securities Exchange Act, of 1934, as amended (the “Exchange Act”)), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that as of June 30, 2017,March 31, 2018, we did not maintain effective disclosure controls and procedures because of the material weaknesses in internal control over financial reporting described below. Notwithstanding these material weaknesses, based on the additional analysis and other post-closing procedures performed, management believes that the Condensed Consolidated Financial Statements included in this report fairly present in all material respects our financial position, results of operations, capital position, and cash flows for the periods presented, in conformity with GAAP.
A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis. We have identified the following material weaknesses:
The Company's financial reporting involves complex accounting matters emanating from our majority-owned subsidiary SC. We determined there was a material weakness in the design and operating effectiveness of the controls pertaining to our oversight of our SC subsidiary'sSC's accounting for transactions that are significant to the Company’s internal control over financial reporting. These deficiencies included (a) ineffective oversight to ensure accountability at SC for the performance of internal controls over financial reporting and to ensure corrective actions, where necessary, were appropriately prioritized and implemented in a timely manner; and (b) inadequate resources and technical expertise at SHUSA to perform effective oversight of the application of accounting and financial reporting activities that are significant to the Company’s consolidated financial statements.
We have identified the following material weaknesses emanating from SC:
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2. | SC’s Control Environment, Risk Assessment, Control Activities and Monitoring |
We did not maintain effective internal control over financial reporting related to the following areas: control environment, risk assessment, control activities and monitoring:
Management did not effectively execute a strategy to hire and retain a sufficient complement of personnel with an appropriate level of knowledge, experience, and training in certain areas important to financial reporting.
The tone at the top was insufficient to ensure there were adequate mechanisms and oversight to ensure accountability for the performance of internal control over financial reporting responsibilities and to ensure corrective actions were appropriately prioritized and implemented in a timely manner.
There was not adequate management oversight of accounting and financial reporting activities in implementing certain accounting practices to conform to the Company’s policies and GAAP.
There was not an adequate assessment of changes in risks by management that could significantly impact internal control over financial reporting or an adequate determination and prioritization of how those risks should be managed.
There was not adequate management oversight and identification of models, spreadsheets and completeness and accuracy of data material to financial reporting.
There were insufficiently documented Company accounting policies and insufficiently detailed Company procedures to put policies into effective action.
There was a lack of appropriate tone at the top in establishing an effective control owner for the risk and controls self-assessment process, which contributed to a lack of clarity about ownership of risk assessments and control design and effectiveness.
There was insufficient governance, oversight and monitoring of the credit loss allowance and accretion processes and a lack of defined roles and responsibilities in monitoring functions.
the following identified material weaknesses emanating from SC:
3. Application of Effective Interest Method for Accretion
The Company’s policies and controls related to the methodology used for applying the effective interest rate method in accordance with GAAP, specifically as it relates the review of key assumptions over prepayment curves, pool segmentation and presentation in financial statements either were not designed appropriately or failed to operate effectively. Additionally the resources dedicated to the reviews were not sufficient to identify all relevant instances of non-compliance with policies and GAAP and did not sufficiently review supporting methodologies and practices to identify variances from the Company’s policy and GAAP.
This resulted in errors in the Company’s application of the effective interest method for accreting discounts, which include discounts upon origination of the loan, subvention payments from manufacturers, and other origination costs on individually acquired retail installment contracts.
This material weakness relates to the following financial statement line items: loans held for investment, loans held-for-sale, the allowance for loan and lease losses, interest income-loans, the provision for credit losses, miscellaneous income, and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.
4. Methodology to Estimate Credit Loss Allowance
The Company’s policies and controls related to the methodology used for estimating the credit loss allowance in accordance with GAAP, specifically as it relates to the calculation of impairment for troubled debt restructurings (TDRs) separately from the general allowance on loans not classified as TDRs, the consideration of net discounts and the calculation of selling costs when estimating the allowance either were not designed appropriately or failed to operate effectively. Additionally the resources dedicated to the reviews were not sufficient to identify all relevant instances of non-compliance with policies and GAAP and did not sufficiently review supporting methodologies and practices to identify variances from the Company’s policies and GAAP.
This resulted in errors in the Company’s methodology for determining the credit loss allowance, specifically not calculating impairment for TDRs separately from a general allowance on loans not classified as TDRs, inappropriately omitting the consideration of net discounts when estimating the allowance and recording charge-offs, and calculating appropriate selling costs for inclusion in the analysis.
This material weakness relates to the following financial statement line items: the allowance for loan and lease losses, the provision for credit losses, and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.
5. Loans Modified as TDRs
The following controls over the identification of TDRs and inputs used to estimate TDR impairment did not operate effectively:
Review controls of the TDR footnote disclosures and supporting information did not effectively identify that parameters used to query the loan data were incorrect.
A review of inputs used to estimate the expected and present value of cash flows of loans modified in TDRs did not identify errors in types of cash flows included and in the assumed timing and amount of defaults and did not identify that the discount rate was incorrect.
As a result, management determined that it had incorrectly identified the population of loans that should be classified as TDRs and, separately, had incorrectly estimated the impairment on these loans due to model input errors.
This material weakness relates to the following financial statement line items: the allowance for loan and lease losses, the provision for credit losses, and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.
6. Development, Approval, and Monitoring of Models Used to Estimate the Credit Loss Allowance
Various deficiencies were identified in the credit loss allowance process related to review, monitoring and approval processes over models and model changes that aggregated to a material weakness. The following controls did not operate effectively:
Review controls over completeness and accuracy of data, inputs and assumptions in models and spreadsheets used for estimating credit loss allowance and related model changes were not effective and management did not adequately challenge significant assumptions.
Review and approval controls over the development of new models to estimate credit loss allowance and related model changes were ineffective.
Adequate and comprehensive performance monitoring over related model output results was not performed and we did not maintain adequate model documentation.
This material weakness relates to the following financial statement line items: the allowance for loan and lease losses, provision for credit losses, and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.
7.4. Identification, Governance, and Monitoring of Models Used to Estimate Accretion
Various deficiencies were identified in the accretion process related to review, monitoring and approvalgovernance processes over models and model changes that aggregated to a material weakness. The following controls did not operate effectively:
Review controls over completeness and accuracy of data, inputs, calculation and assumptions in models and spreadsheets used for estimating accretion were not effective and management did not adequately challenge significant assumptions.
Review and approval controls over the development of new models to estimate accretion and related model changes were ineffective.
Adequate and comprehensive performance monitoring over related model output results was not performed and we did not maintain adequate model documentation.
This material weakness relates to the following financial statement line items: loans held for investment, loans held for sale, the allowance for loan and lease losses, interest income - loans, provision for credit losses, miscellaneous (loss)/income, net and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.
8. Review of New, Unusual or Significant Transactions
Management identified an error in the accounting treatment of certain transactions related to separation agreements with the former Chairman of the Board and CEO of SC. Specifically, controls over the review of new, unusual or significant transactions related to application of the appropriate accounting and tax treatment to this transaction in accordance with GAAP did not operate effectively in that management failed to detect as part of the review procedures that regulatory approval was a prerequisite to recording the transaction and that approval had not been obtained prior to recording the transaction and therefore should have not been recorded.
This material weakness relates to the following financial statement line items: compensation and benefits expense, other liabilities, deferred tax liabilities, net, and common stock and paid-in capital and the related disclosures within Note 13 - Accumulated Other Comprehensive Income/(Loss).
In addition to the above items emanating from SC, the following material weaknesses wereweakness was identified at the SHUSA level:
9.5. Review of Statement of Cash Flows and Footnotes
Management identified a material weakness in internal control over the Company's process to prepare and review the Statement of Cash Flows ("SCF") and Notes to the Consolidated Financial Statements. Specifically, the Company concluded that it did not have adequate controls designed and in place over the preparation and review of such information.
10. Goodwill Impairment Assessment
In connection with the annual goodwill impairment assessment, 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 GAAP. Additionally, the Company determined there was a material weakness in the operating effectiveness of the review control over data utilized in Step Two of the impairment test for the SC reporting unit.
Remediation Status of Reported Material Weaknesses
The Company is currently working to remediate the material weaknesses described above, including assessing the need for additional remediation steps and implementing additional measures to remediate the underlying causes that gave rise to the material weaknesses. The Company is committed to maintaining a strong internal control environment and to ensure that a proper, consistent tone is communicated throughout the organization, including the expectation that previously existing deficiencies will be remediated through implementation of processes and controls ensuringto ensure strict compliance with GAAP.
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To address the material weakness in the control environment (material weakness 1, noted above), the Company has takenis in the following measures:process of strengthening its processes and controls as follows:
Established regular working group meetings, with appropriate oversight by management, to review and challenge complex accounting matters, strengthen accountability for performance of internal control over financial reporting responsibilities and prioritization of corrective actions.
Appointed a Head of Internal Controls with significant public company financial reporting experience and the requisite skillsets in areas important to financial reporting.
Developed a plan to enhance its risk assessment processes, control procedures and documentation.
Established policies and procedures for the oversight of subsidiaries that includes accountability for each subsidiary for maintenance of accounting policies, evaluation of significant and unusual transactions, material estimates, and regular reporting and review of changes in the control environment and related accounting processes.
Reallocated additional Company resources to improve the oversight of subsidiary operations and to ensure sufficient staffing to conduct enhanced financial reporting reviews.
Collaborated with other departments, such as Accounting Policy and Legal, to ensure entity information/data is shared and reviewed accordingly.
To address the material weakness in SC’s control environment, risk assessment, control activities and monitoring (material weakness 2, noted above), the Company has takenis in the following measures:process of strengthening its processes and controls as follows:
Appointed an additional independent director to the Audit Committee of the Board with extensive experience as a financial expert in our industry to provide further experience on the committee.Committee.
Established regular working group meetings, with appropriate oversight by management of both SC and SHUSA to strengthen accountability for performance of internal control over financial reporting responsibilities and prioritization of corrective actions.
Hired a Chief Accounting Officer and other key personnel with significant public company financial reporting experience and the requisite skillsets in areas important to financial reporting.
Developed and implemented a plan to enhance its risk assessment processes, control procedures and documentation.
Reallocated additional Company resources to improve the oversight for certain financial models.
Increased accounting resources with qualified permanent resources to ensure sufficient staffing to conduct enhanced financial reporting procedures and to continue the remediation efforts.
Improved management documentation, review controls and oversight of accounting and financial reporting activities to ensure accounting practices conform to the Company’s policies and GAAP.
Increased accounting participation in critical governance activities to ensure an adequate assessment of risk activities which may impact financial reporting or the related internal controls.
Completed a comprehensive review and update of all accounting policies, process descriptions and control activities.
Developed and implemented additional documentation, controls and governance for the credit loss allowance and accretion processes.
To address the material weaknesses related to the applicationdevelopment, approval, and monitoring of effective interest method for accretionmodels used to estimate the credit loss allowance (material weakness 3, noted above), the Company has taken the following measures:
Completed a comprehensive design effectiveness review and augmentation of the controls to ensure all critical risks are addressed.
Implemented a more comprehensive monitoring plan for the credit loss allowance with a specific focus on model inputs, changes in model assumptions and model outputs to ensure an effective execution of the Company’s risk strategy.
Implemented improved controls over the development of new models or changes to models used to estimate credit loss allowance.
Implemented enhanced on-going performance monitoring procedures.
Developed comprehensive model documentation.
Enhanced the Company’s communication on related issues with its senior leadership team and the Board, including the Risk Committee and the Audit Committee.
Increased resources dedicated to the analysis, review and documentation to ensure compliance with GAAP and the Company’s policies.
To address the material weaknesses related to the identification, governance and monitoring of models used to estimate accretion (material weakness 7,4, noted above), the Company is inhas taken the process of strengthening its processes and controls as follows:following measures:
Enhanced its accountingDeveloped a comprehensive accretion model documentation manual and review procedures of key assumptionsimplemented on-going performance monitoring to ensure the Company’s accretion methodology conforms to Company policy and GAAP.compliance with required standards.
Automated the process for the application of the effective interest rate method for accreting discounts, subvention payments from manufacturers and other origination costs on individually acquired RICs.
Implemented comprehensive review controls over data, inputs and assumptions used in the models.
Strengthened review controls and change management procedures over the models used to estimate accretion.
Increased accounting resources with qualified, permanent resources to ensure an adequate level of review and execution of control activities.
To address the material weaknesses related to themethodology to estimate credit loss allowance (material weakness 4, noted above), loans modified as TDRs (material weakness 5, noted above), and development, approval, and monitoring of models used to estimate the credit loss allowance (material weakness 6, noted above), the Company has taken the following measures:
Conducted a comprehensive design effectiveness review and augmentation of the controls to ensure all critical risks are addressed.
Enhanced its accounting documentation and review procedures relating to credit loss allowance and TDRs to demonstrate how the Company’s policies and procedures align with GAAP and produce a repeatable process.
Implemented enhanced review controls over financial statement disclosures for credit loss allowance and TDR’s to ensure compliance with the Company’s polices and U. S. GAAP.
Implemented a more comprehensive monitoring plan for credit loss allowance and TDRs with a specific focus on model inputs, changes in model assumptions and model outputs to ensure an effective execution of the Company’s risk strategy.
Enhanced the Company’s communication on related issues with its senior leadership team and the Board, including the Risk Committee and the Audit Committee.
To address the material weakness in the review of new, unusual or significant transactionsstatement of cash flows and footnotes (material weakness 8,5, noted above), the Company is in the process of strengthening its processes and controls as follows:
Increasing the documentation, analysis and governance over new, significant and unusual transactions to ensure that these transactions are recorded in accordance with Company’s policies and GAAP.
To address the material weaknesses in the review of SCF and footnotes (material weakness 9, noted above), the Company is in the process of strengthening its processes and controls as follows:
ImprovingImproved the review controls over financial statements and the related disclosures to include a more comprehensive disclosure checklist and improved review procedures from certain members of the management.
Designed and implemented additional controls over the preparation and the review of the SCF and Notes to the Consolidated Financial Statements.
ImplementedStrengthening the review controls, reconciliations and supporting documentation related to the classification of cash flows between operating activities and investing activities in the SCF.
Implementing additional reviews at a detailed level at the statement preparation and data provider levels.
To address the material weaknesses in the goodwill impairment assessment (material weakness 10, noted above), the Company is in the process of strengthening its processes and controls as follows:
Improved reconciliation of carrying value to key information sources.
Increased management reviews of the goodwill carrying value calculation.
Improved communication protocols with appropriate personnel and third-party valuation specialists to provide additional transparency for information used for valuation.
Improved reviews of information provided by appropriate personnel and reconciliation of valuation assumptions to information provided by the Company.
While progress has been made to enhance processes, procedures and controls related toremediate all of these areas, as of March 31, 2018, we are still in the process of developing and implementing thesethe enhanced processes and procedures and testing these controls and believe additional time is required to complete development and implementation, and to demonstrate the sustainabilityoperating effectiveness of these procedures.improved controls. We believe our remedial actions will be effective in remediating the material weaknesses, and we will continue to devote significant time and attention to these remedial efforts. However,In addition, the material weaknesses cannotwill not be considered remediated until the applicable remedial processes and procedures have been in place for a sufficient period of time and management has concluded, through testing, that these controls are effective. Accordingly, the material weaknesses wereare not remediated at June 30, 2017.as of March 31, 2018.
Limitations on Effectiveness of Disclosure Controls and Procedures
In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Changes in Internal Control over Financial Reporting
There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended June 30, 2017March 31, 2018 that have materially affected, or are reasonably likely to materially affect, itsour internal control over financial reporting.
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PART IIII. OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
Reference should be madeRefer to Note 1213 to the Condensed Consolidated Financial Statements for disclosure regarding the lawsuit filed by SHUSA against the IRSInternal Revenue Service (“IRS”) and Note 1416 to the Condensed Consolidated Financial Statements for SHUSA’s litigation disclosure,disclosures, which are incorporated herein by reference.
ITEM 1A - RISK FACTORS
The Company is subject to a number of risks potentially impacting its business, financial condition, results of operations and cash flows. There have been no material changes from the risk factors set forth under Part I, Item IA, Risk Factors, in the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2017.
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - MINE SAFETY DISCLOSURES
None.
ITEM 5 - OTHER INFORMATION
None.
ITEM 6 - EXHIBITS
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(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 001-16581) |
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(3.3 | ) | |
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(3.6 | ) | |
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(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 QuarterlyAnnual Report on Form 10-Q.10-K. 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) |
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(10.2 | ) | |
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(10.310.2 | ) | 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) |
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(10.4 | ) | |
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(10.510.3 | ) | |
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(31.1 | ) | |
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(32.1 | ) | |
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(101(101.INS) | )
| Interactive Data File (XBRL).XBRL Instance Document (Filed herewith) |
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(101.SCH) |
| XBRL Taxonomy Extension Schema (Filed herewith) |
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(101.CAL) |
| XBRL Taxonomy Extension Calculation Linkbase (Filed herewith) |
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(101.DEF) |
| XBRL Taxonomy Extension Definition Linkbase (Filed herewith) |
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(101.LAB) |
| XBRL Taxonomy Extension Label Linkbase (Filed herewith) |
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(101.PRE) |
| XBRL Taxonomy Extension Presentation Linkbase (Filed herewith) |
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.
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| | | SANTANDER HOLDINGS USA, INC. (Registrant) |
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Date: | August 10, 2017 | | /s/ Scott E. Powell |
| | | Scott E. Powell |
| | | President and Chief Executive Officer
(Authorized Officer)
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Date: | August 10, 2017May 9, 2018 | | /s/ Madhukar Dayal |
| | | Madhukar Dayal |
| | | Chief Financial Officer and Senior Executive Vice President |
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Date: | May 9, 2018 | | /s/ David L. Cornish |
| | | David L. Cornish |
| | | Chief Accounting Officer, Controller and Executive Vice President |