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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ☑QUARTERLY REPORT PURSUANT TO SECTIONQuarterly Report Pursuant to Section 13 ORor 15(d) OF THE SECURITIES EXCHANGE ACT OFof the Securities Exchange Act of 1934
For the quarterly period ended September 30, 2017
OR
2020
o☐TRANSITION REPORT PURSUANT TO SECTIONTransition Report Pursuant to Section 13 ORor 15(d) OF THE SECURITIES EXCHANGE ACT OFof the Securities Exchange Act of 1934
For the transition period from to .
Commission File Number: 001-16581
SANTANDER HOLDINGS USA, INC.
(Exact name of registrant as specified in its charter)
Virginia
(State or other jurisdiction of
incorporation or organization)
23-2453088
(I.R.S. Employer
Identification No.)
75 State Street, Boston, Massachusetts
(Address of principal executive offices)
02109
(Zip Code)
(617) 346-7200
Registrant’s telephone number including area code (617) 346-7200
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolsName of each exchange on which registered
Not ApplicableNot ApplicableNot Applicable
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ☑. No o☐.
Indicate by check mark whether the registrant has submitted electronically 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.
Large accelerated filer o☐
Accelerated filer o☐
Emerging growth company ☐
Non-accelerated filer þFiler ☑
(Do not check if smaller reporting company)
Smaller reporting company o
☐
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 numberNumber of shares outstanding of each of the issuer’s classes of common stock asoutstanding at October 31, 2020: 530,391,043 shares

Table of the latest practicable date.Contents


INDEX
ClassOutstanding at October 31, 2017
Common Stock (no par value)530,391,043 shares

Table of Contents


INDEX

Page
Page
Condensed Consolidated Balance Sheets atSeptember 30, 20172020 and December 31, 20162019
45
Condensed Consolidated Statements of Operations for the three-month and nine-month periods endedSeptember 30, 20172020 and 20162019
56
Condensed Consolidated Statements of Comprehensive Income for the three-month and nine-month periods endedSeptember 30, 20172020 and 20162019
67
Condensed Consolidated Statements of Stockholder's Equity for the three-month and nine-month periods endedSeptember 30, 20172020 and 20162019
78
Condensed Consolidated Statements of Cash Flows for the nine-month periods endedSeptember 30, 20172020 and 20162019
810
912
9277
147120
147120
153121
153121
153121
153123
153123
153123
153123
154124
156126
 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
 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


3


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CAUTIONARY NOTE REGARDING 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”)SHUSA contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the financial condition, results of operations, business plans and future performance of the Company. Words such as “may,” “could,” “should,” “looking forward,” “will,” “would,” “believe,” “expect,” “hope,” “anticipate,” “estimate,” “intend,” “plan,” “assume," "goal," "seek" or similar expressions are intended to indicate forward-looking statements.


Although SHUSA believes that the expectations reflected in these forward-looking statements are reasonable as of the date on which the statements are made, these statements are not guarantees of future performance and involve risks and uncertainties based on various factors and assumptions, many of which are beyond the Company's control. 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 adverse impact of COVID-19 on our business, financial condition, liquidity and results of operations;
•the effects of regulation, actions and/or policies of the Board of Governors of the Federal Reserve, System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the "FDIC"),FDIC, the Office of the Comptroller of the Currency (the “OCC”)OCC and the Consumer Financial Protection Bureau (the “CFPB”),CFPB, and other changes in monetary and fiscal policies and regulations, including policies that affect market interest rate policies of the Federal Reserve,rates and money supply, actions related to COVID-19, as well as in the impact of changes in and interpretations of generally accepted accounting principles inGAAP, including adoption of the United States of America ("GAAP"),FASB's CECL credit reserving framework, the failure to adhere to which could subject SHUSA and/or its subsidiaries to formal or informal regulatory compliance and enforcement actions;actions and result in fines, penalties, restitution and other costs and expenses, changes in our business practice, and reputational harm;
•SHUSA’s ability to manage credit risk that may increase to the extent our loans are concentrated by loan type, industry segment, borrower type or location of the borrower or collateral;
•the extent of recessionary conditions in the U.S. related to COVID-19 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;loss expense;
•acts of God, including pandemics and other significant public health emergencies, and other natural or man-made disasters and SHUSA’s ability to deal with disruptions caused by such acts, emergencies and disasters;
•inflation, interest rate, market and monetary fluctuations, including effects from the pending discontinuation of LIBOR as an interest rate benchmark, may, among other things, reduce net interest margins and impact funding sources, revenue and expenses, the value of assets and obligations, and the ability to originate and distribute financial products in the primary and secondary markets;
•the pursuit of protectionist trade or other related policies, including tariffs by the U.S., its global trading partners, and/or other countries, and/or trade disputes generally;
•the ability of certain European member countries to continue to service their debt and the risk that a weakened European economy could negatively affect U.S.-based financial institutions, counterparties with which SHUSA does business, as well as the stability of global financial markets;
inflation, interest rate, marketmarkets, including economic instability and monetary fluctuations, which may, among other things, reduce net interest margins and impact funding sourcesrecessionary conditions in Europe and the ability to originate and distribute financial products ineventual exit of the primary and secondary markets;
regulatory uncertainties and changes faced by financial institutions in the U.S. and globally arisingUnited Kingdom from the U.S. presidential administration and Congress and the potential impact those uncertainties and changes could have on SHUSA's business, results of operations, financial condition or strategy;European Union;
•adverse movements and volatility in debt and equity capital markets and adverse changes in the securities markets, including those related to the financial condition of significant issuers in SHUSA’s investment portfolio;
•SHUSA's ability to grow revenue, manage expenses, attract and retain highly-skilled people and raise capital necessary to achieve its business goals and comply with regulatory requirements;
•SHUSA’s ability to effectively manage its capital and liquidity, including approval of its capital plans by its regulators;regulators and its subsidiaries' ability to continue to pay dividends to it;
•changes in credit ratings assigned to SHUSA or its subsidiaries;subsidiaries that could increase the cost of funding or limit our access to capital markets;
•the ability to manage risks inherent in our businesses, including through effective use of systems and controls, insurance, derivatives and capital management;
•SHUSA’s ability to timely develop competitive new products and services in a changing environment that are responsive to the needs of SHUSA's customers and are profitable to SHUSA, the acceptancesuccess of such products and services byour marketing efforts to customers, and the potential for new products and services to impose additional unexpected costs, on SHUSAlosses, or other liabilities not anticipated at their initiation, and expose SHUSA to increased operational risk;
•competitors of SHUSA that may have greater financial resources or lower costs, or be subject to different regulatory requirements than SHUSA, may innovate more effectively, or may develop products and technology that enable those competitors to compete more successfully than SHUSA;SHUSA and cause SHUSA to lose business or market share;
•SC's agreement with FCA may not result in currently anticipated levels of growth and is subject to performance conditions that could result in termination of the agreement;
•consumers and small businesses may decide not to use banks for their financial transactions, which could impact our net income;
•changes in customer spending, investment or savings behavior;
•loss of customer deposits that could increase our funding costs;
•the ability of SHUSA and its third-party vendors to convert, maintain and maintainupgrade, as necessary, SHUSA’s data processing and related systemsother IT infrastructure on a timely and acceptable basis, and within projected cost estimates;estimates and without significant disruption to our business;
•SHUSA's ability to control operational risks, data security breach risks and outsourcing risks, and the possibility of errors in quantitative models and software SHUSA uses to managein its business, including as a result of cyber attacks,cyberattacks, technological failure, human error, fraud or malice by internal or external parties, and the possibility that SHUSA's controls will prove insufficient, fail or be circumvented;
•changes to tax laws and regulations and the outcome of ongoing tax audits by federal, state and local income tax authorities that may require SHUSA to pay additional taxes or recover fewer overpayments compared to what has been accrued or paid as of period-end;
acts of terrorism or domestic or foreign military conflicts; and acts of God, including natural disasters;
•the costs and effects of regulatory or judicial actions or proceedings, including possible business restrictions resulting from such actions or proceedings; and
•adverse publicity, and negative public opinion, whether specific to SHUSA or regarding other industry participants or industry-wide factors, or other reputational harm.harm;

•acts of terrorism or domestic or foreign military conflicts; and
•the other factors that are described in Part I, Item IA - Risk Factors of our 2019 Annual Report on Form 10-K,

If one or more of the factors affecting the Company’s forward-looking information and statements renders forward-looking information or statements incorrect, the Company’s actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking information and statements. Therefore, the Company cautions the reader not to place undue reliance on any forward-looking information or statements herein. The effect of these factors is difficult to predict. Factors other than these also could adversely affect the Company’s results, and the reader should not consider these factors to be a complete set of all potential risks or uncertainties as new factors emerge from time to time. Management cannot assess the impact of any such factor on the Company’s business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statements only speak as of the date of this document, and the Company undertakes no obligation to update any forward-looking information or statements, whether written or oral, to reflect any change, except as required by law. All forward-looking statements attributable to the Company are expressly qualified by these cautionary statements.
1



Table of Contents



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.
ABS: Asset-backed securities
Deka Lawsuit: Purported securities class action lawsuit filed against SC on August 26, 2014COVID-19: a novel strain of coronavirus, declared a pandemic by the World Health Organization in March 2020
ACL: Allowance for credit losses
CPRs: Constant prepayment rate
AFS: Available-for-sale
CRA: Community Reinvestment Act
ALLL: Allowance for loan and lease losses
CRA Final Rule: the final rule relating to the CRA issued by the OCCC on July 20, 2020
AOCI: Accumulated other comprehensive income
CRA NPR: The NPR related to the CRA issued by the OCC and FDIC on December 12, 2019
ASC: Accounting Standards Codification
CRE: Commercial Real Estate
ASU: Accounting Standards Update
CRE & VF: Commercial Real Estate and Vehicle Finance
ATM: Automated teller machine
DCF: Discounted cash flow
Bank: Santander Bank, National Association
DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act
AFS: Available-for-saleBEA: Bureau of Economic Analysis
DOJ: Department of Justice
ALLL: Allowance for loan and lease lossesBHC: Bank holding company
DTI: Debt-to-incomeDPD: Days past due
Alt-A: Loans originated through brokers outside the Bank's geographic footprint, often lacking full documentationBHCA: Bank Holding Company Act of 1956, as amended
ECOA: Equal Credit Opportunity ActDRIVE: Drive Auto Receivables Trust, a securitization platform
AOD: Assurance of DiscontinuanceBOLI: Bank-owned life insurance
DTI: Debt-to-income
BSI: Banco Santander International
EAD: Exposure at default
BSPR: Banco Santander Puerto Rico
Economic Growth Act: The Economic Growth, Regulatory Relief, and Consumer Protection Act
C&I: Commercial & industrial
EIP: Economic Impact Payments
CARES Act: Coronavirus Aid, Relief, and Economic Security Act
EIR: Effective interest rate
CBB: Consumer and Business Banking
EPS: Enhanced Prudential Standards
APR: Annual percentage rateCBP: Citizens Bank of Pennsylvania
ETR: Effective tax rate
ASCCCAR: Accounting Standards CodificationComprehensive Capital Analysis and Review
Evaluation Date: September 30, 2020
CD: Certificate of deposit
Exchange Act: Securities Exchange Act of 1934, as amended
ASU: Accounting Standards UpdateCECL: Current expected credit losses
FASB: Financial Accounting Standards Board
ATM: Automated teller machineCECL Standard: Amendments based on ASU 2016-13, ASU 2019-04, and ASU 2019-11, Financial Instruments - Credit Losses
FBO: Foreign banking organization
BankCEF: Santander Bank, National AssociationClosed-end fund
FCA: Fiat Chrysler Automobiles US LLC
BEACEO: Bureau of Economic AnalysisChief Executive Officer
FDIC: Federal Deposit Insurance Corporation
BHCCET1: Bank holding companyCommon equity Tier 1
Federal Reserve: Board of Governors of the Federal Reserve System
BOLICEVF: Bank-owned life insuranceCommercial equipment vehicle financing
FHLB: Federal Home Loan Bank
BSI: Banco Santander InternationalCFPB: Consumer Financial Protection Bureau
FHLMC: Federal Home Loan Mortgage Corporation
CBP: Citizens Bank of PennsylvaniaCFO: Chief Financial Officer
FICO®: Fair Isaac Corporation credit scoring model
CCAR: Comprehensive Capital AnalysisChase: JPMorgan Chase & Co and Reviewcertain of its subsidiaries, including EMC Mortgage LLC
Final Rule: Rule implementing certain of the EPS mandated by Section 165 of the DFA
CD: Certificate(s) of deposit
FNMA: Federal National Mortgage Association
CEO: Chief Executive Officer
FRB: Federal Reserve Bank
CEVF: Commercial equipment vehicle financing
FTP: Funds transfer pricing
CET1: Common equity Tier 1
FVO: Fair value option
CFPB: Consumer Financial Protection Bureau
GAAP: Accounting principles generally accepted in the United States of America
Change in Control: First quarter 2014 change in control and consolidation of SC
GCB: Global Corporate Banking
Chrysler Agreement: Ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC, formerly Chrysler Group LLC, signed by SC
HQLA: High-quality liquid assetsFINRA: Financial Industrial Regulatory Authority
Chrysler Capital: Trade name used in providing services under the Chrysler Agreement
FNMA: Federal National Mortgage Association
CIB: Corporate and Investment Banking
FRB: Federal Reserve Bank
CID: Civil investigative demand
FVO: Fair value option
CLTV: Combined loan-to-value
GAAP: Accounting principles generally accepted in the United States of America
CMO: Collateralized mortgage obligation
GBP: British pound sterling
CODM: Chief Operating Decision Maker
GDP: Gross domestic product
Company: Santander Holdings USA, Inc.
GNMA: Government National Mortgage Association
Covered Fund: a hedge fund or private equity fund
GSIB: Global systemically important bank
2


Table of Contents

HFI: Held for investment
REIT: Real estate investment trust
HPI: Housing Price Index
RIC: Retail installment contract
HTM: Held to maturity
ROU: Right-of-use
IDI: Insured depository institution
RV: Recreational vehicle
IHC: U.S. intermediate holding company
RWA: Risk-weighted asset
CLTV: Combined loan-to-valueInterim Policy: Policy issued by the Federal Reserve in the third quarter of 2020 and extended to the fourth quarter prohibiting share repurchases and limiting dividends by CCAR institutions
S&P: Standard & Poor's
IPO: Initial public offering
SAF: Santander Auto Finance
CMO: Collateralized mortgage obligation
IRS: Internal Revenue Service
SAM: Santander Asset Management, LLC
CMP: Civil monetary penalty
ISDA: International Swaps and Derivatives Association, Inc.
Santander: Banco Santander, S.A.
CODM: Chief Operating Decision MakerIT: Information technology
IT: Information technologySantander BanCorp: Santander BanCorp and its subsidiaries
Company: Santander Holdings USA, Inc.
Lending Club: LendingClub Corporation, a peer-to-peer personal lending platform company from which SC acquired loans under flow agreements
Consent Order: Consent order signed by the Bank with the CFPB on July 14, 2016 regarding the Bank’s overdraft coverage practices for ATM and one-time debit card transactions
LCR: Liquidity coverage ratio
Covered Fund: hedge fund or a private equity fund under the Volcker Rule
LHFI: Loans held-for-investment
CPR: Changes in anticipated loan prepayment rates
LHFS: Loans held-for-sale
CRA: Community Reinvestment Act
LIBOR: London Interbank Offered Rate
DCF: Discounted cash flow
LIHTC: Low Income Housing Tax Credit
DDFS: Dundon DFS LLC
LTD: Long-term debt

2

Table of Contents


LTV: Loan-to-value
Santander NY: New York branch of Banco Santander, S.A.
MBS: Mortgage-backed securities
Santander UK: Santander UK plc
Massachusetts AG: Massachusetts Attorney GeneralLGD: Loss given default
SBA: Small Business Administration
LHFI: Loans held for investment
SBNA: Santander Bank, National Association
LHFS: Loans held for sale
SBC: Santander BanCorp
LIBOR: London Interbank Offered Rate
SC: Santander Consumer USA Holdings Inc. and its subsidiaries
LIHTC: Low income housing tax credit
SCB: Stress capital buffer
LTD: Long-term debt
SC Common Stock: Common shares of SC
LTV: Loan-to-value
SCART: Santander Consumer Auto Receivables Trust
MBS: Mortgage-backed securities
SCF: Statement of cash flows
MD&A: Management's Discussion and Analysis of Financial Condition and Results of Operations
SCSCRA: Santander Consumer USA Holdings Inc. and its subsidiariesServicemembers' Civil Relief Act
MSR: Mortgage servicing rightMississippi AG: Attorney General of the State of Mississippi
SC Common Stock: Common shares of SC
NCI: Non-controlling interest
SCF: Statement of cash flows
NMD: Non-maturity deposits
SDART:SDART: Santander Drive Auto Receivables Trust a SC securitization platform
NPL: Non-performing loanMoody's: Moody's Investor Service, Inc.
SDGT:SDGT: Specially Designated Global Terrorist
NSFR: Net stable funding ratioMSPA: Master Securities Purchase Agreement
SEC: Securities and Exchange Commission
NYSE: New York Stock ExchangeMSR: Mortgage servicing right
Securities Act: Securities Act of 1933, as amended
MVE: Market value of equity
SFS: Santander Financial Services, Inc.
NCI: Non-controlling interest
SHUSA: Santander Holdings USA, Inc.
NMDs: Non-maturity deposits
SIS: Santander Investment Securities Inc.
NMTC: New market tax credits
SPAIN: Santander Private Auto Issuing Note
NPL: Non-performing loan
SPE: Special purpose entity
NPR: Notice of proposed rule-making
SRT: Santander Retail Auto Lease Trust
NSFR: Net stable funding ratio
SSLLC: Santander Securities LLC
NYSE: New York Stock Exchange
Subvention: Reimbursement of the finance provider by a manufacturer for the difference between a market loan or lease rate and the below-market rate given to a customer.
OCC: Office of the Comptroller of the Currency
Separation Agreement: Agreement entered into by Thomas Dundon, the former Chief Executive Officer of SC, DDFS, SC and Santander on July 2, 2015TALF: Term asset-backed securities loan facility
OEM: Original equipment manufacturerOCI: Other comprehensive income
SFS: Santander Financial Services, Inc.TDR: Troubled debt restructuring
OIS:Overnight indexed swap
SHUSA: Santander Holdings USA, Inc.TLAC: Total loss-absorbing capacity
Order: OCC consent order signed by SBNA on January 26, 2012 which replaced a prior order signed by the Bank and other parties with the OTS
SIS: Santander Investment Securities Inc.
OREO: Other real estate owned
SPAIN: Santander Prime Auto Issuing Note Trust, a securitization platformTLAC Rule: The Federal Reserve's total loss-absorbing capacity rule
OTTI: Other-than-temporary impairment
SPE: Special purpose entityTrusts: Securitization trusts
Parent Company: the The parent holding company of Santander Bank, National AssociationSBNA and other consolidated subsidiaries
Sponsor Holdings: Sponsor Auto Finance Holding Series LPU.K. United Kingdom
Pledge Agreement: Agreement which, pursuantPCD: Purchased credit deteriorated, assets the Company deems at acquisition 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.have more than insignificant deterioration in credit quality since origination
SSLLC: Santander Securities, LLCUPB: Unpaid principal balance
REIT: Real estate investment trustPD: Probability of default
TDR: Troubled debt restructuringVIE: Variable interest entity
RIC: Retail installment contractPPP: Paycheck Protection Program
TLAC: Total loss-absorbing capacityVOE: Voting rights entity
RV: Recreational vehicle
Trusts: Securitization trustsYTD: Year-to-date
RWA: Risk-weighted assets
UPB: Unpaid principal balance
S&P: Standard & Poor's
VIE: Variable interest entity
Santander: Banco Santander, S.A.
VOE: Voting interest entity
Santander BanCorp: Santander BanCorp and its subsidiaries

3



Table of Contents



PART II. FINANCIAL INFORMATION

ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited (In thousands)
(Unaudited)
September 30, 2020December 31, 2019
ASSETS  
Cash and cash equivalents$8,871,504 $7,644,372 
Investment securities:  
AFS at fair value11,078,972 14,339,758 
HTM (fair value of $5,668,891 and $3,957,227 as of September 30, 2020 and December 31, 2019, respectively)5,488,576 3,938,797 
Other investments (includes trading securities of $42,464 and $1,097 as of September 30, 2020 and December 31, 2019, respectively)1,657,706 995,680 
LHFI(1) (5)
92,777,106 92,705,440 
ALLL (5)
(7,399,598)(3,646,189)
Net LHFI85,377,508 89,059,251 
LHFS (2)
1,147,578 1,420,223 
Premises and equipment, net (3)
780,104 798,122 
Operating lease assets, net (5)(6)
16,217,953 16,495,739 
Goodwill2,596,161 4,444,389 
Intangible assets, net371,998 416,204 
BOLI1,899,070 1,860,846 
Restricted cash (5)
5,827,423 3,881,880 
Other assets (4) (5)
4,425,042 4,204,216 
TOTAL ASSETS$145,739,595 $149,499,477 
LIABILITIES  
Accounts payables and Accrued expenses$5,653,777 $4,476,072 
Deposits and other customer accounts69,245,980 67,326,706 
Borrowings and other debt obligations (5)
48,135,215 50,654,406 
Advance payments by borrowers for taxes and insurance164,391 153,420 
Deferred tax liabilities, net69,183 1,521,034 
Other liabilities (5)
1,666,078 969,009 
TOTAL LIABILITIES124,934,624 125,100,647 
Commitments and contingencies (Note 16)
STOCKHOLDER'S EQUITY  
Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 shares outstanding at both September 30, 2020 and December 31, 2019)17,876,818 17,954,441 
Accumulated other comprehensive income/(loss), net of taxes197,673 (88,207)
Retained earnings1,457,860 4,155,226 
TOTAL SHUSA STOCKHOLDER'S EQUITY19,532,351 22,021,460 
NCI1,272,620 2,377,370 
TOTAL STOCKHOLDER'S EQUITY20,804,971 24,398,830 
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY$145,739,595 $149,499,477 
 September 30, 2017 December 31, 2016
 (in thousands)
ASSETS   
Cash and cash equivalents$7,909,625
 $10,035,859
Investment securities:   
Available-for-sale ("AFS") at fair value17,233,046
 17,024,225
Held-to-maturity (fair value of $1,542,093 and $1,635,413 as of September 30, 2017 and December 31, 2016, respectively)1,560,850
 1,658,644
Trading securities9,098
 1,630
Other investments708,294
 730,831
Loans held-for-investment (1) (5)
81,548,699
 85,819,785
Allowance for loan and lease losses ("ALLL") (5)
(3,956,145) (3,814,464)
Net loans held-for-investment77,592,554
 82,005,321
Loans held-for-sale (2)
1,988,097
 2,586,308
Premises and equipment, net (3)
883,186
 996,498
Operating lease assets, net (5)(6)
10,400,560
 9,747,223
Accrued interest receivable (5)
555,407
 599,321
Equity method investments223,380
 255,344
Goodwill4,454,925
 4,454,925
Intangible assets, net551,041
 597,244
Bank-owned life insurance1,790,201
 1,767,101
Restricted cash (5)
3,033,587
 3,016,948
Other assets (4) (5)
3,092,266
 2,882,868
TOTAL ASSETS$131,986,117
 $138,360,290
LIABILITIES   
Accrued expenses and payables$2,591,266
 $2,821,712
Deposits and other customer accounts61,877,808
 67,240,690
Borrowings and other debt obligations (5)
41,351,374
 43,524,445
Advance payments by borrowers for taxes and insurance181,903
 163,498
Deferred tax liabilities, net1,642,549
 1,420,315
Other liabilities (5)
871,417
 810,872
TOTAL LIABILITIES108,516,317
 115,981,532
STOCKHOLDER'S EQUITY   
Preferred stock (no par value; $25,000 liquidation preference; 7,500,000 shares authorized; 8,000 shares outstanding at both September 30, 2017 and December 31, 2016)195,445
 195,445
Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 shares outstanding at both September 30, 2017 and December 31, 2016)17,012,660
 16,599,497
Accumulated other comprehensive loss(145,210) (193,208)
Retained earnings3,368,210
 3,020,149
TOTAL SHUSA STOCKHOLDER'S EQUITY20,431,105
 19,621,883
Noncontrolling interest3,038,695
 2,756,875
TOTAL STOCKHOLDER'S EQUITY23,469,800
 22,378,758
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY$131,986,117
 $138,360,290
(1) Loans held-for-investment ("LHFI")LHFI includes $204.7$61.4 million and $217.2$102.0 million of loans recorded at fair value at September 30, 20172020 and December 31, 2016,2019, respectively.
(2) RecordedIncludes $240.2 million and $289.0 million of loans recorded at the fair value option ("FVO") or lower of cost or fair value.FVO at September 30, 2020 and December 31, 2019, respectively.
(3) Net of accumulated depreciation of $1.4$1.6 billion and $1.2$1.5 billion at September 30, 20172020 and December 31, 2016,2019, respectively.
(4) Includes mortgage servicing rights ("MSRs") MSRs of $143.5$81.8 million and $146.6 and $130.9 million at September 30, 20172020 and December 31, 2016,2019, respectively, for which the Company has elected the FVO. See Note 812 to these Condensed Consolidated Financial Statements for additional information.
(5) The Company has interests in certain securitization trusts ("Trusts")Trusts that are considered variable interest entities ("VIEs")VIEs for accounting purposes. The Company consolidatesAt September 30, 2020 and December 31, 2019, LHFI included $22.7 billion and $26.5 billion, Operating leases assets, net included $16.2 billion and $16.5 billion, restricted cash included $1.8 billion and $1.6 billion, other assets included $870.2 million and $625.4 million, Borrowings and other debt obligations included $31.3 billion and $34.2 billion, and Other liabilities included $118.0 million and $188.1 million of assets or liabilities that were included within VIEs, where it is deemed the primary beneficiary.respectively. See Note 67 to these Condensed Consolidated Financial Statements for additional information.
(6) Net of accumulated depreciation of $3.0$4.7 billion and $2.8$4.2 billion at September 30, 20172020 and December 31, 2016,2019, respectively.
See accompanying unaudited notes to unaudited Condensed Consolidated Financial Statements.

4



Table of Contents



SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)Unaudited (In thousands)
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
 2020201920202019
INTEREST INCOME:  
Loans$1,916,091 $2,050,667 $5,773,102 $6,085,153 
Interest-earning deposits7,049 46,944 47,471 138,861 
Investment securities:   
AFS38,084 64,777 159,738 210,344 
HTM24,530 16,319 71,305 49,429 
Other investments5,578 6,400 17,482 18,451 
TOTAL INTEREST INCOME1,991,332 2,185,107 6,069,098 6,502,238 
INTEREST EXPENSE:  
Deposits and other customer accounts52,325 152,953 250,060 428,386 
Borrowings and other debt obligations317,615 413,044 1,072,878 1,230,134 
TOTAL INTEREST EXPENSE369,940 565,997 1,322,938 1,658,520 
NET INTEREST INCOME1,621,392 1,619,110 4,746,160 4,843,718 
Credit loss expense405,825 603,635 2,568,808 1,684,478 
NET INTEREST INCOME AFTER CREDIT LOSS EXPENSE1,215,567 1,015,475 2,177,352 3,159,240 
NON-INTEREST INCOME:  
Consumer and commercial fees123,834 133,049 356,907 412,566 
Lease income742,946 735,783 2,269,613 2,116,503 
Miscellaneous income, net(1) (2)
308,222 130,033 330,165 327,849 
TOTAL FEES AND OTHER INCOME1,175,002 998,865 2,956,685 2,856,918 
Net gain(loss) on sale of investment securities(148)2,267 31,646 2,646 
TOTAL NON-INTEREST INCOME1,174,854 1,001,132 2,988,331 2,859,564 
GENERAL, ADMINISTRATIVE AND OTHER EXPENSES:  
Compensation and benefits461,992 485,920 1,391,786 1,432,730 
Occupancy and equipment expenses152,998 156,603 464,784 441,643 
Technology, outside service, and marketing expense124,211 178,053 386,192 482,183 
Loan expense67,139 98,639 219,483 308,139 
Lease expense612,639 523,900 1,844,270 1,516,984 
Impairment of goodwill0 0 1,848,228 0 
Other expenses150,249 190,129 427,978 536,366 
TOTAL GENERAL, ADMINISTRATIVE AND OTHER EXPENSES1,569,228 1,633,244 6,582,721 4,718,045 
INCOME / (LOSS) BEFORE INCOME TAX (BENEFIT)/PROVISION821,193 383,363 (1,417,038)1,300,759 
Income tax (benefit)/provision(53,343)112,927 (272,856)384,467 
NET INCOME / (LOSS) INCLUDING NCI874,536 270,436 (1,144,182)916,292 
LESS: NET INCOME ATTRIBUTABLE TO NCI101,701 66,831 82,087 250,086 
NET INCOME / (LOSS) ATTRIBUTABLE TO SHUSA$772,835 $203,605 $(1,226,269)$666,206 
 Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 30,
 2017 2016 2017 2016
 (in thousands)
INTEREST INCOME:       
Loans$1,822,384
 $1,889,077
 $5,530,239
 $5,755,173
Interest-earning deposits24,370
 13,400
 63,279
 41,890
Investment securities:       
Available-for-sale93,599
 60,844
 270,041
 235,851
Held-to-maturity8,859
 —
 29,502
 —
Other investments4,688
 7,641
 15,876
 25,224
TOTAL INTEREST INCOME1,953,900
 1,970,962
 5,908,937
 6,058,138
INTEREST EXPENSE:       
Deposits and other customer accounts56,707
 64,288
 177,524
 213,135
Borrowings and other debt obligations323,133
 285,544
 913,040
 863,186
TOTAL INTEREST EXPENSE379,840
 349,832
 1,090,564
 1,076,321
NET INTEREST INCOME1,574,060
 1,621,130
 4,818,373
 4,981,817
Provision for credit losses652,120
 687,912
 1,992,334
 2,200,154
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES921,940
 933,218
 2,826,039
 2,781,663
NON-INTEREST INCOME:       
Consumer and Commercial fees151,906
 171,684
 468,609
 535,583
Mortgage banking income, net14,783
 22,537
 43,049
 50,005
Bank-owned life insurance ("BOLI")17,807
 14,150
 49,159
 44,315
Lease income509,714
 483,929
 1,494,801
 1,365,519
Miscellaneous income, net93,805
 35,637
 180,217
 94,842
TOTAL FEES AND OTHER INCOME788,015
 727,937
 2,235,835
 2,090,264
Other-than-temporary impairment ("OTTI") recognized in earnings—
 —
 —
 (44)
Net gains/(losses) on sale of investment securities6,707
 (364) 16,276
 58,595
Net gains/(losses) recognized in earnings6,707
 (364) 16,276
 58,551
TOTAL NON-INTEREST INCOME794,722
 727,573
 2,252,111
 2,148,815
GENERAL AND ADMINISTRATIVE EXPENSES:       
Compensation and benefits452,587
 426,162
 1,360,444
 1,282,094
Occupancy and equipment expenses165,201
 156,611
 491,465
 453,687
Technology expense59,056
 56,449
 181,331
 183,039
Outside services46,994
 57,742
 154,272
 207,472
Marketing expense23,424
 35,944
 91,641
 77,986
Loan expense91,147
 101,101
 285,364
 307,992
Lease expense409,424
 338,077
 1,137,456
 953,142
Other administrative expenses95,712
 109,189
 293,046
 310,078
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES1,343,545
 1,281,275
 3,995,019
 3,775,490
OTHER EXPENSES:       
Amortization of intangibles15,288
 17,174
 46,204
 52,860
Deposit insurance premiums and other expenses19,792
 17,950
 55,218
 56,966
Loss on debt extinguishment5,582
 10,228
 16,321
 88,672
Other miscellaneous expenses1,980
 198
 12,521
 5,779
TOTAL OTHER EXPENSES42,642
 45,550
 130,264
 204,277
INCOME BEFORE INCOME TAX PROVISION330,475
 333,966
 952,867
 950,711
Income tax provision93,448
 108,320
 264,368
 339,968
NET INCOME INCLUDING NONCONTROLLING INTEREST237,027
 225,646
 688,499
 610,743
LESS: NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST75,195
 77,672
 230,547
 257,419
NET INCOME ATTRIBUTABLE TO SANTANDER HOLDINGS USA, INC.$161,832
 $147,974
 $457,952
 $353,324

See accompanying notes to unaudited Condensed Consolidated Financial Statements.

5

Table(1) Netted down by impact of Contents


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
 Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 30,
 2017 2016 2017 2016
 (in thousands)
NET INCOME INCLUDING NONCONTROLLING INTEREST$237,027
 $225,646
 $688,499
 $610,743
OTHER COMPREHENSIVE INCOME, NET OF TAX       
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments, net of tax (1)
(492) 53,828
 3,544
 6,528
Net unrealized gains/(losses) on available-for-sale investment securities, net of tax6,538
 (66,418) 42,856
 112,786
Pension and post-retirement actuarial gains/(losses), net of tax557
 (4,449) 1,598
 (3,319)
TOTAL OTHER COMPREHENSIVE INCOME/(LOSS), NET OF TAX6,603
 (17,039) 47,998
 115,995
COMPREHENSIVE INCOME243,630
 208,607
 736,497
 726,738
NET INCOME ATTRIBUTABLE TO NONCONTROLLING INTEREST75,195
 77,672
 230,547
 257,419
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA$168,435
 $130,935
 $505,950
 $469,319

(1) Excludes $0.2$56.6 million, and$0.3387.9 million of other comprehensive loss attributable to non-controlling interest ("NCI") for the three-month and nine-month periods ended September 30, 2017,2020, respectively, compared to other comprehensive income of $9.9$67.0 million and other comprehensive loss of $11.8$239.1 million for the corresponding periods in 2016.2019 of lower of cost or market adjustments on a portion of the Company's LHFS portfolio.

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

See accompanying unaudited notes to unaudited Condensed Consolidated Financial Statements.


6
5



Table of Contents



SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
Unaudited (In thousands)
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
2020201920202019
NET INCOME / (LOSS) INCLUDING NCI$874,536 $270,436 $(1,144,182)$916,292 
OCI, NET OF TAX
Net unrealized changes in cash flow hedge derivative financial instruments, net of tax (1)
(38,702)8,217 116,951 16,354 
Net unrealized (losses) / gains on AFS investment securities, net of tax(41,551)34,601 149,569 239,395 
Pension and post-retirement actuarial gains, net of tax18,240 542 19,360 12,744 
TOTAL OTHER COMPREHENSIVE (LOSS) / GAIN, NET OF TAX(62,013)43,360 285,880 268,493 
COMPREHENSIVE INCOME / (LOSS)812,523 313,796 (858,302)1,184,785 
NET INCOME ATTRIBUTABLE TO NCI101,701 66,831 82,087 250,086 
COMPREHENSIVE INCOME / (LOSS) ATTRIBUTABLE TO SHUSA$710,822 $246,965 $(940,389)$934,699 

(1) Excludes $1.4 million and $(8.7) million of Other comprehensive income/(loss) attributable to NCI for the three-month and nine-month periods ended September 30, 2020, respectively, compared to $(3.2) million and $(19.7) million for the corresponding periods in 2019, respectively.



See accompanying unaudited notes to Condensed Consolidated Financial Statements.

6


Table of Contents

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)
(inUnaudited (In thousands)
Common Shares OutstandingCommon Stock and Paid-in CapitalAccumulated Other Comprehensive Income / (Loss)Retained EarningsNoncontrolling InterestTotal Stockholder's Equity
Balance, July 1, 2020530,391 17,890,181 259,686 685,025 1,391,885 20,226,777 
Comprehensive income attributable to SHUSA— — (62,013)772,835 — 710,822 
Other comprehensive (OCI) income attributable to NCI— — — — 1,416 1,416 
Net income attributable to NCI— — — — 101,701 101,701 
Impact of SC stock option activity— — — — 1,247 1,247 
Dividends paid to NCI— — — — (13,333)(13,333)
Stock repurchase attributable to NCI— (13,363)— — (210,296)(223,659)
Balance, September 30, 2020530,391 $17,876,818 $197,673 $1,457,860 $1,272,620 $20,804,971 
Common Shares OutstandingCommon Stock and Paid-in CapitalAccumulated Other Comprehensive (Loss)/IncomeRetained EarningsNoncontrolling InterestTotal Stockholder's Equity
Balance, July 1, 2019530,391 17,945,636 (96,519)4,114,658 2,541,044 24,504,819 
Comprehensive income attributable to SHUSA— — 43,360 203,605 — 246,965 
OCI attributable to NCI— — — — (3,195)(3,195)
Net income attributable to NCI— — — — 66,831 66,831 
Impact of SC stock option activity— — — — 3,949 3,949 
Contribution from shareholder and related tax impact (Note 17)— 13,026 — — — 13,026 
Dividends paid to NCI— — — — (22,099)(22,099)
Stock repurchase attributable to NCI— (4,566)— — (136,453)(141,019)
Balance, September 30, 2019530,391 $17,954,096 $(53,159)$4,318,263 $2,450,077 $24,669,277 

7


Table of Contents



SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
Unaudited (In thousands)
Common Shares OutstandingCommon Stock and Paid-in CapitalAccumulated Other Comprehensive (Loss)/IncomeRetained EarningsNoncontrolling InterestTotal Stockholder's Equity
Balance, January 1, 2020530,391 17,954,441 (88,207)4,155,226 2,377,370 24,398,830 
Cumulative-effect adjustment upon adoption of CECL Standard (Note 1)
— — — (1,346,097)(439,367)(1,785,464)
Comprehensive income/(loss) attributable to SHUSA— — 285,880 (1,226,269)— (940,389)
Other comprehensive loss attributable to NCI— — — — (8,690)(8,690)
Net income attributable to NCI— — — — 82,087 82,087 
Impact of SC stock option activity— — — — 4,642 4,642 
Dividends declared and paid on common stock— — — (125,000)— (125,000)
Dividends paid to NCI— — — — (50,546)(50,546)
Stock repurchase attributable to NCI— (77,623)— — (692,876)(770,499)
Balance, September 30, 2020530,391 $17,876,818 $197,673 $1,457,860 $1,272,620 $20,804,971 
Common Shares OutstandingCommon Stock and Paid-in CapitalAccumulated Other Comprehensive (Loss)/IncomeRetained EarningsNoncontrolling InterestTotal Stockholder's Equity
Balance, January 1, 2019530,391 17,859,304 (321,652)3,783,405 2,526,175 23,847,232 
Cumulative-effect adjustment upon adoption of ASU 2016-02
— — — 18,652 — 18,652 
Comprehensive income attributable to SHUSA— — 268,493 666,206 — 934,699 
Other comprehensive loss attributable to NCI— — — — (19,718)(19,718)
Net income attributable to NCI— — — — 250,086 250,086 
Impact of SC stock option activity— — — — 9,555 9,555 
Contribution from shareholder and related tax impact (Note 17)— 88,927 — — — 88,927 
Dividends declared and paid on common stock— — — (150,000)— (150,000)
Dividends paid to NCI— — — — (64,493)(64,493)
Stock repurchase attributable to NCI— 5,865 — — (251,528)(245,663)
Balance, September 30, 2019530,391 $17,954,096 $(53,159)$4,318,263 $2,450,077 $24,669,277 
 
Common
Shares
Outstanding
 
Preferred
Stock
 
Common
Stock and
Paid-in
Capital
 
Accumulated
Other
Comprehensive
(Loss)/Income
 
Retained
Earnings
 
Noncontrolling
Interest
 
Total
Stockholder's
Equity
Balance, January 1, 2016530,391
 $270,445
 $16,629,822
 $(170,530) $2,672,393
 $2,444,970
 $21,847,100
Comprehensive income attributable to Santander Holdings USA, Inc.—
 —
 —
 115,995
 353,324
 —
 469,319
Other comprehensive loss attributable to noncontrolling interest ("NCI")—
 —
 —
 —
 —
 (11,790) (11,790)
Net income attributable to NCI—
 —
 —
 —
 —
 257,419
 257,419
Impact of Santander Consumer USA Holdings Inc. stock option activity—
 —
 69
 —
 —
 16,308
 16,377
Redemption of preferred stock  (75,000) —
 —
 —
 —
 (75,000)
Capital distribution to shareholder—
 —
 (29,090) —
 —
 —
 (29,090)
Stock issued in connection with employee benefit and incentive compensation plans—
 —
 395
 —
 —
 —
 395
Dividends paid on preferred stock—
 —
 —
 —
 (11,478) —
 (11,478)
Balance, September 30, 2016530,391
 $195,445
 $16,601,196
 $(54,535) $3,014,239
 $2,706,907
 $22,463,252
 
Common
Shares
Outstanding
 
Preferred
Stock
 Common
Stock and
Paid-in
Capital		 
Accumulated
Other
Comprehensive
(Loss)/Income
 
Retained
Earnings
 Noncontrolling Interest 
Total
Stockholder's
Equity
Balance, January 1, 2017530,391
 $195,445
 $16,599,497
 $(193,208) $3,020,149
 $2,756,875
 $22,378,758
Cumulative-effect adjustment upon adoption of ASU 2016-09 (Note 1)—
 —
 (26,456) —
 14,764
 37,401
 25,709
Comprehensive income attributable to Santander Holdings USA, Inc.—
 —
 —
 47,998
 457,952
 —
 505,950
Other comprehensive loss attributable to NCI—
 —
 —
 —
 —
 (321) (321)
Net income attributable to NCI—
 —
 —
 —
 —
 230,547
 230,547
Impact of Santander Consumer USA Holdings Inc. stock option activity—
 —
 —
 —
 —
 14,193
 14,193
Contribution of SFS from shareholder(1)
—
 —
 430,783
 —
 (108,705) —
 322,078
Capital contribution from shareholder—
 —
 9,000
 —
 —
 —
 9,000
Stock issued in connection with employee benefit and incentive compensation plans—
 —
 (164) —
 —
 —
 (164)
Dividends paid on common stock—
 —
 —
 —
 (5,000) —
 (5,000)
Dividends paid on preferred stock—
 —
 —
 —
 (10,950) —
 (10,950)
Balance, September 30, 2017530,391
 $195,445
 $17,012,660
 $(145,210) $3,368,210
 $3,038,695
 $23,469,800

(1) Refer to footnote 1 - Basis of Presentation and Accounting Policies for additional information

See accompanying unaudited notes to unaudited Condensed Consolidated Financial Statements.

7
8





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) (in thousands)






Nine-Month Period Ended September 30,
 20202019
CASH FLOWS FROM OPERATING ACTIVITIES:  
Net (loss)/income including NCI$(1,144,182)$916,292 
Adjustments to reconcile net income to net cash provided by operating activities: 
Impairment of goodwill1,848,228 0 
Credit loss expense2,568,808 1,684,478 
Deferred tax (benefit)/expense(396,533)275,303 
Depreciation, amortization and accretion2,120,365 1,749,531 
Net loss on sale of loans269,411 244,274 
Net gain on sale of investment securities(31,646)(2,646)
Loss on debt extinguishment1,026 1,133 
Net gain on real estate owned, premises and equipment, and other(60,626)(24,411)
Stock-based compensation33 308 
Equity loss on equity method investments11,352 478 
Originations of LHFS, net of repayments(2,473,452)(1,138,406)
Purchases of LHFS0 (387)
Proceeds from sales of LHFS1,420,412 1,060,708 
Net change in: 
Revolving personal loans(59,096)(144,411)
Other assets, BOLI and trading securities350,696 (552,053)
Other liabilities469,276 566,705 
NET CASH PROVIDED BY OPERATING ACTIVITIES4,894,072 4,636,896 
CASH FLOWS FROM INVESTING ACTIVITIES: 
Proceeds from sales of AFS investment securities2,665,593 1,044,645 
Proceeds from prepayments and maturities of AFS investment securities6,703,624 3,270,469 
Purchases of AFS investment securities(5,587,453)(5,999,028)
Proceeds from prepayments and maturities of HTM investment securities743,380 256,152 
Purchases of HTM investment securities(2,187,454)(965,966)
Proceeds from sales of other investments315,091 237,537 
Proceeds from maturities of other investments85 13,673 
Purchases of other investments(900,193)(329,598)
Proceeds from sales of LHFI3,540,036 1,446,205 
Distributions from equity method investments5,132 3,506 
Contributions to equity method and other investments(102,762)(176,114)
Proceeds from settlements of BOLI policies5,542 26,318 
Purchases of LHFI(77,136)(818,024)
Net change in loans other than purchases and sales(3,762,585)(7,104,936)
Purchases and originations of operating leases(4,891,504)(6,778,636)
Proceeds from the sale and termination of operating leases3,103,187 2,733,172 
Manufacturer incentives358,197 633,991 
Proceeds from sales of real estate owned and premises and equipment44,476 51,944 
Purchases of premises and equipment(137,059)(135,060)
Net cash paid for branch disposition0 (329,328)
Upfront fee paid to FCA0 (60,000)
NET CASH USED IN INVESTING ACTIVITIES(161,803)(12,979,078)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits and other customer accounts (1)
1,919,274 5,199,415 
Net change in short-term borrowings455,578 448,736 
Net proceeds from long-term borrowings34,327,398 34,591,061 
Repayments of long-term borrowings(32,891,548)(32,239,459)
Proceeds from FHLB advances (with terms greater than 3 months)2,500,000 3,875,000 
Repayments of FHLB advances (with terms greater than 3 months)(6,935,882)(2,500,000)
Net change in advance payments by borrowers for taxes and insurance10,971 14,370 
Dividends paid on common stock(125,000)(150,000)
Dividends paid to NCI(50,546)(64,493)
Stock repurchase attributable to NCI(770,499)(245,663)
Proceeds from the issuance of common stock660 4,441 
Capital contribution from shareholder0 88,927 
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES(1,559,594)9,022,335 
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH3,172,675 680,153 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD11,526,252 10,722,304 
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (2)
$14,698,927 $11,402,457 
NON-CASH TRANSACTIONS
Loans transferred to/(from) other real estate owned(47,033)16,205 
Loans transferred from/(to) LHFI (from)/to LHFS, net2,770,335 2,657,598 
Unsettled purchases of investment securities508,635 256,685 
Adoption of lease accounting standard:
ROU assets0 664,057 
Accrued expenses and payables0 705,650 

Nine-Month Period
Ended September 30,
 2017
2016
    
 (in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:   
Net income including NCI$688,499
 $610,743
Adjustments to reconcile net income to net cash provided by operating activities:   
Provision for credit losses1,992,334
 2,200,154
Deferred tax expense256,111
 271,057
Depreciation, amortization and accretion758,926
 746,607
Net loss on sale of loans256,072
 295,883
Net gain on sale of investment securities(16,276) (58,595)
Net gain on sale of operating leases(288) (248)
OTTI recognized in earnings—
 44
Loss on debt extinguishment16,321
 88,672
Net (gain)/loss on real estate owned and premises and equipment(23,395) 8,382
Stock-based compensation940
 13,360
Equity loss on equity method investments747
 4,719
Originations of loans held-for-sale ("LHFS"), net of repayments(3,805,625) (4,570,257)
Purchases of LHFS(4,021) (3,677)
Proceeds from sales of LHFS4,272,628
 3,859,060
Purchases of trading securities(9,734) (505,254)
Proceeds from sales of trading securities18,074
 525,660
Net change in:   
Revolving personal loans(139,360) (471,061)
Other assets and BOLI (1)
(200,691) (120,709)
Other liabilities (1)
(49,535) 240,917
NET CASH PROVIDED BY OPERATING ACTIVITIES4,011,727
 3,135,457
    
CASH FLOWS FROM INVESTING ACTIVITIES:   
Proceeds from sales of available-for-sale investment securities1,763,305
 6,755,298
Proceeds from prepayments and maturities of available-for-sale investment securities3,791,545
 7,897,204
Purchases of available-for-sale investment securities(6,088,005) (9,427,160)
Proceeds from repayments and maturities of held to maturity investment securities140,992
 —
Purchases of held to maturity investment securities(51,506) —
Proceeds from sales of other investments205,445
 443,715
Proceeds from maturities of other investments560
 45
Purchases of other investments(154,928) (151,011)
Net change in restricted cash(22,760) (626,970)
Proceeds from sales of LHFI1,085,985
 1,447,704
Proceeds from the sales of equity method investments17,717
 —
Distributions from equity method investments7,572
 4,244
Contributions to equity method and other investments(55,236) (24,057)
Purchases of LHFI(517,844) (162,154)
Net change in loans other than purchases and sales2,299,699
 (1,729,419)
Purchases and originations of operating leases(4,739,735) (4,624,096)
Proceeds from the sale and termination of operating leases2,911,643
 1,740,389
Manufacturer incentives778,748
 1,076,593
Proceeds from sales of real estate owned and premises and equipment97,976
 54,205
Purchases of premises and equipment(103,695) (159,608)
NET CASH PROVIDED BY INVESTING ACTIVITIES1,367,478
 2,514,922
    
CASH FLOWS FROM FINANCING ACTIVITIES:   
Net change in deposits and other customer accounts(5,171,305) 2,120,695
Net change in short-term borrowings2,105,048
 (418,856)
Net proceeds from long-term borrowings35,094,920
 35,337,224
Repayments of long-term borrowings(36,051,143) (32,824,455)
Proceeds from Federal Home Loan Bank ("FHLB") advances (with terms greater than 3 months)1,000,000
 4,700,000
Repayments of FHLB advances (with terms greater than 3 months)(4,500,000) (12,123,672)
Net change in advance payments by borrowers for taxes and insurance18,405
 25,271
Cash dividends paid to preferred stockholders(10,950) (11,478)
Dividends paid on common stock(5,000) —
Proceeds from the issuance of common stock5,586
 2,635
Capital contribution from shareholder9,000
 —
Redemption of preferred stock—
 (75,000)
NET CASH USED IN FINANCING ACTIVITIES(7,505,439) (3,267,636)
    
NET (DECREASE) / INCREASE IN CASH AND CASH EQUIVALENTS(2,126,234) 2,382,743
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD10,035,859
 9,447,003
CASH AND CASH EQUIVALENTS, END OF PERIOD$7,909,625
 $11,829,746
    
    
NON-CASH TRANSACTIONS   
Loans transferred to other real estate owned9,536
 61,186
Loans transferred from held-for-investment to held-for-sale, net4,899
 41,803
Unsettled purchases of investment securities—
 4,613
Unsettled sales of investment securities109,106
 —
Residential loan securitizations17,945
 19,585
Contribution of SFS from shareholder (2)
322,078
 —


(1) The net change in deposits for the nine-month period ended September 30, 2016 cash flow activity has been updated for2020 includes the deferred tax classification correction.sale of $4.2 billion of SBC deposits. Refer to Note 1 - Basisfor further information on the sale of Presentation and Accounting Policies for additional information.SBC.
(2) The contributionnine-month periods ended September 30, 2020 and 2019 include cash and cash equivalents balances of SFS to SHUSA was accounted for as a non-cash transaction. Refer to Note 1 - Basis$8.9 billion and $7.7 billion, respectively, and restricted cash balances of Presentation$5.8 billion and Accounting Policies for additional information.$3.7 billion, respectively.


See accompanying unaudited notes to unaudited Condensed Consolidated Financial Statements.

8
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS







NOTE 1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND ACCOUNTING POLICIES


Introduction

Santander Holdings USA, Inc. ("SHUSA" or "the Company")SHUSA is the parent holding company (the "Parent Company") of Santander Bank, National Association, (the "Bank" or "SBNA"),SBNA, a national banking association; Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SC"),SC, a consumer finance company focused on vehicle finance; Santander BanCorp (together with its subsidiaries, "Santander BanCorp"), a financial holding company headquartered in Puerto Rico that offers a full range of financial services through its wholly-owned banking subsidiary, Banco Santander Puerto Rico; Santander Securities, LLC ("SSLLC"),company; SSLLC, a broker-dealer headquartered in Boston, Massachusetts; Banco Santander International ("BSI"), an Edge Act corporation locatedBSI, a financial services company headquartered in Miami, Florida that offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; Santander Investment Securities Inc. ("SIS"),and SIS, a registered broker-dealer locatedheadquartered in New York providing services in investment banking, institutional sales, and trading and offering research reports of Latin American and European equity and fixed income securities; as well as several other subsidiaries. SSLLC, SIS, and another SHUSA subsidiary, SAM, are registered investment advisers with the SEC. SHUSA is headquartered in Boston and the Bank's mainhome office is in Wilmington, Delaware. SHUSA is a wholly-owned subsidiary of Banco Santander, S.A. ("Santander").Santander. The Parent Company's two largest subsidiaries by asset size and revenue are the Bank and SC. On September 1, 2020 the Company sold its investment in Santander BanCorp, a financial holding company headquartered in Puerto Rico that offered a full range of financial services through its wholly-owned banking subsidiary, BSPR.Refer to the caption "Sale of SBC" below for more information.


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,principally located in Massachusetts, New Jersey,Hampshire, Connecticut, Rhode Island, New York, New Hampshire, Massachusetts, Connecticut, Rhode Island,Jersey, Pennsylvania, 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.servicing and delivering service to dealers and customers across the full credit spectrum. SC's primary business is the indirect origination and securitizationservicing of retail installment contracts ("RICs")RICs and leases, principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to subprime retail consumers. Additionally, SC sells consumer RICs through flow agreements and, when market conditions are favorable, it accesses the ABS market through securitizations of consumer RICs. SAF is SC’s primary vehicle financing brand, and is available as a finance option for automotive dealers across the United States.


In conjunction with a ten-year private label financingSince May 2013, under its agreement with Fiat Chrysler Automobiles US LLC ("FCA") that became effective May 1, 2013 (the "Chrysler Agreement"),FCA, SC offers a full spectrum of auto financing productshas operated as FCA's preferred provider for consumer loans, leases, and dealer loans and provides services to FCA customers and dealers under the Chrysler Capital brand. These products and services include consumer RICs and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. ReferIn 2019, SC entered into an amendment to Note 14the Chrysler Agreement which modified that agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions.

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


As of September 30, 2017,2020, SC was owned approximately 58.7%80.2% by SHUSA and 41.3%19.8% by other shareholders. Common shares of SC ("SC Common Stock") areStock is listed on the New York Stock Exchange (the "NYSE")NYSE under the trading symbol "SC."


Intermediate Holding Company ("IHC")IHC


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

On July 1, 2017, an additional Santander subsidiary, Santander Financial Services, Inc. ("SFS"),SFS, a finance company located in Puerto Rico, was transferred to the Company. The contribution of SFSAdditionally, effective July 2, 2018, Santander transferred SAM to the Company transferred approximately $679 million of assets, which were primarily comprised of cash and cash equivalents and loans held for sale, approximately $357 million of liabilities and approximately $322 million of equity to the Company. Moreover, the Company is in the process of dissolving the business assets.IHC.



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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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


SFSSale of SBC

On October 21, 2019, the Company entered into an agreement to sell the stock of Santander BanCorp ("SBC") (the holding company that owns BSPR). On September 1, 2020, the Company completed the sale of SBC to FirstBank Puerto Rico for approximately $1.28 billion. The sale of SBC resulted in the recognition of a gain in the third quarter of 2020 totaling $62 million, reported in Miscellaneous income, net and a tax impact of $12 million, for a total net gain of $50 million. In addition, the Company reclassified to income approximately $23.6 million ($14.8 million after tax) of other comprehensive income related to its investment in SBC which is an entity under common controlalso recorded in Miscellaneous income, net. The final sales price and gain on sale are subject to adjustments based on the buyer’s review of Santander; howeverthe transferred assets and liabilities, in accordance with the agreement. In the second quarter of 2020, the Company recorded $39 million tax expense to establish a deferred tax liability for the book over tax basis in its results of operations, financial condition, and cash flows are immaterialinvestment in SBC. Transaction expenses related to the historical financial resultssale of SBC totaled approximately $10.0 million through September 30, 2020.

At August 31, 2020 and December 31, 2019, the Consolidated Balance Sheets of the Company. As a result,Company included total assets of $5.5 billion and $6.0 billion, respectively, total liabilities of $4.3 billion and $4.8 billion, respectively, and total equity of $1.2 billion at both dates attributable to SBC.

The Condensed Consolidated Statements of Operations of the Company has determined that it will report the results of SFS on a prospective basis beginning July 1, 2017 rather than, as required by GAAP, retrospectively restate its financial statements for the contribution of SFS. As a result, SHUSA's net income is understated for the nine-month periodthree and nine-months ended September 30, 20172020 included $14.3 million and $33.1 million, respectively, of net income attributable to SBC and $26.4 million and $66.6 million, respectively, of net income attributable to SBC for the comparative periods in 2019.

As part of the stipulations of the transaction, SBC transferred all of its non-performing assets to the Company's wholly-owned subsidiary, SFS. This resulted in three separate transactions executed in December 2019, August 2020, and October 2020 for a total of $160.0 million in loans and $30.0 million of real estate owned which are included in the Condensed Consolidated Balance Sheet of the Company at September 30, 2016 by $3.3 million and $14.7 million, respectively, and a contribution to stockholder's equity of $322.1 million was recorded on July 1, 2017, which are immaterial to the overall presentation of the Company's financial statements for each of the periods presented.2020.


Basis of Presentation


TheseThe accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its consolidated subsidiaries, including the Bank, SC, and certain special purpose financing trusts utilized in financing transactionsTrusts that are considered VIEs. The Company generallyalso consolidates VIEs for which it is deemed to be the primary beneficiary and generally consolidates voting interest entities ("VOEs")VOEs in which the Company has a controlling financial interest. The Condensed 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.

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Additionally, where applicable, the Company's accounting policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. Accordingly, they do not include all of the information and footnotes required for GAAP for complete financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflectthese financial statements contain all adjustments, consisting of a normal and recurring natureadjustments necessary for a fair statement of the Condensed Consolidated Balance Sheets, Statementsfinancial position, results of Operations, Statements of Comprehensive Income, Statements of Stockholder's Equityoperations, and Statements of Cash Flows ("SCF")cash flows for the periods indicated, and contain adequate disclosure for the fair statement of this interim financial information.

Correction Results of Deferred Tax Classification

Beginning December 31, 2015 through March 31, 2017, net deferred tax assets and net deferred tax liabilities of entities filing separate U.S. Federal tax returns were improperly offset in the Company’s Consolidated Balance Sheet. As a result, the Company understated Deferred Tax Assets, Total Assets, Deferred Tax Liabilities and Total Liabilities by $981.7 million, $989.8 million, $791.2 million, $756.1 million, $743.0 million, and $804.5 millionoperations for the periods ended March 31, 2017, December 31, 2016, September 30, 2016, June 30, 2016, March 31, 2016, and December 31, 2015, respectively.

The Company has determined that the impactpresented herein are not necessarily indicative 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, 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.

There was no significant impact to the Company’s Consolidated Statements of Operations, Consolidated Statements of Other Comprehensive Income, Consolidated Statements of Equity, or Consolidated Statement of Cash Flows for any period.

The Company has corrected the balances described above as of December 31, 2016 in its Consolidated Balance Sheet included herein. In future filings, the Company will correct the deferred tax classification balances and capital ratio disclosures for the periods described above when presented.

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 and troubled debt restructurings (“TDRs”), (v) goodwill, (vi) derivatives and hedging activities, and (vii) 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 andfor 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.entire year. These Condensed Consolidated Financial Statementsfinancial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2016.2019.


Certain prior-year amounts have been reclassified to conform to the current year presentation. These reclassifications did not have a material impact on the Company's consolidated financial condition or results of operations.

Use of Estimates

The preparation of condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results could differ from those estimates, and those differences may be material. The most significant estimates include the ACL, accretion of discounts and subvention on RICs, fair value measurements, expected end-of-term lease residual values, values of repossessed assets, goodwill, and income taxes. These estimates, although based on actual historical trends and modeling, may potentially show significant variances over time.
10
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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


Recently Adopted Accounting Standards

Since January 1, 2020, the Company adopted the following FASB ASUs:
•Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This guidance significantly changed how entities measure credit losses for most financial assets and certain other instruments measured at amortized cost. The amendment introduced a new credit reserving framework known as CECL, which replaced the incurred loss impairment framework with one that reflects expected credit losses over the expected life of financial assets and commitments, and requires consideration of a broader range of reasonable and supportable information, including estimation of future expected changes in macroeconomic conditions. Additionally, the standard changes the accounting framework for purchased credit-deteriorated HTM debt securities and loans, and dictates measurement of AFS debt securities using an allowance instead of reducing the carrying amount as it was under the OTTI framework. The Company adopted the new guidance on January 1, 2020 on a modified retrospective basis which resulted in an increase in the ACL of approximately $2.5 billion, a decrease in stockholder's equity of approximately $1.8 billion and a decrease in deferred tax liabilities, net of approximately $0.7 billion at January 1, 2020.  The increase was based on forecasts of expected future economic conditions and was primarily driven by the fact that the allowance covers expected credit losses over the full expected life of the loan portfolios.

•In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides temporary optional expedients to reduce the costs and complexity associated with the high volume of contractual modifications expected in the transition away from LIBOR as the benchmark rate in contracts and hedges. These optional expedients allow entities to negate many of the accounting impacts of modifying contracts and hedging relationships necessitated by reference rate reform, allowing them to generally maintain the accounting as if a change had not occurred. The Company adopted this standard during the three-month period ended March 31, 2020, electing the practical expedients relative to the Company’s contracts and hedging relationships modified as a result of reference rate reform through December 31, 2022. These practical expedients did not have a material impact on the Company’s business, financial position, results of operations, or disclosures.

•In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general tax accounting principles and simplifying other specific tax scenarios. The Company adopted this standard as of January 1, 2020 reflecting the change prospectively. It did not have a material impact to the Company’s business, financial position, results of operations, or disclosures.
The adoption of the following ASUs did not have a material impact on the Company's financial position or results of operations:
•ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
•ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities

As of September 30, 2017, withrequired by the exceptionadoption of the items notedCECL standard, the following additional accounting policy disclosures are required to update the disclosures included in the section captioned "Recently Adopted Accounting Policies" below, there have been no significant changes to the Company's accounting policies as disclosed in theour Annual Report on Form 10-K for the year ended December 31, 2016.2019:


Recently AdoptedSignificant Accounting Policies

Since January 1, 2017,Investment Securities and Other Investments

Investments in debt securities are classified as either AFS, HTM, trading, or other investments. Investments in equity securities are generally recorded at fair value with changes recorded in earnings. Management determines the appropriate classification at the time of purchase.
12



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

Debt securities that the Company adoptedhas the followingpositive intent and ability to hold until maturity are classified as HTM securities. HTM securities are reported at cost and adjusted for payments, chargeoffs, amortization of premium and accretion of discount. Impairment of HTM securities is recorded using a valuation reserve which represents management’s best estimate of expected credit losses during the lives of the securities. Securities for which management has an expectation that nonpayment of the amortized costs basis is zero do not have a reserve. The Company has a zero loss expectation when the securities are issued or guaranteed by certain U.S. government entities and those entities have a long history of no defaults and the highest credit ratings issued by rating agencies. Transfers of debt securities into the HTM category from the AFS category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in OCI and in the carrying value of HTM securities. Such amounts are amortized over the remaining lives of the securities. Any allowance recorded for credit losses while the security was classified as AFS is reversed through provision expense. Thereafter, the allowance is recorded through the provision using the HTM valuation reserve.

Debt securities expected to be held for an indefinite period of time are classified as AFS and recorded on the balance sheet at fair value. If the fair value of an AFS debt security declines below its amortized cost basis and the Company does not have the intention or requirement to sell the security before it recovers its amortized cost basis, declines due to credit factors will be recorded in earnings through an allowance on AFS securities, and declines due to non-credit factors will be recorded in AOCI, net of taxes. Subsequent to recognition of a credit loss, improvements to the expectation of collectability will be reversed through the allowance. If the Company has the intention or requirement to sell the security, the Company will record its fair value changes in earnings as a direct write down to the security. Increases in fair value above amortized cost basis are recorded in AOCI, net of taxes.

The Company conducts a comprehensive security-level impairment assessment quarterly on all AFS securities with a fair value that is less than their amortized cost basis to determine whether the loss is due to credit factors. The quarterly assessment takes into consideration whether (i) the Company has the intent to sell or (ii) it is more likely than not that it will be required to sell the security before the expected recovery of its amortized cost. The Company also considers whether or not it would expect to receive all of the contractual cash flows from the investment based on its assessment of the security structure, recent security collateral performance metrics, external credit ratings, failure of the issuer to make scheduled interest or principal payments, judgment and expectations of future performance, and relevant independent industry research, analysis and forecasts. The Company also considers the severity of the impairment in its assessment. Similar to HTM securities, securities for which management expects risk of nonpayment of the amortized cost basis is zero do not have a reserve. The Company has a zero loss expectation when the securities are issued or guaranteed by certain U.S. government entities and those entities have a long history of no defaults and the highest credit ratings issued by rating agencies. In the event of a credit loss, the credit component of the impairment is recognized within non-interest income as a separate line item and by the recording of a valuation reserve. The non-credit component is recorded within AOCI.

The Company does not measure an ACL for accrued interest, and instead writes off uncollectible accrued interest balances in a timely manner. The Company places securities on nonaccrual and reverses any uncollectible accrued interest when the full and timely collection of interest or principal becomes uncertain, but no later than at 90 days past due.

See Note 2 to these Condensed Consolidated Financial Statements for details on the Company's investments.

LHFI

Purchased LHFI

Loans that at acquisition the Company deems to have more than insignificant deterioration in credit quality since origination (i.e., PCD loans) require the recognition of an ACL at purchase. The ACL is added to the purchase price at the date of acquisition to determine the initial amortized cost basis of the PCD loan. The ACL is calculated using the same methodology as originated loans, as described below. Alternatively, the Company can elect the FVO at the time of purchase for any financial asset. Under the FVO, loans are recorded at fair value with changes in value recognized immediately in income. There is no ACL for loans under a FVO.
13



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

Allowance for Credit Losses

General

The ALLL and reserve for off-balance sheet commitments (together, the ACL) are maintained at levels that represent management’s best estimate of expected credit losses in the Company’s HFI loan portfolios, which excludes those loans accounted for under the FVO. The allowance for expected credit losses is measured based on a lifetime expected loss model, which means that it is not necessary for a loss event to occur before a credit loss is recognized. Management’s estimate of expected credit losses is based on an evaluation of relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of the reported amounts. Management's evaluation takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, economic forecasts 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. Provisions for credit losses are charged to provision expense in amounts sufficient to maintain the ACL at levels considered adequate to cover expected credit losses in the Company’s HFI loan portfolios.

The ALLL is a valuation account that is deducted from, or added to, the amortized cost basis to present the net amount expected to be collected on the Company’s HFI loan portfolios. The reserve for off-balance sheet commitments represents the ECL for unfunded lending commitments and financial guarantees, and is presented within Other liabilities on the Company's Condensed Consolidated Balance Sheets. The reserve for off-balance sheet commitments, together with the ALLL, is generally referred to collectively throughout this Form 10-Q as the ACL, despite the presentation differences.

The Company measures expected losses of all components of the amortized cost basis of its loans. For all loans except TDRs and credit cards, the Company has elected to exclude accrued interest receivable balances from the measurement of expected credit losses because it applies a nonaccrual policy that results in the timely write off of uncollectible interest.

Off-balance sheet commitments which are not unconditionally cancellable by the Company are subject to credit risk. Additions to the reserve for off-balance sheet commitments are made by charges to the credit loss expense. The Company does not calculate a liability for expected credit losses for off-balance sheet credit exposures which are unconditionally cancellable by the lender, because these instruments do not expose the Company to credit risk. At SHUSA, this generally applies to credit cards and commercial demand lines of credit.

Methodology

The Company uses several methodologies for the measurement of ACL. The Company generally uses a DCF approach for determining ALLL for TDRs and other individually assessed loans, and loss rate or roll-rate models for other loans. The methodologies utilized by the Company to estimate expected credit losses may vary by product type.

Expected credit losses are estimated on a collective basis when similar risk characteristics exist. Expected credit losses are estimated on an individual basis only if the individual asset or exposure does not share similar risk attributes with other financial assets or exposures, including when an asset is treated as a collateral dependent asset. The estimate of expected credit losses reflects information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of reported amounts. This information includes internal information, external information, or a combination of both. The Company uses historical loss experience as a starting point for estimating expected credit losses.

The ACL estimate includes significant assumptions including the reasonable and supportable economic forecast period, which considers the availability of forward-looking scenarios and their respective time horizons, as well as the reversion method to historical losses. The economic scenarios used by the Company are available up to the contractual maturities of the assets, and therefore the Company can project losses through the respective contractual maturities, using an input reversion approach. This method results in a single, quantitatively consistent credit model across the entire projection period as the macroeconomic effects in the historical data are controlled for the estimate of the long-run loss level.
14



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

The Company uses multiple scenarios in its CECL estimation process. The selection of scenarios is reviewed quarterly and governed by the ACL Committee. Additionally, the results from the CECL models are reviewed and adjusted, if necessary, based on management’s judgment, as discussed in the section captioned "Qualitative Reserves" below.

CECL Models

The Company uses a statistical methodology based on an ECL approach that focuses on forecasting the ECL components (i.e., PD, payoff, LGD and EAD) on a loan level basis to estimate the expected future lifetime losses.
•In calculating the PD and payoff, the Company developed model forecasts which consider variables such as delinquency status, loan tenor and credit quality as measured by internal risk ratings assigned to individual loans and credit facilities.
•The LGD component forecasts the extent of losses given that a default has occurred and considers variables such as collateral, LTV and credit quality.
•The EAD component captures the effects of expected partial prepayments and underpayments that are expected to occur during the forecast period and considers variables such as LTV, collateral and credit quality.

The above ECL components are used to compute an ACL based on the weighted average of the results of four macroeconomic scenarios. The weighting of these scenarios is governed and approved quarterly by management through established committee governance. These ECL components are inputs to both the Company’s DCF approach for TDRs and individually assessed loans, and the non-DCF approach for other loans.

When using a non-DCF method to measure the ACL, the Company measures ECL over the asset’s contractual term, adjusted for (a) expected prepayments, (b) expected extensions associated with assets for which management has a reasonable expectation at the reporting date that it will execute a TDR with the borrower, and (c) expected extensions or renewal options (excluding those that are accounted for as derivatives) included in the original or modified contract at the reporting date that are not unconditionally cancellable by the Company.

In addition to the ALLL, management estimates expected losses related to off-balance sheet commitments using the same models and procedures used to estimate expected loan losses. Off-balance sheet commitments for commercial customers are analyzed and segregated by risk according to the Company's internal risk rating scale. These risk classifications, in conjunction with a forecast of expected usage of committed amounts and an analysis of historical loss experience, reasonable and supportable forecasts of economic conditions, performance trends within specific portfolio segments, and any other pertinent information result in the estimation of the reserve for off-balance sheet commitments.

DCF Approaches

A DCF method measures expected credit losses by forecasting expected future principal and interest cash flows and discounting them using the financial asset’s EIR. The ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows. When using a DCF method to measure the ACL, the period of exposure is determined as a function of the Company’s expectations of the timing of principal and interest payments. The Company considers estimated prepayments in the future principal and interest cash flows when utilizing a DCF method.The Company generally uses a DCF approach for TDRs and impaired commercial loans. The Company reports the entire change in present value in credit loss expense.

Collateral-Dependent Assets

A loan is considered a collateral-dependent financial asset when:
•The Company determines foreclosure is probable, or
•The borrower is experiencing financial difficulty and the Company expects repayment to be provided substantially through the operation or sale of the collateral.

For all collateral-dependent loans, the Company measures the allowance for expected credit losses as the difference between the asset’s amortized cost basis and the fair value of the underlying collateral as of the reporting date, adjusted for expected costs to sell. If repayment or satisfaction of the loan is dependent only on the operation, rather than the sale of the collateral, the measure of credit losses does not incorporate estimated costs to sell.
15



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

A collateral dependent loan is written down (i.e., charged-off) to the fair value of the collateral adjusted for costs to sell (if repayment from sale is expected.) Any subsequent increase or decrease in the collateral’s fair value less cost to sell is recognized as an adjustment to the related loan’s ACL. Negative ACLs are limited to the amount previously charged-off.

Collateral Maintenance Provisions

For certain loans with collateral maintenance provisions which are secured by highly liquid collateral, the Company expects nonpayment of the amortized cost basis to be zero when such provisions require the borrower to continually replenish collateral in the event the fair value of the collateral changes. For these loans, the Company records no ACL.

Negative Allowance

Negative allowance is defined as the amount of future recovery expected for accounts that have already been charged-off. The Company performs an analysis of the actual historical recovery values to determine the pattern of recovery and expected rate of recovery over a given historic period, and uses the results of this analysis to determine a negative allowance. Negative allowance reduces the ACL.

Qualitative Reserves

Quantitative models have certain limitations with respect to estimating expected losses in times of rapidly changing macro-economic forecasts. The ACL estimate includes qualitative adjustments to adjust for limitations in modeled results with respect to forecasted economic conditions that are well outside of historic economic conditions used to develop the models and to give consideration to significant government relief programs, stimulus, and internal credit accommodations. Management believes the qualitative component of the ACL, which incorporates management’s expert judgment related to expected future credit losses, will continue to represent a significant portion of the ACL for the foreseeable future.

Regardless of the extent of the Company's analysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the judgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains a qualitative reserve to the ACL to recognize the existence of these exposures. Imprecisions include loss factors inherent in the loan portfolio that may not have been discreetly contemplated in the modelled approach to the allowance, as well as potential variability in estimates.

The qualitative adjustment is also established in consideration of several factors such as the interpretation of economic trends, changes in the nature and volume of our loan portfolios, trends in delinquency and collateral values, and concentration risk. This analysis is conducted at least quarterly, and the Company revises the allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a loan pool classification.

Governance

A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. Management regularly monitors the condition of borrowers and assesses both internal and external factors in determining whether any relationships have deteriorated considering factors such as historical loss experience, trends in delinquency and NPLs, changes in risk composition and underwriting standards, experience and ability of staff and regional and national economic conditions, trends and forecasts. Risk factors are continuously reviewed and revised by management when conditions warrant.

The Company's reserves are principally based on various models subject to the Company's model risk management framework. New models are approved by the Company's Model Risk Management Committee, and inputs are reviewed periodically by the Company's Internal Audit function. Models, inputs and documentation are further reviewed and validated at least annually, and the Company completes a detailed variance analysis of historical model projections against actual observed results on a quarterly basis. Required actions resulting from the Company's analysis, if necessary, are governed by its ACL Committee.

In addition, a review of allowance levels based on nationally published statistics is conducted on at least an annual basis. Reserve levels are collectively reviewed for adequacy and approved quarterly by Board-level committees.

The ACL is subject to review by banking regulators. The Company's primary bank regulators conduct examinations of the ACL and make assessments regarding its adequacy and the methodology employed in its determination.
16



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

Changes in the assumptions used in these estimates could have a direct material impact on credit loss expense in the Condensed Consolidated Statements of Operations and in the allowance for loan losses. The loan portfolio represents the largest asset on the Condensed Consolidated Balance Sheets. The Company’s models incorporate a variety of assumptions based on historical experience, current conditions and forecasts. Management also applies its judgement in evaluating the appropriateness of the allowance. Material changes to the ACL might be necessary if prevailing conditions differ materially from the assumptions and estimates utilized in calculating the ACL.

TDRs

TDR Impact to ACL

The Company’s policies for estimating the ACL also apply to TDRs as follows:

•The Company reflects the impact of the concession in the ALLL for TDRs. Interest rate concessions and significant term deferrals can only be captured within the ALLL by using a DCF method. Therefore, in circumstances in which the Company offers such extensions in its TDR modification, it uses a DCF method to calculate the ALLL.

•The Company recognizes the impact of a TDR modification to the ALLL when the Company has a reasonable expectation that the TDR modification will be executed.

Recently Issued Accounting Standards Board ("FASB") Accounting Standards Updates ("ASUs"):Not Yet Adopted


ASU 2016-09, Compensation - Stock Compensation (Topic 718). This new guidance simplifies certain aspects related to income taxes,There are no recently issued GAAP accounting developments that we expect will have a material impact on the StatementCompany's business, financial position, results of Cash Flows,operations, or disclosures upon adoption.

Subsequent Events

The Company evaluated events from the date of these Condensed Consolidated Financial Statements on September 30, 2020 through the issuance of these Condensed Consolidated Financial Statements, and forfeitures when accounting for share-based payment transactions. ASU 2016-09 eliminates the requirement to recognize excess tax benefitshas determined that there have been no material events that would require recognition in Accumulated Paid In Capital pools, and instead requires companies to record all excess tax benefits and deficiencies at settlement, vestingits Condensed Consolidated Financial Statements or expirationdisclosure in the income statement as provision for income taxes. At adoption of ASU 2016-09 on January 1, 2017,Notes to 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 capitalCondensed Consolidated Financial Statements for the three-month and nine-month periods ended September 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 classified2020 except as an operating activity rather than financing activitiesnoted in the Statement of Cash Flows on a prospective basis. In addition, the Company voluntarily changed its accounting policy on forfeitures from previously recognizing forfeitures based on estimating the number of awards expected to be forfeited to electing to recognize forfeiture of awards as they occur to simplify the accounting for forfeitures. This resulted in a cumulative adjustment, as a decrease to beginning retained earnings of $1.4 million.Notes 15 and 17.

17


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. 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 adopted this ASU as of October 1, 2017.
The adoption of the following ASUs did not have an impact on the Company's financial position or results of operations.

ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.
ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments.
ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323).
ASU 2016-17, Consolidation (Topic 810), Interest Held Through Related Parties That Are Under Common Control.



11


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 2. RECENT ACCOUNTING DEVELOPMENTS

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU, as amended, requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendment includes a five-step process to assist an entity in achieving the main principle(s) of revenue recognition under ASC 606. The amended standard will be effective for the Company for the first annual period beginning after December 15, 2017. It should be applied retrospectively to each prior reporting period presented or as a cumulative-effect adjustment as of the date of adoption.

Because the ASU does not apply to revenue associated with leases and financial instruments (including loans, securities, and derivatives), 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). In addition to potential timing differences for revenue recognition under the new standard, SHUSA is evaluating the standard’s guidance for assessment of gross versus net reporting of revenues and expenses related to certain arrangements such as security underwriting. The Company is also in the process of developing additional quantitative and qualitative disclosures that are required upon the adoption of the new revenue recognition standard. 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 does not expect the adjustment to be material. 

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. The Company currently recognizes assets and liabilities for all of its vehicle lease transactions. 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-sale debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the OTTI model. It 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 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”), 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.


12



SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)INVESTMENT SECURITIES


In addition to those describedSummary of Investments 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, Financial Instruments - Overall (Subtopic 825-10): 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 (A consensus of the FASB Emerging Issues Task Force)
ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business
ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities
- AFS and HTM
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
ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities


NOTE 3. INVESTMENT SECURITIES

Investment Securities Summary - Available-for-sale and Held-to-Maturity


The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of investments in debt securities available-for-saleAFS at the dates indicated:
 September 30, 2020December 31, 2019
(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$212,609 $3,045 $0 $215,654 $4,086,733 $4,497 $(292)$4,090,938 
Corporate debt securities172,845 78 (15)172,908 139,696 39 (22)139,713 
ABS111,577 854 (1,290)111,141 138,839 1,034 (1,473)138,400 
State and municipal securities3 0 0 3 9 0 0 9 
MBS:        
GNMA - Residential3,322,848 84,241 (194)3,406,895 4,868,512 12,895 (16,066)4,865,341 
GNMA - Commercial1,413,584 26,142 (193)1,439,533 773,889 6,954 (1,785)779,058 
FHLMC and FNMA - Residential5,587,145 78,402 (5,670)5,659,877 4,270,426 14,296 (30,325)4,254,397 
FHLMC and FNMA - Commercial66,699 6,264 (2)72,961 69,242 2,665 (5)71,902 
Total investments in debt securities AFS$10,887,310 $199,026 $(7,364)$11,078,972 $14,347,346 $42,380 $(49,968)$14,339,758 
 September 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Loss
 
Fair
Value
 (in thousands)
U.S. Treasury securities$1,669,963
 $524
 $(2,380) $1,668,107
Corporate debt securities43,798
 97
 —
 43,895
Asset-backed securities (“ABS”)524,503
 12,315
 (985) 535,833
Equity securities11,364
 1
 (538) 10,827
State and municipal securities25
 —
 —
 25
Mortgage-backed securities (“MBS”):       
U.S. government agencies - Residential5,243,543
 7,268
 (44,468) 5,206,343
U.S. government agencies - Commercial1,375,787
 1,888
 (9,440) 1,368,235
Federal Home Loan Mortgage Corporation (“FHLMC”)
and Federal National Mortgage Association ("FNMA") - Residential debt securities		8,482,935
 11,540
 (117,466) 8,377,009
FHLMC and FNMA - Commercial debt securities23,163
 —
 (392) 22,771
Non-agency securities1
 —
 —
 1
Total investment securities AFS$17,375,082
 $33,633
 $(175,669) $17,233,046


13


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
ABS1,196,702
 16,410
 (2,388) 1,210,724
Equity securities11,716
 —
 (565) 11,151
State and municipal securities30
 —
 —
 30
MBS:       
U.S. government agencies - Residential5,424,412
 3,253
 (64,537) 5,363,128
U.S. government agencies - Commercial948,696
 1,998
 (8,196) 942,498
FHLMC and FNMA - Residential debt securities7,765,003
 6,712
 (154,858) 7,616,857
FHLMC and FNMA - Commercial debt securities23,636
 —
 (670) 22,966
Non-agency securities14
 —
 —
 14
Total investment securities AFS$17,227,566
 $30,199
 $(233,540) $17,024,225


The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of investments in debt securities held-to-maturityHTM at the dates indicated:
 September 30, 2020December 31, 2019
(in thousands)Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Loss		Fair
Value		Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Loss		Fair
Value
ABS$50,381 $561 $0 $50,942 $0 $0 $0 $0 
MBS:   
GNMA - Residential2,156,473 50,005 (801)2,205,677 1,948,025 11,354 (7,670)1,951,709 
GNMA - Commercial3,281,722 130,690 (140)3,412,272 1,990,772 20,115 (5,369)2,005,518 
Total investments in debt securities HTM$5,488,576 $181,256 $(941)$5,668,891 $3,938,797 $31,469 $(13,039)$3,957,227 
 September 30, 2017
 
Amortized
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Loss
 
Fair
Value
 (in thousands)
MBS:       
U.S. government agencies - Residential$1,509,428
 $2,207
 $(21,100) $1,490,535
U.S. government agencies - Commercial51,422
 136
 —
 51,558
Total investment securities held-to-maturity$1,560,850
 $2,343
 $(21,100) $1,542,093

 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

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


As of September 30, 20172020 and December 31, 2016,2019, the Company had investment securities available-for-sale with an estimated faircarrying value of $6.5$3.4 billion and $7.2$7.5 billion, respectively, pledged as collateral, which waswere comprised of the following: $3.0 billion$306.4 million and $3.2$2.7 billion, respectively, were pledged as collateral for the Company's borrowing capacity with the Federal Reserve Bank ("FRB");FRB; $2.3 billion and $3.0$3.5 billion, respectively, were pledged to secure public fund deposits; $119.6$334.9 million and $109.7$148.5 million, respectively, were pledged to various independent parties to secure repurchase agreements, support hedging relationships, and for recourse on loan sales; $623.8 million0 and $622.0$699.1 million, respectively, were pledged to deposits with clearing organizations; and $422.1$425.8 million and $271.2$461.9 million, respectively, were pledged to secure the Company's customer overnight sweep product.

14


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 3. INVESTMENT SECURITIES (continued)


At September 30, 20172020 and December 31, 2016,2019, the Company had $48.1$36.4 million and $44.8$46.0 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.Sheets. No accrued interest related to investment securities was written off during the periods ended September 30, 2020 or December 31, 2019.


There were 0 transfers of securities between AFS and HTM during the periods ended September 30, 2020 or December 31, 2019.

18



NOTE 2. INVESTMENT SECURITIES (continued)

Contractual Maturity of Investments in Debt Securities


Contractual maturities of the Company’s investments in debt securities available-for-saleAFS at September 30, 20172020 were as follows:
 Amortized Cost Fair Value
 (in thousands)
Due within one year$875,069
 $875,216
Due after 1 year but within 5 years1,221,182
 1,231,546
Due after 5 years but within 10 years210,785
 210,395
Due after 10 years15,056,682
 14,905,062
Total$17,363,718
 $17,222,219
    
(in thousands)Amortized CostFair Value
Due within one year$349,080 $349,831 
Due after 1 year but within 5 years115,239 119,460 
Due after 5 years but within 10 years353,072 368,100 
Due after 10 years10,069,919 10,241,581 
Total$10,887,310 $11,078,972 

Contractual maturities of the Company’s investments in debt securities held-to-maturityHTM at September 30, 20172020 were as follows:
(in thousands)Amortized CostFair Value
Due within one year$2,483 $3,416 
Due after 1 year but within 5 years34,178 34,320 
Due after 5 years but within 10 years12,787 13,206 
Due after 10 years5,439,128 5,617,949 
Total$5,488,576 $5,668,891 
 Amortized Cost Fair Value
 (in thousands)
Due after 10 years$1,560,850
 $1,542,093
Total$1,560,850
 $1,542,093
    

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

Gross Unrealized Loss and Fair Value of Investments in Debt Securities Available-for-SaleAFS and Held-to-maturityHTM


The following tables presenttable presents the aggregate amount of unrealized losses as of September 30, 20172020 and December 31, 20162019 on debt securities in the Company’s AFS investment portfolios classified according to the amount of time those securities have been in a continuous loss position:
 September 30, 2020December 31, 2019
 Less than 12 months12 months or longerLess than 12 months12 months or longer
(in thousands)Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
U.S. Treasury securities$0 $0 $0 $0 $200,096 $(167)$499,883 $(125)
Corporate debt securities131,377 (15)0 0 110,802 (22)0 0 
ABS4,013 (17)46,649 (1,273)27,662 (44)47,616 (1,429)
MBS:        
GNMA - Residential51,846 (178)10,756 (16)2,053,763 (6,895)997,024 (9,171)
GNMA - Commercial52,123 (193)0 0 217,291 (1,756)14,300 (29)
FHLMC and FNMA - Residential1,416,139 (5,456)24,369 (214)660,078 (4,110)1,344,057 (26,215)
FHLMC and FNMA - Commercial0 0 422 (2)0 0 430 (5)
Total investments in debt securities AFS$1,655,498 $(5,859)$82,196 $(1,505)$3,269,692 $(12,994)$2,903,310 $(36,974)
 September 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$1,028,957
 $(2,380) $—
 $—
 $1,028,957
 $(2,380)
ABS28,047
 (280) 99,474
 (705) 127,521
 (985)
Equity securities666
 (11) 9,981
 (527) 10,647
 (538)
MBS:           
U.S. government agencies - Residential2,706,703
 (34,342) 887,686
 (10,126) 3,594,389
 (44,468)
U.S. government agencies - Commercial905,790
 (5,797) 77,367
 (3,643) 983,157
 (9,440)
FHLMC and FNMA - Residential debt securities4,382,804
 (54,005) 1,587,768
 (63,461) 5,970,572
 (117,466)
FHLMC and FNMA - Commercial debt securities22,316
 (382) 455
 (10) 22,771
 (392)
Total investment securities AFS$9,075,283
 $(97,197) $2,662,731
 $(78,472) $11,738,014
 $(175,669)

15


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)
ABS76,552
 (1,021) 111,758
 (1,367) 188,310
 (2,388)
Equity securities770
 (16) 9,800
 (549) 10,570
 (565)
MBS:           
U.S. government agencies - Residential3,831,354
 (46,846) 1,027,609
 (17,691) 4,858,963
 (64,537)
U.S. government agencies - Commercial532,334
 (4,451) 98,918
 (3,745) 631,252
 (8,196)
FHLMC and FNMA - Residential debt securities4,740,824
 (58,514) 1,981,886
 (96,344) 6,722,710
 (154,858)
FHLMC and FNMA - Commercial debt securities22,504
 (659) 462
 (11) 22,966
 (670)
Total investment securities AFS$10,220,992
 $(113,833) $3,230,433
 $(119,707) $13,451,425
 $(233,540)


The following tables presenttable presents the aggregate amount of unrealized losses as of September 30, 20172020 and December 31, 20162019 on debt securities in the Company’s held-to-maturityHTM investment portfolios classified according to the amount of time those securities have been in a continuous loss position:
September 30, 2020December 31, 2019
Less than 12 months12 months or longerLess than 12 months12 months or longer
(in thousands)Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
MBS:
GNMA - Residential$168,035 $(801)$0 $0 $559,058 $(2,004)$657,733 $(5,666)
GNMA - Commercial67,237 (140)0 0 731,445 (5,369)0 0 
Total investments in debt securities HTM$235,272 $(941)$0 $0 $1,290,503 $(7,373)$657,733 $(5,666)
  September 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 $1,198,222
 $(21,100) $—
 $—
 $1,198,222
 $(21,100)
Total investment securities held-to-maturity $1,198,222
 $(21,100) $—
 $—
 $1,198,222
 $(21,100)


19
  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)



OTTI

Management evaluates all investment securities in an unrealized loss position for OTTI on a quarterly basis. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. The OTTI assessment is a subjective process requiring the use of judgments and assumptions. During the securities-level assessments, consideration is given to (1) the intent not to sell and probability that the Company will not be required to sell the security before recovery of its cost basis to allow for any anticipated recovery in fair value, (2) the financial condition and near-term prospects of the issuer, as well as company news and current events, and (3) the ability to collect the future expected cash flows. Key assumptions utilized to forecast expected cash flows may include loss severity, expected cumulative loss percentage, cumulative loss percentage to date, weighted average Fair Isaac Corporation ("FICO®") scores and weighted average loan-to-value ("LTV") ratio, rating or scoring, credit ratings and market spreads, as applicable.

16



SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 3.2. INVESTMENT SECURITIES (continued)


The Company assesses and recognizes OTTI in accordance with applicable accounting standards. Under these standards, if the Company determines that impairmentAllowance for credit-related losses on its debtAFS 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 not0t record any material OTTIan allowance for credit-related losses on AFS securities against its investments in earnings related to its investmentdebt securities for the three-month and nine-month periods endedat September 30, 2017 and recognized $0 thousand and $44 thousand OTTI for the three-month and nine-month periods ended September 30, 2016, respectively.2020 or December 31, 2019.


Management has concluded that the unrealized losses on its investments in debt and equity securities for which it has not recognized OTTIrecorded an allowance (which were comprised of 520466 individual securities at September 30, 2017)2020) are temporary in naturenot credit-related 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)(2) the entire contractual principal and interest due on these securities is currently expected to be recoverable, (4)(3) the Company does not intend to sell these investments at a loss and (5)(4) it is more likely than not that the Company will not be required to sell the investments before recovery of the amortized cost basis, which for the Company's debt securities may be at maturity. Accordingly, the Company has concluded that the impairment on these securities is not other-than-temporary.


Gains (Losses) and Proceeds on Sales of Investments in Debt Securities


Proceeds from sales of investmentinvestments in debt securities and the realized gross gains and losses from those sales arewere as follows:
Three-Month Period Ended September 30,Nine-Month Period Ended September 30,
Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 30,
2017 2016 2017 2016
(in thousands) (in thousands)
(in thousands)(in thousands)2020201920202019
Proceeds from the sales of AFS securities$566,286
 $—
 $1,872,411
 $6,755,298
Proceeds from the sales of AFS securities$1,112,033 $416,981 $2,665,593 $1,044,645 
       
Gross realized gains$7,123
 $—
 $18,247
 $60,328
Gross realized gains$573 $2,667 $33,400 $6,007 
Gross realized losses—
 —
 —
 (2,558)Gross realized losses(721)(400)(1,754)(3,361)
OTTI—
 —
 —
 (44)
Net realized gains (1)
$7,123
 $—
 $18,247
 $57,726
Net realized gains/(losses) (1)
Net realized gains/(losses) (1)
$(148)$2,267 $31,646 $2,646 
(1)    Excludes theIncludes net realized gains/gain/(losses) related toon trading securities.securities of $(0.1) million and $(1.0) million for the three-month and nine-month periods ended September 30, 2020, respectively, and $(0.3) million and $(0.6) million for the three-month and nine-month periods ended September 30, 2019, respectively.


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

The Company recognized $7.1Other Investments

Other investments consisted of the following as of:
(in thousands)September 30, 2020December 31, 2019
FHLB of Pittsburgh and FRB stock$550,164 $716,615 
LIHTC investments300,588 265,271 
Equity securities not held for trading (1)
14,490 12,697 
Interest-bearing deposits with an affiliate bank750,000 0 
Trading securities42,464 1,097 
Total$1,657,706 $995,680 
(1)    Includes $1.4 million and $18.2 million for the three-month and nine-month periods ended September 30, 2017, in net gains on the sale0 of AFS investment securities as a result of overall balanceequity certificates related to an off-balance sheet and interest rate risk management. The net gain realized for the three-month period ended September 30, 2017 was primarily comprised of the sale of MBS's, including FHLMC residential debt securities and collateralized mortgage obligations ("CMOs"), with a book value of $558.6 million for a gain of $7.0 million. The net gain realized for the nine-month period ended September 30, 2017 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, including FHLMC residential debt securities and collateralized mortgage obligations ("CMOs"), with a book value of $1.1 billion for a gain of $16.3 million.
The Company recognized $57.7 million for the nine-month period ended September 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 realized for the nine-month period ended September 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 CMOs, with a book value of $1.3 billion for a gain of $24.7 million.

17


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 3. INVESTMENT SECURITIES (continued)

Trading Securities

The Company held $9.1 million of trading securitiessecuritization as of September 30, 2017, compared to $1.6 million held at2020 and December 31, 2016. Gains and losses on trading securities are recorded within Net gains/(losses) on sale of investment securities on the Company's Condensed Consolidated Statement of Operations.2019, respectively.

Other Investments


Other investments primarily include the Company's investment in the stock of the FHLB of Pittsburgh and the FRB with aggregate carrying amounts of $630.2 million and $680.5 million as of September 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.there is no market for their sale. The stocks can be sold back only at their par value of $100 per share, and FHLB stock can be sold back only to the FHLB or to another member institution. Accordingly, these stocks are carried at cost. During the three-month and nine-month periods ended September 30, 2017,2020, the Company purchased $65.9$29.9 million and $154.8$148.5 million of FHLB stock at par, respectively, and redeemed $88.4$135.9 million and $205.4$311.9 million of FHLB stock at par.par, respectively. There was no0 gain or loss associated with these redemptions. During the three-month and nine-month periods ended September 30, 2017,2019, the Company did not0t purchase any FRB stock. Other

The Company's LIHTC investments also include $78.1 million and $50.4 million of low-income housing tax credit ("LIHTC") investmentsare accounted for using the proportional amortization method. Equity securities are measured at fair value as of September 30, 20172020, with changes in fair value recognized in net income, and December 31, 2016, respectively.consist primarily of CRA mutual fund investments.


TheInterest-bearing deposits include deposits maturing in more than 90 days with Santander.

20



NOTE 2. INVESTMENT SECURITIES (continued)

With the exception of equity and trading securities, which are measured at fair value, the Company evaluates these other investments for impairment based on the ultimate recoverability of the carrying value, rather than by recognizing temporary declines in value. The Company held an immaterial amount of equity securities without readily determinable fair values at the reporting date.




NOTE 4.3. LOANS AND ALLOWANCE FOR CREDIT LOSSES


Overall


The Company's loansLHFI are generally 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 provideCertain LHFI are accounted for losses inherent in its portfolios.at fair value under the FVO. Certain loans are pledged as collateral for borrowings, securitizations, or special purpose entities ("SPEs"). SPEs. These loans totaled $50.8$52.8 billion at September 30, 20172020 and $53.5$53.9 billion at December 31, 2016.2019.


Loans that the Company intends to sell are classified as loans-held-for-sale (“LHFS”). TheLHFS. The LHFS portfolio balance at September 30, 20172020 was $2.0$1.1 billion, compared to $2.6$1.4 billion at December 31, 2016.2019. During the third quarter of 2020, the Company returned $1.6 billion of RICs classified as LHFS in the residential mortgage portfolio are either reported at fair value or at the lower of cost or fair value.to LHFI. For a discussion on the valuation of LHFS at fair value, see Note 1612 to thethese 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 ACL was released as a charge-off. Loan originations and purchasesLoans under SC’s personal lending platform during 2016 have been classified as held for saleLHFS and subsequent adjustments to lower of cost or market are recorded through Miscellaneous Income (Expense),income, net on the Condensed Consolidated Statements of Operations. As of September 30, 2017,2020, the carrying value of the personal unsecured held-for-saleheld for sale portfolio was $929.5$763.3 million. LHFS in the residential mortgage portfolio that were originated with the intent to sell were $240.2 million as of September 30, 2020 and are reported at either estimated fair value (if the FVO is elected) or the lower of cost or fair value.


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 September 30, 20172020 and December 31, 2016,2019, accrued interest receivable on the Company's loans was $507.3$613.8 million and $554.5$497.7 million, respectively.




18
21





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 4.3. 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:
 September 30, 2020December 31, 2019
(dollars in thousands)AmountPercentAmountPercent
Commercial LHFI:    
CRE loans$7,466,898 8.0 %$8,468,023 9.1 %
C&I loans16,289,708 17.6 %16,534,694 17.8 %
Multifamily loans8,677,483 9.4 %8,641,204 9.3 %
Other commercial(2)
7,217,276 7.8 %7,390,795 8.2 %
Total commercial LHFI39,651,365 42.8 %41,034,716 44.4 %
Consumer loans secured by real estate:    
Residential mortgages7,132,279 7.7 %8,835,702 9.5 %
Home equity loans and lines of credit4,288,526 4.6 %4,770,344 5.1 %
Total consumer loans secured by real estate11,420,805 12.3 %13,606,046 14.6 %
Consumer loans not secured by real estate:    
RICs and auto loans40,615,831 43.7 %36,456,747 39.3 %
Personal unsecured loans845,860 0.9 %1,291,547 1.4 %
Other consumer(3)
243,245 0.3 %316,384 0.3 %
Total consumer loans53,125,741 57.2 %51,670,724 55.6 %
Total LHFI(1)
$92,777,106 100.0 %$92,705,440 100.0 %
Total LHFI:    
Fixed rate$64,631,198 69.7 %$61,775,942 66.6 %
Variable rate28,145,908 30.3 %30,929,498 33.4 %
Total LHFI(1)
$92,777,106 100.0 %$92,705,440 100.0 %
 September 30, 2017 December 31, 2016
 Amount Percent Amount Percent
 (dollars in thousands)
Commercial LHFI:       
Commercial real estate loans$9,690,850
 11.9% $10,112,043
 11.8%
Commercial and industrial loans15,196,539
 18.6% 18,812,002
 21.9%
Multifamily loans8,293,232
 10.2% 8,683,680
 10.1%
Other commercial(2)
6,876,521
 8.4% 6,832,403
 8.0%
Total commercial LHFI40,057,142
 49.1% 44,440,128
 51.8%
Consumer loans secured by real estate:       
Residential mortgages8,476,935
 10.4% 7,775,272
 9.1%
Home equity loans and lines of credit5,855,086
 7.2% 6,001,192
 7.0%
Total consumer loans secured by real estate14,332,021
 17.6% 13,776,464
 16.1%
Consumer loans not secured by real estate:       
RICs and auto loans - originated23,074,936
 28.3% 22,104,918
 25.8%
RICs and auto loans - purchased2,162,540
 2.7% 3,468,803
 4.0%
Personal unsecured loans1,262,591
 1.5% 1,234,094
 1.4%
Other consumer(3)
659,469
 0.8% 795,378
 0.9%
Total consumer loans41,491,557
 50.9% 41,379,657
 48.2%
Total LHFI(1)
$81,548,699
 100.0% $85,819,785
 100.0%
Total LHFI:       
Fixed rate$49,274,614
 60.4% $51,752,761
 60.3%
Variable rate32,274,085
 39.6% 34,067,024
 39.7%
Total LHFI(1)
$81,548,699
 100.0% $85,819,785
 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 $1.2$3.1 billion and $845.8 million$3.2 billion as of September 30, 20172020 and December 31, 2016,2019, respectively.
(2)Other commercial includes commercial equipment vehicle financing ("CEVF")CEVF leveraged leases and loans.
(3)Other consumer primarily includes recreational vehicle ("RV")RV and marine loans.


Portfolio segments and classes


GAAP requires that entities disclose information about the credit quality of their financing receivables at disaggregated levels, specifically defined as “portfolio segments” and “classes,” based on management’s systematic methodology for determining the ACL. The Company utilizes an alternatesimilar categorization compared to the financial statement categorization of loans to model and calculate the ACL and track the credit quality, delinquency and impairment status of the underlying loan populations. In disaggregating its financing receivables portfolio, the Company’s methodology begins with the commercial and consumer segments.


The commercial segmentation reflects line of business distinctions. The three commercial real estate linesCRE line of business distinctions include “Corporate banking,” which includes commercial and industrialC&I owner-occupied real estate “Middle market real estate,” which represents the portfolio ofand specialized lending for investment real estate, including financingestate. The Company's allowance methodology further classifies loans in this line of business into construction and non-construction loans; however, the methodology for continuing care retirement communitiesdevelopment and “Santander real estate capital”, which is the commercial real estate portfoliodetermination of the specialized lending group. "Commercial and industrial"allowance is generally consistent between the two portfolios. C&I includes non-real estate-related commercial and industrial loans. "Multifamily" represents loans for multifamily residential housing units. “Other commercial” includes loans to global customer relationships in Latin America which are not defined as commercial or consumer for regulatory purposes. The remainder of the portfolio primarily represents the CEVF business.portfolio.

19


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 September 30, 2017 and December 31, 2016, respectively:
Commercial Portfolio Segment(2)
    
Major Loan Classifications(1)
 September 30, 2017 December 31, 2016
  (in thousands)
Commercial LHFI:    
Commercial real estate:    
Corporate Banking $3,467,935
 $3,693,109
Middle Market Real Estate 5,188,460
 5,180,572
Santander Real Estate Capital 1,034,455
 1,238,362
Total commercial real estate 9,690,850
 10,112,043
Commercial and industrial (3)
 15,196,539
 18,812,002
Multifamily 8,293,232
 8,683,680
Other commercial 6,876,521
 6,832,403
Total commercial LHFI $40,057,142
 $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 $83.3 million of LHFS at September 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.


In accordance withDuring the Company's accounting policy when establishingnine-month periods ended September 30, 2020 and 2019, SC originated $11.1 billion and $9.5 billion, respectively, in Chrysler Capital loans (including through the collective ACL for originated loans, the Company's estimate of losses on recorded investment includes the estimateSBNA originations program), which represented 61% and 56%, respectively, of the related net unaccreted discount balance that is expected atUPB of SC's total RIC originations (including 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.

SBNA originations program).
22
Consumer Portfolio Segment(2)
    
Major Loan Classifications(1)
 September 30, 2017 December 31, 2016
  (in thousands)
Consumer loans secured by real estate:   
Residential mortgages(3)
 $8,476,935
 $7,775,272
Home equity loans and lines of credit 5,855,086
 6,001,192
Total consumer loans secured by real estate 14,332,021
 13,776,464
Consumer loans not secured by real estate:   
RICs and auto loans - originated (4)
 23,074,936
 22,104,918
RICs and auto loans - purchased (4)
 2,162,540
 3,468,803
Personal unsecured loans(5)
 1,262,591
 1,234,094
Other consumer 659,469
 795,378
Total consumer LHFI $41,491,557
 $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 $212.6 million and $462.9 million of LHFS at September 30, 2017 and December 31, 2016, respectively.
(4)RIC and auto loans exclude $762.6 million and $924.7 million of LHFS at September 30, 2017 and December 31, 2016, respectively.
(5)Personal unsecured loans exclude $929.5 million and $1.1 billion of LHFS at September 30, 2017 and December 31, 2016, respectively.

20



SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 4.3. 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 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:

  September 30, 2017 December 31, 2016
  (in thousands)
RICs - Purchased:   
Unpaid principal balance ("UPB") (1)
 $2,289,692
 $3,765,714
UPB - FVO (2)
 31,003
 29,481
Total UPB 2,320,695
 3,795,195
Purchase marks (3)
(158,155) (326,392)
Total RICs - Purchased 2,162,540
 3,468,803
     
RICs - Originated:    
UPB (1)
 23,391,153
 22,527,753
Net discount (335,015) (441,131)
Total RICs - Originated23,056,138
 22,086,622
SBNA auto loans 18,798
 18,296
Total RICs - originated post change in control 23,074,936
 22,104,918
Total RICs and auto loans $25,237,476
 $25,573,721

(1) UPB does not include amounts related to the loan receivables - unsecured and loan receivables from dealers due to the short-term and revolving nature of these receivables.
(2) The Company elected to account for these loans, which were acquired with evidence of credit deterioration, under the FVO.
(3) Includes purchase marks of $6.8 million and $6.7 million related to purchase loan portfolios on which we elected to apply the FVO at September 30, 2017 and December 31, 2016, respectively.

During the nine months ended September 30, 2017 and 2016, the Company originated $5.2 billion and $6.5 billion, respectively, in Chrysler Capital loans, which represented 46% and 51%, respectively, of the total RIC originations. As of September 30, 2017 and December 31, 2016, the Company's auto RIC portfolio consisted of $6.9 billion and $7.4 billion, respectively, of Chrysler loans, which represented 31% and 32%, respectively, of the Company's auto RIC portfolio.



21


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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

ACL Rollforward by Portfolio Segment

The ACL is comprised of the ALLL and the reserve for unfunded lending commitments. The activity in the ACL by portfolio segment for the three-month and nine-month periods ended September 30, 20172020 and 20162019 was as follows:
Three-Month Period Ended September 30, 2020
(in thousands)(in thousands)CommercialConsumerUnallocatedTotal
ALLL, beginning of period (1)
ALLL, beginning of period (1)
$759,599 $6,353,139 $0 $7,112,738 
Credit loss expense on loansCredit loss expense on loans14,797 365,799 380,596 
Three-Month Period Ended September 30, 2017
Commercial Consumer Unallocated Total
Charge-offsCharge-offs(28,962)(577,179)(606,141)
RecoveriesRecoveries7,843 504,562 512,405 
Charge-offs, net of recoveriesCharge-offs, net of recoveries(21,119)(72,617)0 (93,736)
ALLL, end of periodALLL, end of period$753,277 $6,646,321 $0 $7,399,598 
(in thousands)
Reserve for unfunded lending commitments, beginning of period (1)
Reserve for unfunded lending commitments, beginning of period (1)
$95,022 $27,721 $122,743 
Credit loss expense on unfunded lending commitmentsCredit loss expense on unfunded lending commitments24,752 477 25,229 
Reserve for unfunded lending commitments, end of periodReserve for unfunded lending commitments, end of period119,774 28,198 0 147,972 
Total ACL, end of periodTotal ACL, end of period$873,051 $6,674,519 $0 $7,547,570 
Nine-Month Period Ended September 30, 2020
(in thousands)(in thousands)CommercialConsumerUnallocatedTotal
ALLL, beginning of period$428,247
 $3,478,337
 $47,023
 $3,953,607
ALLL, beginning of period$399,829 $3,199,612 $46,748 $3,646,189 
Provision for loan and lease losses17,129
 630,048
 —
 647,177
Other(1)
356
 5,283
 —
 5,639
Day 1: Adjustment to allowance for adoption of ASU 2016-13 (1)
Day 1: Adjustment to allowance for adoption of ASU 2016-13 (1)
198,919 2,383,711 (46,748)2,535,882 
Credit loss expense on loans (1)
Credit loss expense on loans (1)
254,262 2,268,811 2,523,073 
Charge-offs(30,576) (1,224,296) —
 (1,254,872)Charge-offs(125,871)(2,721,664)(2,847,535)
Recoveries9,635
 594,959
 —
 604,594
Recoveries26,138 1,515,851 1,541,989 
Charge-offs, net of recoveries(20,941) (629,337) —
 (650,278)Charge-offs, net of recoveries(99,733)(1,205,813)0 (1,305,546)
ALLL, end of period$424,791
 $3,484,331
 $47,023
 $3,956,145
ALLL, end of period$753,277 $6,646,321 $0 $7,399,598 
       
Reserve for unfunded lending commitments, beginning of period$111,015
 $796
 $—
 $111,811
Reserve for unfunded lending commitments, beginning of period$85,934 $5,892 $91,826 
Release of reserve for unfunded lending commitments5,241
 (298) —
 4,943
Loss on unfunded lending commitments(668) —
 —
 (668)
Day 1: Adjustment to allowance for adoption of ASU 2016-13Day 1: Adjustment to allowance for adoption of ASU 2016-1310,081 330 10,411 
Credit loss expense on unfunded lending commitments (1)
Credit loss expense on unfunded lending commitments (1)
23,759 21,976 45,735 
Reserve for unfunded lending commitments, end of period115,588
 498
 —
 116,086
Reserve for unfunded lending commitments, end of period119,774 28,198 0 147,972 
Total ACL, end of period$540,379
 $3,484,829
 $47,023
 $4,072,231
Total ACL, end of period$873,051 $6,674,519 $0 $7,547,570 
       
Nine-Month Period Ended September 30, 2017
Commercial Consumer Unallocated Total
(in thousands)
ALLL, beginning of period$449,835
 $3,317,606
 $47,023
 $3,814,464
Provision for loan and lease losses62,597
 1,933,602
 —
 1,996,199
Other(1)
356
 5,283
 —
 5,639
Charge-offs(117,263) (3,590,495) —
 (3,707,758)
Recoveries29,266
 1,818,335
 —
 1,847,601
Charge-offs, net of recoveries(87,997) (1,772,160) —
 (1,860,157)
ALLL, end of period$424,791
 $3,484,331
 $47,023
 $3,956,145
Reserve for unfunded lending commitments, beginning of period$121,613
 $806
 $—
 $122,419
Release of reserve for unfunded lending commitments(3,557) (308) —
 (3,865)
Loss on unfunded lending commitments(2,468) —
 —
 (2,468)
Reserve for unfunded lending commitments, end of period115,588
 498
 —
 116,086
Total ACL, end of period$540,379
 $3,484,829
 $47,023
 $4,072,231
Ending balance, individually evaluated for impairment(2)
$60,492
 $1,765,790
 $—
 $1,826,282
Ending balance, collectively evaluated for impairment364,299
 1,718,541
 47,023
 2,129,863
       
Financing receivables:       
Ending balance$40,140,421
 $43,396,375
 $—
 $83,536,796
Ending balance, evaluated under the FVO or lower of cost or fair value83,279
 1,959,926
 —
 2,043,205
Ending balance, individually evaluated for impairment(1)
514,846
 6,650,254
 —
 7,165,100
Ending balance, collectively evaluated for impairment39,542,296
 34,786,195
 —
 74,328,491
(1) Includes transfers ina correction for the period ending Septemberclassification of ACL balances and certain activity between Commercial and Consumer from January 1, 2020 through June 30, 2017.2020. This resulted in a cumulative $322 million reclassification required at June 30, 2020 increasing the Consumer and decreasing the Commercial ACL.
(2) Consists of loans in TDR status.



22
23




SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS






NOTE 4.3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)


Three-Month Period Ended September 30, 2019
(in thousands)CommercialConsumerUnallocatedTotal
ALLL, beginning of period$447,078 $3,290,007 $46,748 $3,783,833 
Credit loss expense on loans(1)
14,251 583,640 0 597,891 
Charge-offs(57,276)(1,367,404)0 (1,424,680)
Recoveries18,393 760,423 0 778,816 
Charge-offs, net of recoveries(38,883)(606,981)0 (645,864)
ALLL, end of period$422,446 $3,266,666 $46,748 $3,735,860 
Reserve for unfunded lending commitments, beginning of period$83,346 $6,060 $0 $89,406 
(Recovery of) / credit loss expense on unfunded lending commitments5,907 (163)0 5,744 
Reserve for unfunded lending commitments, end of period89,253 5,897 0 95,150 
Total ACL, end of period$511,699 $3,272,563 $46,748 $3,831,010 
Nine-Month Period Ended September 30, 2019
(in thousands)CommercialConsumerUnallocatedTotal
ALLL, beginning of period$441,086 $3,409,021 $47,023 $3,897,130 
Credit loss expense on loans(1)
59,895 1,624,933 0 1,684,828 
Charge-offs(117,591)(4,020,570)(275)(4,138,436)
Recoveries39,056 2,253,282 0 2,292,338 
Charge-offs, net of recoveries(78,535)(1,767,288)(275)(1,846,098)
ALLL, end of period$422,446 $3,266,666 $46,748 $3,735,860 
Reserve for unfunded lending commitments, beginning of period$89,472 $6,028 $0 $95,500 
Release of unfunded lending commitments(219)(131)0 (350)
Reserve for unfunded lending commitments, end of period89,253 5,897 0 95,150 
Total ACL, end of period$511,699 $3,272,563 $46,748 $3,831,010 
 Three-Month Period Ended September 30, 2016
 Commercial Consumer Unallocated Total
 (in thousands)
ALLL, beginning of period$528,858
 $3,189,784
 $47,245
 $3,765,887
(Release of) / Provision for loan and lease losses21,454
 687,697
 —
 709,151
Charge-offs(41,660) (1,249,370) —
 (1,291,030)
Recoveries21,359
 608,915
 —
 630,274
Charge-offs, net of recoveries(20,301) (640,455) —
 (660,756)
ALLL, end of period$530,011
 $3,237,026
 $47,245
 $3,814,282
        
Reserve for unfunded lending commitments, beginning of period$156,155
 $743
 $—
 $156,898
(Release of) / Provision for unfunded lending commitments(21,244) 5
 —
 (21,239)
Loss on unfunded lending commitments(1,094) —
 —
 (1,094)
Reserve for unfunded lending commitments, end of period133,817
 748
 —
 134,565
Total ACL, end of period$663,828
 $3,237,774
 $47,245
 $3,948,847
        
 Nine-Month Period Ended September 30, 2016
 Commercial Consumer Unallocated Total
 (in thousands)
ALLL, beginning of period$456,812
 $2,742,088
 $47,245
 $3,246,145
Provision for loan and lease losses122,832
 2,090,516
 —
 2,213,348
Charge-offs(118,273) (3,424,199) —
 (3,542,472)
Recoveries68,640
 1,828,621
 —
 1,897,261
Charge-offs, net of recoveries(49,633) (1,595,578) —
 (1,645,211)
ALLL, end of period$530,011
 $3,237,026
 $47,245
 $3,814,282
        
Reserve for unfunded lending commitments, beginning of period$148,207
 $814
 $—
 $149,021
Provision for / (Release of) unfunded lending commitments(13,128) (66) —
 (13,194)
Loss on unfunded lending commitments(1,262) —
 —
 (1,262)
Reserve for unfunded lending commitments, end of period133,817
 748
 —
 134,565
Total ACL, end of period$663,828
 $3,237,774
 $47,245
 $3,948,847
Ending balance, individually evaluated for impairment(1)
$146,458
 $1,376,942
 $—
 $1,523,400
Ending balance, collectively evaluated for impairment383,553
 1,860,084
 47,245
 2,290,882
        
Financing receivables:       
Ending balance$45,812,581
 $44,091,345
 $—
 $89,903,926
Ending balance, evaluated under the fair value option or lower of cost or fair value(1)
224,524
 3,027,806
 —
 3,252,330
Ending balance, individually evaluated for impairment(1)
693,317
 5,465,762
 —
 6,159,079
Ending balance, collectively evaluated for impairment44,894,740
 35,597,777
 —
 80,492,517
(1) Credit loss expense includes $0 and $20.4 million related to retail installment contracts transferred to held for sale during the three and nine months ended September 30, 2019.

(1)Consists of loans in TDR status.





23


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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 Nine-Month Period Ended
 September 30, 2017
September 30, 2017
 Purchased
Originated
Total
Purchased
Originated
Total
 (in thousands)
ALLL, beginning of period$468,671
 $2,792,666
 $3,261,337
 $559,092
 $2,538,127
 $3,097,219
Provision for loan and lease losses47,106
 523,832
 570,938
 128,372
 1,686,611
 1,814,983
Charge-offs(142,561) (1,043,732) (1,186,293) (481,389) (2,991,112) (3,472,501)
Recoveries52,406
 535,677
 588,083
 219,547
 1,574,817
 1,794,364
Charge-offs, net of recoveries(90,155) (508,055) (598,210) (261,842) (1,416,295) (1,678,137)
ALLL, end of period$425,622
 $2,808,443
 $3,234,065
 $425,622
 $2,808,443
 $3,234,065

 Three-Month Period Ended Nine-Month Period Ended
 September 30, 2016 September 30, 2016
 Purchased Originated Total Purchased Originated Total
 (in thousands)
ALLL, beginning of period$615,623
 $2,342,440
 $2,958,063
 $590,807
 $1,891,989
 $2,482,796
Provision for loan and lease losses29,406
 630,962
 660,368
 150,658
 1,877,527
 2,028,185
Charge-offs(207,662) (996,395) (1,204,057) (666,623) (2,611,263) (3,277,886)
Recoveries155,673
 442,543
 598,216
 518,198
 1,261,297
 1,779,495
Charge-offs, net of recoveries(51,989) (553,852) (605,841) (148,425) (1,349,966) (1,498,391)
ALLL, end of period$593,040
 $2,419,550
 $3,012,590
 $593,040
 $2,419,550
 $3,012,590


Refer to Note 14 for discussion of contingencies and possible losses related to the impact of hurricane activity in regions where the Company has lending activities.

The credit risk in the Company’s loan portfolios is driven by credit and collateral quality, and is affected by borrower-specific and economy-wide factors. In general, there is an inverse relationship between the credit quality of loans and projections of impairment losses so that loans with better credit quality require a lower expected loss. The Company manages this risk through its underwriting, pricing strategies, credit policy standards, and servicing guidelines and practices, as well as the application of geographic and other concentration limits.

The Company estimates lifetime expected losses based on prospective information as well as account-level models based on historical data. Unemployment, HPI, and used vehicle index growth rates, along with loan level characteristics, are the key inputs used in the models for prediction of the likelihood that the borrower will default in the forecasted period (the PD). The used vehicle index is also used to estimate the loss in the event of default. The historic volume of loan deferrals provided to customers impacted by COVID-19 has driven positive trends in delinquencies and severity (charge-offs) in the quarter however, the inclusion of key loan characteristics as inputs to the models (including number of extensions) and management’s evaluation of qualitative factors ensure the allowance is appropriate.

24





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 4.3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)


The Company has determined the reasonable and supportable period to be three years, at which time the economic forecasts generally tend to revert to historical averages. The Company utilizes qualitative factors to capture any additional risks that may not be captured in either the economic forecasts or in the historical data, including consideration of the portfolio metrics and collateral value. The Company generally uses a third-party vendor's consensus baseline macroeconomic scenario for the quantitative estimate and additional positive and negative macroeconomic scenarios to make qualitative adjustment for macroeconomic uncertainty and may consider adjustments to macroeconomic inputs based on market volatility. 

The baseline scenario was based on the latest consensus forecasts available, which show an improvement in key variables in this quarter, including a decrease in unemployment rates (which are a key driver to losses). The scenarios are periodically updated over a reasonable and supportable time horizon, with weightings assigned by management and approved through established committee governance.

The Company's allowance for loan losses increased $286.9 million and $3.8 billion for the three and nine-months ended September 30, 2020. For the three months ended September 30, 2020, the increase was primarily due to portfolio growth.For the nine months ended September 30, 2020, the primary drivers were an approximately a $2.5 billion increase at CECL adoption on January 1, 2020, driven mainly by the addition of lifetime expected credit losses for non-TDR loans and additional reserves specific to COVID-19 risk.

Non-accrual loans by Class of Financing Receivable


The recorded investment inamortized cost basis of financial instruments that are either non-accrual loanswith related expected credit loss or nonaccrual without related expected credit loss disaggregated by class of financing receivables and other non-performing assets is summarized as follows:
Non-accrual loans as of (1):
Non-accrual loans with no allowanceInterest Income recognized on nonaccrual loans
(in thousands)September 30, 2020December 31, 2019September 30, 2020September 30, 2020
Non-accrual loans:  
Commercial:  
CRE$95,621 $83,117 $65,104 $0 
C&I102,274 153,428 40,723 0 
Multifamily51,349 5,112 49,236 0 
Other commercial16,984 31,987 7,634 0 
Total commercial loans266,228 273,644 162,697 0 
Consumer:  
Residential mortgages164,001 134,957 66,223 0 
Home equity loans and lines of credit94,872 107,289 33,718 0 
RICs and auto loans967,101 1,643,459 187,774 84,403 
Personal unsecured loans0 2,212 0 0 
Other consumer7,135 11,491 77 0 
Total consumer loans1,233,109 1,899,408 287,792 84,403 
Total non-accrual loans1,499,337 2,173,052 450,489 84,403 
OREO43,015 66,828 — — 
Repossessed vehicles249,572 212,966 — — 
Foreclosed and other repossessed assets3,206 4,218 — — 
Total OREO and other repossessed assets295,793 284,012 — — 
Total non-performing assets$1,795,130 $2,457,064 $450,489 $84,403 
(1) The December 31, 2019 table includes balances based on recorded investment. Differences between amortized cost and UPB were not material
25



 September 30, 2017 December 31, 2016
 (in thousands)
Non-accrual loans:   
Commercial:   
Commercial real estate:   
Corporate banking$88,459
 $104,879
Middle market commercial real estate57,536
 71,264
Santander real estate capital921
 3,077
Commercial and industrial184,089
 182,368
Multifamily10,715
 8,196
Other commercial20,767
 11,097
Total commercial loans362,487
 380,881
Consumer:   
Residential mortgages284,415
 287,140
Home equity loans and lines of credit116,482
 120,065
RICs and auto loans - originated1,553,954
 1,045,587
RICs - purchased274,374
 284,486
Personal unsecured loans5,412
 5,201
Other consumer10,393
 12,694
Total consumer loans2,245,030
 1,755,173
Total non-accrual loans2,607,517
 2,136,054
    
Other real estate owned ("OREO")146,362
 116,705
Repossessed vehicles157,757
 173,754
Foreclosed and other repossessed assets1,711
 3,838
Total OREO and other repossessed assets305,830
 294,297
Total non-performing assets$2,913,347
 $2,430,351
NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)


Age Analysis of Past Due Loans


For reporting of past due loans, a payment ofThe Company generally considers an account delinquent when an obligor fails to pay substantially all (defined as 90% or more of the amount due is considered to meet the contractual requirements. For certain RICs originated prior to January 1, 2017, the Company considers 50% of a single payment due sufficient to qualify as a payment for past due classification purposes. For RICs originated after January 1, 2017, the required minimum payment is 90%) of the scheduled payment regardless of which origination channelby the receivable was originated through. The Company aggregates partial payments in determining whether a full payment has been missed in computing past due status.date. When an account is deferred, the loan is returned to accrual status during the deferral period and accrued interest related to the loan is evaluated for collectability.


25


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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


The age of recorded investmentsamortized cost 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:
September 30, 2020
(in thousands)30-89
Days Past
Due		90
Days or Greater		Total
Past Due		CurrentTotal
Financing
Receivables		Amortized Cost
> 90 Days and
Accruing
Commercial:      
CRE$27,468 $67,396 $94,864 $7,372,034 $7,466,898 $0 
C&I(1)
54,832 63,054 117,886 16,315,919 16,433,805 0 
Multifamily37,822 9,720 47,542 8,629,941 8,677,483 0 
Other commercial142,627 6,175 148,802 7,068,474 7,217,276 47 
Consumer:      
Residential mortgages(2)
78,452 111,976 190,428 7,182,040 7,372,468 0 
Home equity loans and lines of credit37,688 66,439 104,127 4,184,399 4,288,526 0 
RICs and auto loans2,481,517 217,776 2,699,293 37,916,538 40,615,831 0 
Personal unsecured loans(3)
51,253 49,491 100,744 1,508,408 1,609,152 45,070 
Other consumer9,163 6,965 16,128 227,117 243,245 0 
Total$2,920,822 $598,992 $3,519,814 $90,404,870 $93,924,684 $45,117 
 As of:
  September 30, 2017
  30-89
Days Past
Due		 90
Days or Greater		 Total
Past Due		 Current 
Total
Financing
Receivables(1)
 Recorded Investment
> 90 Days
and
Accruing
 (in thousands)
Commercial:            
Commercial real estate:            
Corporate banking $21,114
 $49,274
 $70,388
 $3,397,547
 $3,467,935
 $—
Middle market commercial real estate 67,854
 33,344
 101,198
 5,087,262
 5,188,460
 —
Santander real estate capital —
 525
 525
 1,033,930
 1,034,455
 —
Commercial and industrial 80,116
 52,117
 132,233
 15,147,585
 15,279,818
 —
Multifamily 59
 1,837
 1,896
 8,291,336
 8,293,232
 —
Other commercial 72,944
 4,614
 77,558
 6,798,963
 6,876,521
 10
Consumer:            
Residential mortgages 282,297
 217,899
 500,196
 8,189,377
 8,689,573
 —
Home equity loans and lines of credit 41,210
 77,589
 118,799
 5,736,287
 5,855,086
 —
RICs and auto loans - originated 3,381,392
 331,033
 3,712,425
 20,125,142
 23,837,567
 —
RICs and auto loans - purchased 551,123
 51,261
 602,384
 1,560,156
 2,162,540
 —
Personal unsecured loans 104,796
 107,060
 211,856
 1,980,284
 2,192,140
 96,246
Other consumer 14,978
 15,774
 30,752
 628,717
 659,469
 —
Total $4,617,883
 $942,327
 $5,560,210
 $77,976,586
 $83,536,796
 $96,256
(1) C&I loans includes $144.1 million of LHFS at September 30, 2020.
(1)Financing receivables include LHFS.
(2) Residential mortgages includes $240.2 million of LHFS at September 30, 2020.

(3) Personal unsecured loans includes $763.3 million of LHFS at September 30, 2020.
As of
December 31, 2019
(in thousands)30-89
Days Past
Due		90
Days or Greater		Total
Past Due		CurrentTotal
Financing
Receivables		Recorded
Investment
> 90 Days and Accruing
Commercial:      
CRE$51,472 $65,290 $116,762 $8,351,261 $8,468,023 $0 
C&I (1)
55,957 84,640 140,597 16,510,391 16,650,988 0 
Multifamily10,456 3,704 14,160 8,627,044 8,641,204 0 
Other commercial61,973 6,352 68,325 7,322,469 7,390,794 0 
Consumer:  
Residential mortgages(2)
154,978 128,578 283,556 8,848,971 9,132,527 0 
Home equity loans and lines of credit45,417 75,972 121,389 4,648,955 4,770,344 0 
RICs and auto loans4,364,110 404,723 4,768,833 31,687,914 36,456,747 0 
Personal unsecured loans(3)
85,277 102,572 187,849 2,110,803 2,298,652 93,102 
Other consumer11,375 7,479 18,854 297,530 316,384 0 
Total$4,841,015 $879,310 $5,720,325 $88,405,338 $94,125,663 $93,102 
(1)C&I loans included $116.3 million of LHFS at December 31, 2019.
(2) Residential mortgages included $296.8 million of LHFS at December 31, 2019.
(3) Personal unsecured loans included $1.0 billion of LHFS at December 31, 2019.

26





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 4.3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)


 As of
  December 31, 2016
  30-89
Days Past
Due		 90
Days or Greater		 Total
Past Due		 Current 
Total
Financing
Receivable(1)
 Recorded
Investment
> 90 Days
and
Accruing
 (in thousands)
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
 —
Commercial and industrial 46,104
 33,800
 79,904
 18,853,163
 18,933,067
 —
Multifamily 7,133
 2,339
 9,472
 8,674,208
 8,683,680
 —
Other commercial 45,379
 2,590
 47,969
 6,784,434
 6,832,403
 1
Consumer:             
Residential mortgages 230,850
 224,790
 455,640
 7,782,525
 8,238,165
 —
Home equity loans and lines of credit 37,209
 75,668
 112,877
 5,888,315
 6,001,192
 —
RICs and auto loans - originated 3,092,841
 296,085
 3,388,926
 19,640,740
 23,029,666
 —
RICs and auto loans - purchased 800,993
 71,273
 872,266
 2,596,537
 3,468,803
 —
Personal unsecured loans 89,524
 103,698
 193,222
 2,118,474
 2,311,696
 93,845
Other consumer 31,980
 20,386
 52,366
 743,012
 795,378
 —
Total $4,404,130
 $928,319
 $5,332,449
 $83,073,644
 $88,406,093
 $93,846
(1)Financing receivables include LHFS.

27


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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

Impaired Loans by Class of Financing Receivable

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

Impaired loans disaggregated by class of financing receivables are summarized as follows:
  September 30, 2017
  
Recorded Investment(1)
 UPB Related
Specific
Reserves		 Average
Recorded
Investment
  (in thousands)
With no related allowance recorded:        
Commercial:        
Commercial real estate:        
Corporate banking $90,335
 $118,315
 $—
 $89,675
Middle market commercial real estate 49,207
 72,294
 —
 54,647
Santander real estate capital —
 —
 —
 1,309
Commercial and industrial 86,831
 90,543
 —
 77,483
Multifamily 8,980
 9,939
 —
 9,675
Other commercial 884
 1,029
 —
 961
Consumer:        
Residential mortgages 172,400
 222,662
 —
 173,735
Home equity loans and lines of credit 42,483
 42,483
 —
 45,678
RICs and auto loans - originated —
 —
 —
 —
RICs and auto loans - purchased 19,395
 24,883
 —
 26,884
Personal unsecured loans(2)
 30,459
 30,459
 —
 28,234
Other consumer 10,335
 14,183
 —
 14,835
With an allowance recorded:        
Commercial:        
Commercial real estate:        
Corporate banking 61,629
 73,893
 15,488
 71,035
Middle market commercial real estate 26,179
 32,368
 6,090
 38,225
Santander real estate capital 8,405
 8,405
 1,135
 8,498
Commercial and industrial 144,503
 175,042
 35,138
 180,541
Multifamily 6,242
 6,242
 354
 4,586
Other commercial 15,717
 15,783
 2,287
 11,468
Consumer:        
Residential mortgages 292,426
 334,044
 41,218
 288,528
Home equity loans and lines of credit 49,808
 62,042
 1,704
 49,835
RICs and auto loans - originated 4,679,505
 4,742,581
 1,334,552
 3,975,411
RICs and auto loans - purchased 1,324,976
 1,497,436
 379,300
 1,590,462
  Personal unsecured loans 16,710
 16,904
 6,835
 16,784
  Other consumer 11,758
 15,640
 2,181
 12,426
Total:        
Commercial $498,912
 $603,853
 $60,492
 $548,103
Consumer 6,650,255
 7,003,317
 1,765,790
 6,222,812
Total $7,149,167
 $7,607,170
 $1,826,282
 $6,770,915

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

28


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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

The Company recognized interest income, not including the impact of purchase accounting adjustments, of $633.3 million for the nine-month period ended September 30, 2017 on approximately $6.0 billion of TDRs that were in performing status as of September 30, 2017.

  December 31, 2016
  
Recorded Investment(1)
 UPB Related
Specific
Reserves		 Average
Recorded
Investment
  (in thousands)
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
Commercial and industrial 68,135
 74,034
 —
 40,163
Multifamily 10,370
 11,127
 —
 9,919
Other commercial 1,038
 1,038
 —
 639
Consumer:        
Residential mortgages 175,070
 222,142
 —
 160,373
Home equity loans and lines of credit 48,872
 48,872
 —
 39,976
RICs and auto loans - originated —
 —
 —
 8
RICs and auto loans - purchased 34,373
 44,296
 —
 55,036
Personal unsecured loans(2)
 26,008
 26,008
 —
 19,437
Other consumer 19,335
 23,864
 —
 15,915
With an allowance recorded:        
Commercial:        
 Corporate banking 80,440
 85,309
 21,202
 71,667
 Middle market commercial real estate 50,270
 66,059
 12,575
 44,158
 Santander real estate capital 8,591
 8,591
 890
 4,623
Commercial and industrial 216,578
 232,204
 57,855
 166,999
Multifamily 2,930
 2,930
 876
 4,292
Other commercial 7,218
 7,218
 5,198
 5,217
Consumer:        
Residential mortgages 284,630
 324,188
 38,764
 303,845
Home equity loans and lines of credit 49,862
 63,775
 3,467
 60,855
RICs and auto loans - originated 3,271,316
 3,332,297
 997,169
 2,298,646
RICs and auto loans - purchased 1,855,948
 2,097,520
 471,687
 2,155,028
Personal unsecured loans 16,858
 17,126
 6,846
 9,349
Other consumer 13,093
 17,253
 2,442
 15,878
Total:        
Commercial $597,288
 $680,513
 $98,596
 $513,095
Consumer 5,795,365
 6,217,341
 1,520,375
 5,134,346
Total $6,392,653
 $6,897,854
 $1,618,971
 $5,647,441
(1)Recorded investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments.
(2)Includes LHFS.

The Company recognized interest income of $657.5 million for the year ended December 31, 2016 on approximately $5.2 billion of TDRs that were in performing status as of December 31, 2016.


29


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


CommercialThe Company's Risk Department performs a credit quality disaggregated by class of financing receivables is summarized according to standard regulatoryanalysis and classifies certain loans over an internal threshold based on the commercial lending classifications as follows:described below:


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


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


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


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


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:

27
           
September 30, 2017 Corporate
banking		 Middle
market
commercial
real estate		 Santander
real estate
capital		 Commercial and industrial Multifamily Remaining
commercial		 
Total(1)
  (in thousands)
Rating:              
Pass $2,893,695
 $4,814,655
 $997,914
 $14,183,443
 $8,162,600
 $6,747,806
 $37,800,113
Special mention 361,652
 234,793
 18,173
 553,863
 82,209
 39,160
 1,289,850
Substandard 199,883
 115,409
 18,368
 490,616
 48,423
 89,555
 962,254
Doubtful 12,705
 23,603
 —
 51,896
 —
 —
 88,204
Total commercial loans $3,467,935
 $5,188,460
 $1,034,455
 $15,279,818
 $8,293,232
 $6,876,521
 $40,140,421



(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)
  (in thousands)
Rating:              
Pass $3,303,428
 $4,843,468
 $1,170,259
 $17,865,871
 $8,515,866
 $6,804,184
 $42,503,076
Special mention 144,125
 136,989
 44,281
 541,828
 120,731
 10,651
 998,605
Substandard 226,206
 161,962
 23,822
 503,185
 47,083
 11,932
 974,190
Doubtful 19,350
 38,153
 —
 22,183
 —
 5,636
 85,322
Total commercial loans $3,693,109
 $5,180,572
 $1,238,362
 $18,933,067
 $8,683,680
 $6,832,403
 $44,561,193

(1)Financing receivables include LHFS.

30


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS






NOTE 4.3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)


Each commercial loan is evaluated to determine its risk rating at least annually. The indicators represent the rating for loans as of the date presented based on the most recent assessment performed. Amortized cost basis of loans in the commercial portfolio segment by credit quality indicator, class of financing receivable, and year of origination are summarized as follows:
September 30, 2020
Commercial Loan Portfolio (1)
(dollars in thousands)Amortized Cost by Origination Year
Regulatory Rating:
2020(3)
2019201820172016PriorTotal
Commercial real estate
Pass$545,334 $1,226,314 $1,737,872 $1,076,788 $673,677 $1,653,587 $6,913,572 
Special mention8,717 16,899 28,096 82,613 37,658 70,262 244,245 
Substandard0 5,590 22,099 24,624 39,678 213,415 305,406 
Doubtful0 0 0 0 0 0 0 
N/A(2)
0 0 0 0 0 3,675 3,675 
Total Commercial real estate$554,051 $1,248,803 $1,788,067 $1,184,025 $751,013 $1,940,939 $7,466,898 
C&I
Pass$4,109,046 $3,564,841 $2,647,502 $889,298 $552,009 $2,473,820 $14,236,516 
Special mention12,443 85,908 217,125 72,128 54,147 281,875 723,626 
Substandard51,731 22,196 167,650 40,017 93,690 250,180 625,464 
Doubtful691 0 1 2,694 405 14,506 18,297 
N/A(2)
312,075 332,414 87,430 18,579 21,372 58,032 829,902 
Total C&I$4,485,986 $4,005,359 $3,119,708 $1,022,716 $721,623 $3,078,413 $16,433,805 
Multifamily
Pass$738,446 $2,006,547 $1,560,057 $1,363,283 $627,914 $1,714,053 $8,010,300 
Special mention0 71,335 267,026 73,904 38,034 79,726 530,025 
Substandard0 7,736 8,282 57,279 14,273 49,588 137,158 
Doubtful0 0 0 0 0 0 0 
N/A0 0 0 0 0 0 0 
Total Multifamily$738,446 $2,085,618 $1,835,365 $1,494,466 $680,221 $1,843,367 $8,677,483 
Remaining commercial
Pass$2,894,096 $1,568,505 $826,882 $508,052 $283,720 $1,042,742 $7,123,997 
Special mention155 12,119 9,339 14,808 12,260 14,638 63,319 
Substandard1,851 1,288 4,129 4,015 6,710 11,218 29,211 
Doubtful441 0 115 29 109 55 749 
N/A0 0 0 0 0 0 0 
Total Remaining commercial$2,896,543 $1,581,912 $840,465 $526,904 $302,799 $1,068,653 $7,217,276 
Total Commercial loans
Pass$8,286,922 $8,366,207 $6,772,313 $3,837,421 $2,137,320 $6,884,202 $36,284,385 
Special mention21,315 186,261 521,586 243,453 142,099 446,501 1,561,215 
Substandard53,582 36,810 202,160 125,935 154,351 524,401 1,097,239 
Doubtful1,132 0 116 2,723 514 14,561 19,046 
N/A(2)
312,075 332,414 87,430 18,579 21,372 61,707 833,577 
Total commercial loans$8,675,026 $8,921,692 $7,583,605 $4,228,111 $2,455,656 $7,931,372 $39,795,462 
(1)Includes $144.1 million of LHFS at September 30, 2020.
(2)Consists of loans that have not been assigned a regulatory rating.
(3)Loans originated during the nine months ended September 30, 2020.




28



NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
December 31, 2019CREC&IMultifamilyRemaining
commercial
Total(1)
At Recorded Investment(in thousands)
Regulatory Rating:
Pass$7,513,567 $14,816,669 $8,356,377 $7,072,083 $37,758,696 
Special Mention508,133 743,462 260,764 260,051 1,772,410 
Substandard379,199 321,842 24,063 44,919 770,023 
Doubtful24,378 47,010 0 13,741 85,129 
N/A(2)
42,746 722,005 0 0 764,751 
Total commercial loans$8,468,023 $16,650,988 $8,641,204 $7,390,794 $41,151,009 
(1)Includes $116.3 million of LHFS at December 31, 2019.
(2)Consists of loans that have not been assigned a regulatory rating.

Consumer Lending Asset Quality Indicators-Credit Score


Consumer financing receivables for which either an internal or external credit score is a core component of the allowance model are summarized by credit score determined at origination as follows:
 September 30, 2017 December 31, 2016
As of September 30, 2020As of September 30, 2020RICs and auto loans
(dollars in thousands)(dollars in thousands)
Amortized Cost by Origination Year(3)
Credit Score Range(2)
 
RICs and auto loans(3)
 Percent 
RICs and auto loans(3)
 Percent
2020(2)
2019201820172016PriorTotalPercent
 (dollars in thousands)
No FICO®(1)
 $4,312,044
 16.5% $4,154,228
 15.7%
No FICO(1)
No FICO(1)
$1,360,292 $1,284,613 $598,203 $579,827 $297,688 $207,835 $4,328,458 10.7 %
<600 13,819,835
 53.2% 14,100,215
 53.2%<6004,631,650 4,739,858 2,906,269 1,252,008 779,962 768,907 15,078,654 37.1 %
600-639 4,413,269
 17.0% 4,597,541
 17.4%600-6392,075,117 2,091,482 1,106,392 374,714 264,567 217,786 6,130,058 15.1 %
>=640 3,454,959
 13.3% 3,646,485
 13.7%>=6407,415,445 5,371,261 1,547,323 300,693 238,139 205,800 15,078,661 37.1 %
Total $26,000,107
 100.0% $26,498,469
 100.0%Total$15,482,504 $13,487,214 $6,158,187 $2,507,242 $1,580,356 $1,400,328 $40,615,831 100.0 %
(1)    Consists primarily of loans for which credit scores are not available or are not considered in the ALLL model.
(2)     Credit scores updated quarterly.Loans originated during the nine-months ended September 30, 2020.
(3)    RICs and autoExcludes LHFS.
December 31, 2019RICs and auto loans
Credit Score Range
Recorded Investment
(in thousands)
Percent
No FICO(1)
$3,178,459 8.7 %
<60015,013,670 41.2 %
600-6395,957,970 16.3 %
>=64012,306,648 33.8 %
Total$36,456,747 100.0 %
(1)    Consists primarily of loans include $762.6 million and $924.7 million of LHFS at September 30, 2017 and December 31, 2016 that dofor which credit scores are not have an allowance.available or are not considered in the ALLL model.


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.


FICO scores are refreshed quarterly, where possible. The indicators disclosed represent the credit scores for loans as of the date presented based on the most recent assessment performed.
29



NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Residential mortgage and home equity financing receivables by LTV and FICO range are summarized as follows:
As of September 30, 2020As of September 30, 2020
Residential Mortgages(1)(3)
(dollars in thousands)(dollars in thousands)Amortized Cost by Origination Year
FICO ScoreFICO Score
2020(4)
2019201820172016PriorGrand Total
N/A(2)
N/A(2)
LTV <= 70%LTV <= 70%$0 $0 $524 $504 $0 $18,003 $19,031 
70.01-80%70.01-80%0 0 — 0 0 3,295 3,295 
80.01-90%80.01-90%284 0 0 0 0 1,464 1,748 
90.01-100%90.01-100%0 0 0 0 0 1,125 1,125 
100.01-110%100.01-110%0 0 0 0 0 503 503 
LTV>110%LTV>110%0 0 0 0 0 0 0 
LTV - N/A(2)
LTV - N/A(2)
4,541 7,922 4,427 5,705 5,343 13,244 41,182 
<600<600
LTV <= 70%LTV <= 70%$841 $1,926 $9,287 $15,837 $11,973 $117,734 $157,598 
70.01-80%70.01-80%193 4,638 3,979 8,071 3,835 8,785 29,501 
80.01-90%80.01-90%387 5,107 10,063 3,066 0 1,410 20,033 
90.01-100%90.01-100%208 5,139 0 0 214 1,433 6,994 
100.01-110%100.01-110%0 0 0 0 0 409 409 
LTV>110%LTV>110%0 0 0 0 0 1,519 1,519 
LTV - N/A(2)LTV - N/A(2)0 0 0 0 0 61 61 
 
Residential Mortgages(1)(3)
September 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)
N/A(2)
 $332,686
 $10,295
 $1,220
 $—
 $—
 $—
 $—
 $344,201
<600 27
 223,552
 64,225
 53,315
 29,774
 4,664
 24,310
 399,867
600-639 39
 153,329
 47,086
 37,683
 35,296
 2,361
 5,797
 281,591
600-639
LTV <= 70%LTV <= 70%$1,711 $7,169 $3,241 $13,519 $10,223 $88,732 $124,595 
70.01-80%70.01-80%2,187 4,598 7,915 2,908 2,925 5,745 26,278 
80.01-90%80.01-90%359 7,138 8,559 4,483 250 2,197 22,986 
90.01-100%90.01-100%881 4,803 0 0 0 543 6,227 
100.01-110%100.01-110%0 0 0 0 0 270 270 
LTV>110%LTV>110%0 0 0 0 0 209 209 
LTV - N/A(2)
LTV - N/A(2)
0 0 0 0 0 0 0 
640-679 102
 288,451
 104,426
 87,570
 93,608
 4,322
 11,046
 589,525
640-679
LTV <= 70%LTV <= 70%$6,326 $21,034 $15,591 $32,598 $33,176 $155,822 $264,547 
70.01-80%70.01-80%9,099 19,763 6,848 10,437 3,123 9,610 58,880 
80.01-90%80.01-90%939 13,665 13,350 2,480 166 2,339 32,939 
90.01-100%90.01-100%8,089 12,223 0 0 0 1,399 21,711 
100.01-110%100.01-110%0 0 0 0 0 1,258 1,258 
LTV>110%LTV>110%0 0 0 0 0 437 437 
LTV - N/A(2)
LTV - N/A(2)
0 0 0 0 0 35 35 
680-719 53
 521,023
 235,751
 138,110
 152,743
 4,896
 10,144
 1,062,720
680-719
LTV <= 70%LTV <= 70%$30,965 $54,844 $43,110 $68,327 $57,554 $226,746 $481,546 
70.01-80%70.01-80%23,253 49,104 25,728 11,035 8,221 11,845 129,186 
80.01-90%80.01-90%6,011 25,312 27,960 4,101 137 4,254 67,775 
90.01-100%90.01-100%22,291 22,128 0 0 0 1,925 46,344 
100.01-110%100.01-110%0 0 0 0 0 415 415 
LTV>110%LTV>110%0 0 0 0 0 1,108 1,108 
LTV - N/A(2)LTV - N/A(2)0 0 0 0 0 23 23 
720-759 95
 895,781
 468,835
 177,903
 173,269
 6,896
 12,500
 1,735,279
720-759
LTV <= 70%LTV <= 70%$71,352 $88,466 $79,677 $158,519 $143,006 $341,158 $882,178 
70.01-80%70.01-80%75,766 81,867 39,273 23,567 11,551 14,171 246,195 
80.01-90%80.01-90%10,718 45,780 43,572 10,491 273 3,040 113,874 
90.01-100%90.01-100%34,469 38,027 0 13 0 624 73,133 
100.01-110%100.01-110%0 0 0 0 0 916 916 
LTV>110%LTV>110%0 0 0 0 0 1,559 1,559 
LTV - N/A(2)
LTV - N/A(2)
0 0 0 0 0 286 286 
>=760 552
 2,686,523
 1,099,436
 270,981
 192,950
 8,726
 17,222
 4,276,390
>=760
LTV <= 70%LTV <= 70%$253,357 $360,805 $231,800 $533,353 $610,305 $1,209,079 $3,198,699 
70.01-80%70.01-80%163,010 307,248 121,271 62,713 26,816 17,158 698,216 
80.01-90%80.01-90%30,274 127,372 71,400 16,662 309 5,646 251,663 
90.01-100%90.01-100%30,011 57,327 0 0 76 3,990 91,404 
100.01-110%100.01-110%0 0 0 574 0 1,485 2,059 
LTV>110%LTV>110%0 0 0 0 92 1,949 2,041 
LTV - N/A(2)
LTV - N/A(2)
0 0 0 0 0 288 288 
Total - All FICO BandsTotal - All FICO Bands
LTV <= 70%LTV <= 70%$364,552 $534,244 $383,230 $822,657 $866,237 $2,157,274 $5,128,194 
70.01-80%70.01-80%273,508 467,218 205,014 118,731 56,471 70,609 1,191,551 
80.01-90%80.01-90%48,972 224,374 174,904 41,283 1,135 20,350 511,018 
90.01-100%90.01-100%95,949 139,647 0 13 290 11,039 246,938 
100.01-110%100.01-110%0 0 0 574 0 5,256 5,830 
LTV>110%LTV>110%0 0 0 0 92 6,781 6,873 
LTV - N/A(2)
LTV - N/A(2)
4,541 7,922 4,427 5,705 5,343 13,937 41,875 
Grand Total $333,554
 $4,778,954
 $2,020,979
 $765,562
 $677,640
 $31,865
 $81,019
 $8,689,573
Grand Total$787,522 $1,373,405 $767,575 $988,963 $929,568 $2,285,246 $7,132,279 
(1) IncludesExcludes LHFS.
(2) Balances in the "N/A" range for LTV or FICO score primarily represent loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable.
(3) The ALLL model considers LTV for financing receivables in first lien position and CLTV for financing receivables in second lien position for the Company.
(4) Loans originated during the nine-months ended September 30, 2020.
30



NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)
As of September 30, 2020
Home Equity Loans and Lines of Credit(2)
(in thousands)Amortized Cost by Origination Year
FICO Score
2020(4)
2019201820172016PriorTotalRevolving
N/A(2)
LTV <= 70%$74 $0 $81 $9 $344 $855 $1,363 $28 
70.01-90%0 229 280 154 0 48 711 11 
90.01-110%0 0 0 0 0 0 0 0 
LTV>110%0 0 0 0 0 0 0 0 
LTV - N/A(2)
6,810 12,893 16,279 15,867 12,101 75,133 139,083 0 
<600
LTV <= 70%$164 $2,094 $6,902 $10,492 $15,275 $129,234 $164,161 $2,351 
70.01-90%226 1,526 5,956 6,055 1,947 14,527 30,237 451 
90.01-110%0 0 0 0 0 2,680 2,680 36 
LTV>110%0 0 0 270 0 3,258 3,528 56 
LTV - N/A(2)
0 0 0 15 0 535 550 0 
600-639
LTV <= 70%$416 $3,806 $9,182 $11,033 $12,079 $94,856 $131,372 $2,069 
70.01-90%264 2,741 4,259 3,459 1,218 9,934 21,875 336 
90.01-110%0 0 0 0 0 4,209 4,209 65 
LTV>110%48 0 0 0 0 1,544 1,592 20 
LTV - N/A(2)
0 0 0 0 0 33 33 0 
640-679
LTV <= 70%$4,519 $14,957 $21,127 $24,324 $19,871 $160,606 $245,404 $3,791 
70.01-90%2,033 10,418 11,945 6,855 2,620 18,855 52,726 840 
90.01-110%0 50 0 0 0 4,809 4,859 68 
LTV>110%0 0 0 0 0 2,822 2,822 42 
LTV - N/A(2)
94 95 0 100 0 122 411 0 
680-719
LTV <= 70%$19,916 $30,186 $46,889 $53,038 $49,790 $250,405 $450,224 $6,949 
70.01-90%7,732 21,292 25,138 20,367 5,018 29,166 108,713 1,726 
90.01-110%157 75 0 0 0 9,634 9,866 140 
LTV>110%0 0 0 0 0 5,089 5,089 71 
LTV - N/A(2)
0 51 0 63 0 127 241 0 
720-759
LTV <= 70%$29,013 $48,412 $66,199 $71,598 $72,386 $365,235 $652,843 $10,147 
70.01-90%16,451 33,790 36,063 26,427 8,072 34,489 155,292 2,441 
90.01-110%0 132 11 0 0 11,267 11,410 160 
LTV>110%144 0 0 0 0 8,322 8,466 128 
LTV - N/A(2)
55 20 0 0 0 127 202 0 
>=760
LTV <= 70%$85,582 $144,351 $181,212 $182,809 $157,716 $945,506 $1,697,176 $26,284 
70.01-90%32,557 70,787 71,555 49,205 15,834 101,268 341,206 5,400 
90.01-110%315 22 0 0 0 25,371 25,708 389 
LTV>110%492 66 269 0 0 12,240 13,067 198 
LTV - N/A(2)
70 752 130 69 0 386 1,407 0 
Total - All FICO Bands
LTV <= 70%$139,684 $243,806 $331,592 $353,303 $327,461 $1,946,697 $3,342,543 $51,619 
LTV 70.01 - 90%59,263 140,783 155,196 112,522 34,709 208,287 710,760 11,205 
LTV 90.01 - 110%472 279 11 0 0 57,970 58,732 858 
LTV>110%684 66 269 270 0 33,275 34,564 515 
LTV - N/A(2)
7,029 13,811 16,409 16,114 12,101 76,463 141,927 0 
Grand Total$207,132 $398,745 $503,477 $482,209 $374,271 $2,322,692 $4,288,526 $64,197 
(1) - (4) Refer to corresponding notes above.

31



NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Residential Mortgages(1)(3)
December 31, 2019
N/A(2)
LTV<=70%70.01-80%80.01-90%90.01-100%100.01-110%LTV>110%Grand Total
FICO Score(dollars in thousands)
N/A(2)
$92,052 $4,654 $534 $0 $0 $0 $0 $97,240 
<60033 180,465 48,344 36,401 27,262 1,518 2,325 296,348 
600-63931 122,675 45,189 34,690 37,358 636 1,108 241,687 
640-6791,176 263,781 89,179 78,215 87,067 946 1,089 521,453 
680-7197,557 511,018 219,766 132,076 155,857 1,583 2,508 1,030,365 
720-75914,427 960,290 413,532 195,335 191,850 1,959 3,334 1,780,727 
>=76036,621 3,324,285 938,368 353,989 203,665 3,673 7,281 4,867,882 
Grand Total$151,897 $5,367,168 $1,754,912 $830,706 $703,059 $10,315 $17,645 $8,835,702 
(1) Excludes LHFS.
(2) Residential mortgages in the "N/A" range for LTV or FICO score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable.
(3) The ALLL model considers LTV for financing receivables in first lien position for the Company and homeCLTV for financing receivables in second lien position for the Company.
Home Equity Loans and Lines of Credit(2)
December 31, 2019
N/A(1)
LTV<=70%70.01-90%90.01-110%LTV>110%Grand Total
FICO Score
N/A(1)
$176,138 $189 $153 $0 $0 $176,480 
<600824 215,977 66,675 11,467 4,459 299,402 
600-6391,602 147,089 34,624 4,306 3,926 191,547 
640-6799,964 264,021 78,645 8,079 3,626 364,335 
680-71917,120 478,817 146,529 12,558 9,425 664,449 
720-75925,547 665,647 204,104 12,606 10,857 918,761 
>=76061,411 1,639,702 408,812 30,259 15,186 2,155,370 
Grand Total$292,606 $3,411,442 $939,542 $79,275 $47,479 $4,770,344 
(1) Excludes LHFS.
(2)    Home equity loans and lines of credit in the "N/A" range for LTV or FICO score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable.
(3)    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.


31


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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

  
Home Equity Loans and Lines of Credit(2)
September 30, 2017 
N/A(1)
 LTV<=70% 70.01-90% 90.01-110% LTV>110% Grand Total
FICO Score (dollars in thousands)
N/A(1)
 $153,230
 $620
 $564
 $—
 $—
 $154,414
<600 8,561
 166,488
 64,193
 13,307
 10,019
 262,568
600-639 5,960
 143,081
 70,451
 10,181
 10,789
 240,462
640-679 7,960
 265,434
 145,426
 22,790
 13,371
 454,981
680-719 8,035
 452,532
 281,087
 32,697
 18,979
 793,330
720-759 7,699
 654,371
 389,602
 43,180
 22,235
 1,117,087
>=760 18,516
 1,758,747
 923,209
 84,817
 46,955
 2,832,244
Grand Total $209,961
 $3,441,273
 $1,874,532
 $206,972
 $122,348
 $5,855,086

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

  
Residential Mortgages(1)(3)
December 31, 2016 
N/A (2)
 LTV<=70% 70.01-80% 80.01-90% 90.01-100% 100.01-110% LTV>110% Grand Total
FICO Score (dollars in thousands)
N/A(2)
 $696,730
 $102,911
 $4,635
 $2,327
 $196
 $150
 $—
 $806,949
<600 80
 228,794
 70,793
 49,253
 30,720
 6,622
 5,885
 392,147
600-639 147
 152,728
 48,006
 42,443
 42,356
 4,538
 6,675
 296,893
640-679 98
 283,054
 101,495
 81,669
 93,552
 5,287
 4,189
 569,344
680-719 112
 487,257
 193,351
 136,937
 146,090
 6,766
 11,795
 982,308
720-759 56
 767,192
 348,524
 163,163
 178,264
 8,473
 16,504
 1,482,176
>=760 495
 2,415,542
 860,582
 219,014
 180,841
 11,134
 20,740
 3,708,348
Grand Total $697,718
 $4,437,478
 $1,627,386
 $694,806
 $672,019
 $42,970
 $65,788
 $8,238,165

(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.


32




SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS






NOTE 4.3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)


TDR Loans


The following table summarizes the Company’s performing and non-performing TDRs at the dates indicated:
(in thousands)September 30, 2020December 31, 2019
Performing$3,710,124 $3,646,354 
Non-performing529,073 673,777 
Total (1)
$4,239,197 $4,320,131 
 September 30, 2017 December 31, 2016
 (in thousands)
Performing$5,959,537
 $5,169,788
Non-performing941,936
 937,127
Total$6,901,473
 $6,106,915
(1) Excludes LHFS.

Commercial Loan TDRs

All of the Company’s commercial loan modifications are based on the circumstances of the individual customer, including specific customers' complete relationships with the Company. Loan terms are modified to meet each borrower’s specific circumstances at a point in time and may allow for modifications such as term extensions, interest rate reductions, etc. Modifications for commercial loan TDRs generally, although not always, result in bifurcation of the original loan into A and B notes. The A note is restructured to allow for upgraded risk rating and return to accrual status after a sustained period of payment performance has been achieved (typically six months for monthly payment schedules). The B note, if any, is structured as a deficiency note; the balance is charged off but the debt is usually not forgiven. Commercial TDRs are generally placed on non-accrual status until the Company believes repayment under the revised terms is reasonably assured and a sustained period of repayment performance has been achieved (typically six months for a monthly amortizing loan). TDRs are subject to analysis for specific reserves by either calculating the present value of expected future cash flows or, if collateral-dependent, calculating the fair value of the collateral less its estimated cost to sell. The TDR classification will remain on the loan until it is paid in full or liquidated.

Consumer Loan TDRs


The primary modification programdecrease in total non-performing TDRs is primarily due to the significant increase in deferrals granted to borrowers impacted by COVID-19. The additional risk of these deferrals is captured in the ACL for the Company’s residential mortgagethree 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.nine months ended September 30, 2020.

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 fair market value of the collateral, less costs to sell and classified as non-accrual/non-performing loans for the remaining life of the loan.


33


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

Activity by Class of Financing Receivable
The ALLL is established to recognize losses inherent in funded loans intended to be held for investment that are probable and can be reasonably estimated. Prior to loans being placed in TDR status, the Company generally measures its allowance under a loss contingency methodology in which consumer loans with similar risk characteristics are pooled and loss experience information is monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV and credit scores.

Upon TDR modification, the Company generally measures impairment based on a present valueCompany's modifications consist primarily 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 a consumer TDR subsequently defaults, the Company generally measures impairment based on the fair value of the collateral, if applicable, less its estimated cost to sell.

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

34


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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

Financial Impact and TDRs by Concession Type
term extensions. The following tables detail the activity of TDRs for the three-month and nine-month periods ended September 30, 20172020 and September 30, 2016, respectively:2019:
 Three-Month Period Ended September 30, 2020
Number of
Contracts
Pre-TDR Amortized Cost(1)
Post-TDR Amortized Cost(2)
(dollars in thousands)
Commercial: 
CRE20 $33,898 $33,898 
C&I126 22,611 22,631 
Multi-family0 0 0 
Other commercial4 894 894 
Consumer:
Residential mortgages(3)
161 12,422 12,419 
 Home equity loans and lines of credit21 2,189 2,295 
RICs and auto loans14,530 313,816 315,368 
 Personal unsecured loans2 7 0 
 Other consumer356 14,514 14,492 
Total15,220 $400,351 $401,997 
Nine-Month Period Ended September 30, 2020
Number of
Contracts
Pre-TDR Amortized Cost(1)
Post-TDR Amortized Cost(2)
(dollars in thousands)
Commercial:
CRE31 $48,872 $48,872 
C&I515 50,576 50,694 
Multi-family5 51,466 51,466 
Other commercial9 1,011 1,011 
Consumer:
   Residential mortgages(3)
189 16,094 16,234 
Home equity loans and lines of credit71 6,956 7,329 
RICs and auto loans69,385 1,386,389 1,403,939 
Personal unsecured loans4 7 0 
Other consumer1,154 43,089 43,400 
Total71,363 $1,604,460 $1,622,945 
(1) Pre-TDR modification amount is the month-end balance prior to the month in which the modification occurred.
(2) Post-TDR modification amount is the month-end balance for the month in which the modification occurred.
(3) The post-TDR modification amounts for residential mortgages exclude interest reserves.


33



 Three-Month Period Ended September 30, 2017
 Number of
Contracts		 
Pre-TDR Recorded
Investment(1)
 Term Extension
Capitalized(4)
Rate ReductionPrincipal ForbearanceFee Waiver
Other(4)
Post-TDR Recorded Investment(2)
 (dollars in thousands)
Commercial: 
Commercial real estate:           
Corporate Banking18
 $4,632
 $—
$—
$—
$(2)$—
$(125)$4,505
Commercial and industrial252
 3,079
 (3)—
—
—
—
(31)3,045
Consumer:    
  
 
 
Residential mortgages(3)
38
 7,750
 —
357
—
—
—
(769)7,338
 Home equity loans and lines of credit9
 995
 —
—
—
—
—
(29)966
RICs and auto loans - originated67,044
 1,166,434
 (1,228)—
—
—
—
65
1,165,271
RICs - purchased19
 1,057
 4
—
—
—
—
2
1,063
 Personal unsecured loans3,109
 5,330
 —
—
—
—
—
(106)5,224
 Other consumer35
 581
 —
1
—
—
—
(1)581
Total70,524
 $1,189,858
 $(1,227)$358
$—
$(2)$—
$(994)$1,187,993
            
 Nine-Month Period Ended September 30, 2017
 Number of
Contracts		 
Pre-TDR Recorded
Investment(1)
 Term Extension
Capitalized(4)
Rate ReductionPrincipal ForbearanceFee Waiver
Other(4)
Post-TDR Recorded Investment(2)
 (dollars in thousands)
Commercial:           
Commercial real estate:           
Corporate Banking72
 $143,976
 $(13,676)$—
$127
$(13,483)$(38)$(416)$116,490
Middle market commercial real estate1
 19,979
 (595)—
—
—
—
—
19,384
Commercial and industrial639
 15,486
 (10)—
—
—
—
(35)15,441
Consumer:           
Residential mortgages(3)
187
 36,724
 6
698
133
—
—
(1,310)36,251
 Home equity loans and lines of credit45
 3,838
 —
—
—
—
—
509
4,347
RICs and auto loans - originated163,797
 2,870,605
 (2,949)—
—
—
—
(82)2,867,574
RICs - purchased98
 1,447
 (2)



—


—
1,445
 Personal unsecured loans10,999
 18,470
 —
—
—
—
—
(219)18,251
 Other consumer97
 2,385
 —
1
—
—
—
(1)2,385
Total175,935
 $3,112,910
 $(17,226)$699
$260
$(13,483)$(38)$(1,554)$3,081,568
NOTE 3. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)


 Three-Month Period Ended September 30, 2019
Number of
Contracts
Pre-TDR Recorded
Investment(1)
Post-TDR Recorded Investment(2)
(dollars in thousands)
Commercial: 
CRE12 $15,388 $10,061 
C&I23 651 655 
Consumer:
Residential mortgages(3)
29 3,822 3,857 
 Home equity loans and lines of credit30 2,676 3,313 
RICs and auto loans21,553 376,520 378,063 
Personal unsecured loans40 633 659 
 Other consumer28 1,049 1,043 
Total21,715 $400,739 $397,651 
Nine-Month Period Ended September 30, 2019
Number of
Contracts
Pre-TDR Recorded
Investment(1)
Post-TDR Recorded Investment(2)
(dollars in thousands)
Commercial:
CRE37 $60,520 $56,291 
C&I61 1,589 1,593 
Consumer:
Residential mortgages(3)
74 10,497 10,767 
Home equity loans and lines of credit107 10,684 12,041 
RICs and auto loans58,724 1,001,458 1,004,336 
Personal unsecured loans161 1,938 1,972 
Other consumer39 1,406 1,397 
Total59,203 $1,088,092 $1,088,397 
(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month in which the modification occurred.
(2)Post-TDR modification outstanding recorded investment amount is the month-end balance for the month in which the modification occurred.
(3)The post-TDR modification outstanding recorded investment amounts for residential mortgages exclude interest reserves.
(4) Other modifications may include modifications such as fee waivers, or capitalization of fees.

35


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 September 30, 2016
 Number of
Contracts		 
Pre-TDR Recorded
Investment(1)
 Term ExtensionPrincipal Forbearance
Other(4)
Post-TDR Recorded Investment(2)
 (dollars in thousands)
Commercial:        
Commercial real estate:        
 Corporate Banking21
 $53,849
 $10
$(1,342)$(2,927)$49,590
 Middle market commercial real estate1
 500
 —
—
14,607
15,107
 Santander real estate capital—
 —
 —
—
—
—
Commercial and industrial249
 6,475
 —
—
(113)6,362
Consumer:        
Residential mortgages(3)
68
 10,917
 —
—
(408)10,509
 Home equity loans and lines of credit39
 2,637
 (132)—
59
2,564
RICs and auto loans - originated43,632
 798,710
 (122)—
(119)798,469
RICs - purchased10,227
 108,855
 (657)—
(22)108,176
 Personal unsecured loans756
 2,014
 —
—
(90)1,924
 Other consumer255
 5,636
 (2)—
29
5,663
Total55,248
 $989,593
 $(903)$(1,342)$11,016
$998,364
         
         
 Nine-Month Period Ended September 30, 2016
 Number of
Contracts		 
Pre-TDR Recorded
Investment(1)
 Term ExtensionPrincipal Forbearance
Other(4)
Post-TDR Recorded Investment(2)
 (dollars in thousands)
Commercial: 
Commercial real estate:        
 Corporate Banking81
 $213,688
 $(22)$(27,198)$(3,438)$183,030
 Middle market commercial real estate5
 11,326
 —
—
44,483
55,809
  Santander real estate capital1
 8,729
 —
—
(18)8,711
Commercial and industrial815
 26,601
 —
—
(79)26,522
Consumer:        
Residential mortgages(3)
237
 36,354
 (1)—
(3)36,350
 Home equity loans and lines of credit141
 9,680
 —
—
(226)9,454
RICs and auto loans - originated109,896
 2,023,661
 (369)—
(227)2,023,065
RICs - purchased35,072
 407,562
 (1,799)—
(63)405,700
 Personal unsecured loans18,264
 27,639
 —
—
(270)27,369
 Other consumer285
 6,726
 (2)—
(150)6,574
Total164,797
 $2,771,966
 $(2,193)$(27,198)$40,009
$2,782,584
(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.

36


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





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.DPD. For RICs, a TDR is considered to have subsequently defaulted after modification at the earlier of the date of repossession or 120 days past due.DPD. The following table details period-end recorded investmentamortized cost balances of TDRs that became TDRs during the past twelve-month period and have subsequently defaulted during the three-month and nine-month periods ended September 30, 20172020 and September 30, 2016,2019, respectively.
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
2020201920202019
Number of
Contracts
Recorded Investment(1)
Number of
Contracts
Recorded Investment(1)
Number of
Contracts
Recorded Investment(1)
Number of
Contracts
Recorded Investment(1)
(dollars in thousands)(dollars in thousands)
Commercial
CRE2 $3,011 0 $0 34 $8,125 2 $223 
C&I26 905 6 5,956 42 9,165 31 6,801 
Other commercial0 0 0 0 1 45 0 0 
Consumer:  
Residential mortgages3 397 23 2,804 33 5,278 102 10,432 
Home equity loans and lines of credit0 0 9 641 22 3,104 24 1,707 
RICs and auto loans4,353 82,098 5,188 83,531 10,429 182,535 18,073 298,602 
Personal unsecured loans0 0 61 565 0 0 178 1,745 
Other consumer45 1,751 0 0 91 3,558 0 0 
Total4,429 $88,162 5,287 $93,497 10,652 $211,810 18,410 $319,510 
(1)Represents the period-end balance. Does not include Chapter 7 bankruptcy TDRs.
34


 Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 30,
 2017 2016 2017 2016
 Number of
Contracts		 
Recorded Investment(1)
 Number of
Contracts		 
Recorded Investment(1)
 Number of
Contracts		 
Recorded Investment(1)
 Number of
Contracts		 
Recorded Investment(1)
 (dollars in thousands) (dollars in thousands)
Commercial               
Middle Market Commercial Real Estate5
 6,386
 —
 —
 10
 6,825
 —
 —
Commercial and industrial61
 2,210
 76
 2,838
 163
 5,842
 194
 14,223
Consumer:               
Residential mortgages55
 8,594
 5
 579
 175
 23,659
 22
 3,171
Home equity loans and lines of credit2
 47
 19
 2,991
 6
 257
 54
 8,457
RICs and auto loans11,275
 199,045
 12,112
 208,762
 34,496
 606,327
 35,299
 588,127
Unsecured loans731
 2,029
 719
 1,676
 2,667
 6,769
 3,594
 5,048
Other consumer7
 58
 263
 766
 29
 334
 263
 766
Total12,136
 $218,369
 13,194
 $217,612
 37,546
 $650,013
 39,426
 $619,792

(1)The recorded investment represents the period-end balance at September 30, 2017 and 2016. Does not include Chapter 7 bankruptcy TDRs.


NOTE 5.4. OPERATING LEASE ASSETS, NET


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


Lease extensions granted by the Company are not treated as modifications.Income continues to accrue during the extension period and remaining lease payments are recorded on a straight-line basis over the modified lease term.

Operating lease assets, net consisted of the following as of September 30, 20172020 and December 31, 2016:2019:

(in thousands)September 30, 2020December 31, 2019
Leased vehicles$21,795,939 $21,722,726 
Less: accumulated depreciation(4,694,217)(4,159,944)
Depreciated net capitalized cost17,101,722 17,562,782 
Manufacturer subvention payments, net of accretion(972,778)(1,177,342)
Origination fees and other costs66,432 76,542 
Leased vehicles, net16,195,376 16,461,982 
Commercial equipment vehicles and aircraft, gross28,899 41,154 
Less: accumulated depreciation(6,322)(7,397)
Commercial equipment vehicles and aircraft, net
22,577 33,757 
Total operating lease assets, net$16,217,953 $16,495,739 
  September 30, 2017 December 31, 2016
  (in thousands)
Leased vehicles $14,391,725
 $13,603,494
Origination fees and other costs 28,507
 23,141
Manufacturer subvention payments (1,112,522) (1,126,323)
Leased vehicles, gross 13,307,710
 12,500,312
Less: accumulated depreciation (2,979,073) (2,811,855)
Leased vehicles, net 10,328,637
 9,688,457
     
Commercial equipment vehicles and aircraft, gross 86,910
 65,401
Less: accumulated depreciation (14,987) (6,635)
Commercial equipment vehicles and aircraft, net 71,923
 58,766
     
Total operating lease assets, net $10,400,560
 $9,747,223

37


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 5. OPERATING LEASE ASSETS, NET (continued)

Periodically, the Company executes bulk sales of leases originated under the Chrysler Capital program. During the three-month and nine-month periods ended September 30, 2017 and September 30, 2016, the Company did not execute any bulk sales of leases originated under the Chrysler Capital program.


The following summarizes the future minimum rental payments due to the Company as lessor under operating leases as of September 30, 20172020 (in thousands):

2020$746,384 
20212,306,840 
20221,221,406 
2023430,908 
202410,197 
Thereafter7,817 
Total$4,723,552 

During the three-month and nine-month periods ended September 30, 2020, the Company recognized $120.4 million and $170.5 million, respectively, of net gains on the sale of operating lease assets that had been returned to the Company at the end of the lease term compared to $48.5 million and $121.0 million for the corresponding periods in 2019. These amounts are recorded within Miscellaneous income, net in the Company's Condensed Consolidated Statements of Operations.


NOTE 5. GOODWILL AND OTHER INTANGIBLES

Goodwill

Goodwill is assigned to reporting units, which are operating segments or one level below an operating segment, as of the acquisition date. The following table presents activity in the Company's goodwill by its reporting units for the nine-month period ended September 30, 2020:
(in thousands)CBBC&ICRE & VFCIBSCTotal
Goodwill at December 31, 2019$1,880,304 $317,924 $1,095,071 $131,130 $1,019,960 $4,444,389 
Impairment during the period(1,557,384)(290,844)0 0 0 (1,848,228)
Goodwill at September 30, 2020$322,920 

$27,080 $1,095,071 

$131,130 

$1,019,960 

$2,596,161 

There were no changes to the Company's reportable segments during the nine-month period ended September 30, 2020. Refer to Note 17 to these Consolidated Financial Statements for additional details on the Company's reportable segments.

35



   
2017 $496,600
2018 1,516,400
2019 859,503
2020 219,541
2021 4,282
Thereafter —
Total $3,096,326
NOTE 5. GOODWILL AND OTHER INTANGIBLES (continued)


LeaseThe Company made a change in its commercial banking reportable segments beginning January 1, 2019 and, accordingly, re-allocated goodwill previously attributed to commercial banking to the related C&I and CRE&VF reporting units based on the estimated fair value of each reporting unit at January 1, 2019. Upon re-allocation, management tested the new reporting units for impairment using the same methodology and assumptions used in the October 1, 2018 goodwill impairment test, and noted that there was 0 impairment.

The Company evaluates goodwill for impairment at the reporting unit level. The Company completes its annual goodwill impairment test as of October 1 each year. The Company conducted its last annual goodwill impairment tests as of October 1, 2019 using generally accepted valuation methods.

The Company continually assesses whether or not there have been events requiring a review of goodwill. During the second quarter of 2020, primarily due to the ongoing economic impacts of the COVID-19 pandemic, the Company determined that a goodwill triggering event occurred for the CBB, C&I, and CRE & VF reporting units. These second quarter triggering events are in addition to the CBB triggering event during the first quarter of 2020, whereby the estimated fair value of CBB exceeded its carrying value by less than 5%.

Based on its goodwill impairment analysis performed as of June 30, 2020, the Company concluded that a goodwill impairment charge of $1.6 billion and $290.8 million was required for the CBB and C&I reporting units, respectively. The CRE & VF reporting unit’s estimated fair value exceeded its carrying value by less than 5%. The goodwill allocated to these reporting units has become more sensitive to impairment as the valuation is highly correlated with forecasted interest rates, credit costs, and other factors. A risk of further impairment or impairment to additional reporting units exists in subsequent quarters if the reporting unit’s operating environment does not return to a more normalized status in the foreseeable future.

In prior annual goodwill impairment assessments, the Company determined that an equal weighting of the market and income approach valuation methods provided a reliable fair value estimate. In light of the significant market volatility arising from the continued impacts of the COVID-19 pandemic and the responses to the pandemic from multiple government agencies, the Company determined to give only a 25% weighting to the market approach in estimating the second quarter fair value of CBB, C&I, and CRE & VF, which is consistent with the approach used during the first quarter interim impairment assessment of CBB. The Company continued to analyze implied market multiples to support the valuation under the market approach.

There were no disposals, additions or impairments of goodwill for the three-month and nine-month periods ended September 30, 20172019.

Other Intangible Assets

The following table details amounts related to the Company's intangible assets subject to amortization for the dates indicated.
 September 30, 2020December 31, 2019
(in thousands)Net Carrying
Amount		Accumulated
Amortization		Net Carrying
Amount		Accumulated
Amortization
Intangibles subject to amortization:
Dealer networks$318,571 $(261,429)$347,982 $(232,018)
Chrysler relationship38,750 (100,000)50,000 (88,750)
Trade name12,600 (5,400)13,500 (4,500)
Other intangibles2,077 (55,097)4,722 (52,450)
Total intangibles subject to amortization$371,998 $(421,926)$416,204 $(377,718)

At September 30, 2020 and December 31, 2019, the Company did 0t have any intangibles, other than goodwill, that were not subject to amortization.

Amortization expense on intangible assets was $509.7$14.7 million and $1.5 billion, respectively, compared to $483.9$44.2 million, and $1.4 billion, respectively, for the three-month and nine-month periods ended September 30, 2016.2020, respectively, and $14.7 million and $44.3 million for the corresponding periods in 2019, respectively.


Lease
36



NOTE 5. 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:
YearCalendar Year AmountRecorded To DateRemaining Amount To Record
(in thousands)
2020$58,661 $44,211 $14,450 
202139,904 — 39,904 
202239,901 — 39,901 
202328,649 — 28,649 
202424,792 — 24,792 
Thereafter224,302 — 224,302 


NOTE 6. OTHER ASSETS

The following is a detail of items that comprised Other assets at September 30, 2020 and December 31, 2019:
(in thousands)September 30, 2020December 31, 2019
Operating lease ROU assets$576,691 $656,472 
Deferred tax assets0 503,681 
Accrued interest receivable660,348 545,148 
Derivative assets at fair value1,403,599 555,880 
Other repossessed assets252,778 217,184 
Equity method investments270,990 271,656 
MSRs81,776 132,683 
OREO43,015 66,828 
Income tax receivables236,962 272,699 
Prepaid expense332,688 352,331 
Miscellaneous assets and receivables
566,195 629,654 
Total other assets$4,425,042 $4,204,216 

Operating lease ROU assets

We have operating leases for real estate and non-real estate assets. Real estate leases relate to office space and bank/lending retail branches. Non-real estate leases include data centers, ATMs, vehicles and certain equipment leases. Real estate leases may include one or more options to renew, with renewal terms that can extend the lease term generally from one to five years. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

For the three-month and nine-month periods ended September 30, 2017 was $409.42020, operating lease expenses were $36.8 million and $1.1 billion,$112.6 million, respectively, compared to $338.1$35.8 million and $953.1$110.0 million for the corresponding periods in 2019. Sublease income was $0.7 million and $3.3 million, respectively, for the three-month and nine-month periods ended September 30, 2016.2020 compared to $1.1 million and $3.0 million for the corresponding periods in 2019. These are reported within Occupancy and equipment expenses in the Company’s Condensed Consolidated Statements of Operations.


37




NOTE 6. VARIABLE INTEREST ENTITIESOTHER ASSETS (continued)


Supplemental balance sheet information related to leases was as follows:
Maturity of Lease Liabilities at September 30, 2020Total Operating leases
(in thousands)
2020$36,423 
2021132,421 
2022121,301 
2023109,015 
202495,345 
Thereafter207,511 
Total lease liabilities$702,016 
Less: Interest(63,824)
Present value of lease liabilities$638,192 

Supplemental Balance Sheet InformationSeptember 30, 2020December 31, 2019
Operating lease ROU assets$576,691 $656,472 
Other liabilities638,192 711,666 
Weighted-average remaining lease term (years)6.67.1
Weighted-average discount rate2.9 %3.1 %

Nine-Month Period Ended September 30,
Other Information20202019
(in thousands)
Operating cash flows from operating leases(1)
$(105,497)$(98,110)
Leased assets obtained in exchange for new operating lease liabilities$34,921 $813,090 
(1) Activity is included within the net change in other liabilities on the Consolidated SCF.

The Company made approximately $3.0 million and $2.9 million in payments during the nine-month periods ended September 30, 2020 and 2019, respectively, to Santander for rental of certain office space. The related ROU assets and lease liabilities were approximately $9.8 million and $14.2 million at September 30, 2020 and 2019, respectively.

The remainder of Other assets is comprised of:

•Deferred tax asset, net - Refer to Note 14 of these Condensed Consolidated Financial Statements for more information on tax-related activities.
•Derivative assets at fair value - Refer to the "Offsetting of Financial Assets" table in Note 11 to these Condensed Consolidated Financial Statements for the detail of these amounts.
•Equity method investments - The Company makes certain equity investments in various limited partnerships, some of which are considered VIEs, that invest in and lend to qualified community development entities, such as renewable energy investments, through the NMTC and CRA programs. The Company acts only in a limited partner capacity in connection with these partnerships, so the Company has determined that it is not the primary beneficiary of the partnerships because it does not have the power to direct the activities of the partnerships that most significantly impact the partnerships' economic performance.
•MSRs - See further discussion on the valuation of the MSRs in Note 12.
•Income tax receivables - Refer to Note 14 of these Condensed Consolidated Financial Statements for more information on tax-related activities.
•OREO and Other repossessed assets includes property and vehicles recovered through foreclosure and repossession.
•Miscellaneous assets and receivables includes subvention receivables in connection with the agreement with Chrysler Capital, investment and capital market receivables, derivatives trading receivables, and unapplied payments.

38




NOTE 7. VIEs


The Company transfers RICs and leased vehiclesvehicle leases into newly formed Trusts that then issue one or more classes of notes payable backed by the collateral. The Company’s continuing involvement with these Trusts is in the form of servicing the assets and, generally, through holding residual interests in the Trusts. The Trusts are considered VIEs under GAAP, and the Company may or may not consolidate these VIEs on theits Condensed Consolidated Balance Sheets.


For further description of the Company'sCompany’s securitization activities, involvement with VIEs and accounting policies regarding consolidation of VIEs, see Part II, Item 8 - Financial Statements and Supplementary Data Note 7 ofin the 2016Company's 2019 Annual Report on Form 10-K.


On-balance sheet VIEsOther Intangible Assets


The assets of consolidated VIEs that are included infollowing table details amounts related to the Company's Condensed Consolidated Financial Statements, presented reflectingintangible assets subject to amortization for the 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:dates indicated.

 September 30, 2020December 31, 2019
(in thousands)Net Carrying
Amount		Accumulated
Amortization		Net Carrying
Amount		Accumulated
Amortization
Intangibles subject to amortization:
Dealer networks$318,571 $(261,429)$347,982 $(232,018)
Chrysler relationship38,750 (100,000)50,000 (88,750)
Trade name12,600 (5,400)13,500 (4,500)
Other intangibles2,077 (55,097)4,722 (52,450)
Total intangibles subject to amortization$371,998 $(421,926)$416,204 $(377,718)
38


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 6. VARIABLE INTEREST ENTITIES (continued)

  September 30, 2017 December 31, 2016
  (in thousands)
Assets    
Restricted cash $1,969,094
 $2,087,177
Loans(1)(2)
 22,592,031
 23,568,066
Operating lease assets, net 9,931,283
 8,564,628
Various other assets 634,338
 686,253
Total Assets $35,126,746
 $34,906,124
Liabilities    
Notes payable(2)
 $28,654,850
 $31,667,976
Various other liabilities 153,942
 91,234
Total Liabilities $28,808,792
 $31,759,210

(1) Includes $832.4 million and $1.0 billion of RICs held for sale atAt September 30, 20172020 and December 31, 2016, 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,2019, the Company retains one or more of the lowest tranches of bonds. Ratherdid 0t have any intangibles, other than showing investment in bonds as an assetgoodwill, that were not subject to amortization.

Amortization expense on intangible assets was $14.7 million and the associated debt as a liability, these amounts are eliminated in consolidation as required by GAAP.

The Company retains servicing responsibility$44.2 million, for receivables transferred to the Trusts and receives a monthly servicing fee on the outstanding principal balance. Supplemental fees, such as late charges, for servicing the receivables are reflected in miscellaneous income. As of September 30, 2017 and December 31, 2016, the Company was servicing $26.2 billion and $27.4 billion, respectively, of RICs that have been transferred to consolidated Trusts. The remainder of the Company’s RICs remains unpledged.

Below is a summary of the cash flows received from the on-balance sheet Trusts for the periods indicated:
  Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 30,
  2017 2016 2017 2016
  (in thousands)
Assets securitized $2,998,430
 $2,043,114
 $15,395,158
 $12,026,706
         
Net proceeds from new securitizations (1)
 $2,936,719
 $1,688,822
 $11,998,611
 $9,509,135
Net proceeds from sale of retained bonds —
 —
 273,733
 128,798
Cash received for servicing fees (2)
 228,131
 200,634
 653,048
 595,070
Net distributions from Trusts (2)
 666,179
 776,306
 2,073,965
 2,167,512
Total cash received from Trusts $3,831,029
 $2,665,762
 $14,999,357
 $12,400,515
(1) Includes additional advances on existing securitizations.
(2) These amounts are not reflected in the accompanying Condensed Consolidated Statements of Cash Flows because the cash flows are between the VIEs and other entities included in the consolidation.

Off-balance sheet VIEs

During the three-month and nine-month periods ended September 30, 2017, the Company sold $1.3 billion2020, respectively, and $2.6 billion of gross RICs to VIEs in off-balance sheet securitizations for a loss of $6.8$14.7 million and $13.0$44.3 million for the corresponding periods in 2019, respectively.

36



NOTE 5. GOODWILL AND OTHER INTANGIBLES (continued)

The transaction was executed underestimated aggregate amortization expense related to intangibles, excluding any impairment charges, for each of the new securitization platformfive succeeding calendar years ending December 31 is:
YearCalendar Year AmountRecorded To DateRemaining Amount To Record
(in thousands)
2020$58,661 $44,211 $14,450 
202139,904 — 39,904 
202239,901 — 39,901 
202328,649 — 28,649 
202424,792 — 24,792 
Thereafter224,302 — 224,302 


NOTE 6. OTHER ASSETS

The following is a detail of items that comprised Other assets at September 30, 2020 and December 31, 2019:
(in thousands)September 30, 2020December 31, 2019
Operating lease ROU assets$576,691 $656,472 
Deferred tax assets0 503,681 
Accrued interest receivable660,348 545,148 
Derivative assets at fair value1,403,599 555,880 
Other repossessed assets252,778 217,184 
Equity method investments270,990 271,656 
MSRs81,776 132,683 
OREO43,015 66,828 
Income tax receivables236,962 272,699 
Prepaid expense332,688 352,331 
Miscellaneous assets and receivables
566,195 629,654 
Total other assets$4,425,042 $4,204,216 

Operating lease ROU assets

We have operating leases for real estate and non-real estate assets. Real estate leases relate to office space and bank/lending retail branches. Non-real estate leases include data centers, ATMs, vehicles and certain equipment leases. Real estate leases may include one or more options to renew, with Santander, Santander Prime Auto Issuing Note (“SPAIN"). Santander will hold eligible vertical interests in notesrenewal terms that can extend the lease term generally from one to five years. ROU assets represent our right to use an underlying asset for the lease term and certificates of not less than 5%lease liabilities represent our obligation to comply withmake lease payments arising from the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DFA”) risk retention rules. lease.

For the three-month and nine-month periods ended September 30, 2016,2020, operating lease expenses were $36.8 million and $112.6 million, respectively, compared to $35.8 million and $110.0 million for the Company executed no off-balance sheet securitizations with VIEscorresponding periods in which it has continuing involvement.2019. Sublease income was $0.7 million and $3.3 million, respectively, for three-month and nine-month periods ended September 30, 2020 compared to $1.1 million and $3.0 million for the corresponding periods in 2019. These are reported within Occupancy and equipment expenses in the Company’s Condensed Consolidated Statements of Operations.



39
37





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 6. VARIABLE INTEREST ENTITIESOTHER ASSETS (continued)


As of September 30, 2017 and December 31, 2016, the CompanySupplemental balance sheet information related to leases was servicing $4.0 billion and $2.7 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:
Maturity of Lease Liabilities at September 30, 2020Total Operating leases
(in thousands)
2020$36,423 
2021132,421 
2022121,301 
2023109,015 
202495,345 
Thereafter207,511 
Total lease liabilities$702,016 
Less: Interest(63,824)
Present value of lease liabilities$638,192 
  September 30, 2017 December 31, 2016
 (in thousands)
SPAIN $2,265,206
 $—
Total serviced for related parties 2,265,206
 —
     
Chrysler Capital securitizations 1,690,729
 2,472,756
Other third parties —
 268,345
Total serviced for third parties 1,690,729
 2,741,101
Total serviced for other portfolio $3,955,935
 $2,741,101


Supplemental Balance Sheet InformationSeptember 30, 2020December 31, 2019
Operating lease ROU assets$576,691 $656,472 
Other liabilities638,192 711,666 
Weighted-average remaining lease term (years)6.67.1
Weighted-average discount rate2.9 %3.1 %

Nine-Month Period Ended September 30,
Other Information20202019
(in thousands)
Operating cash flows from operating leases(1)
$(105,497)$(98,110)
Leased assets obtained in exchange for new operating lease liabilities$34,921 $813,090 
(1) Activity is included within the net change in other liabilities on the Consolidated SCF.

The Company made approximately $3.0 million and $2.9 million in payments during the nine-month periods ended September 30, 2020 and 2019, respectively, to Santander for rental of certain office space. The related ROU assets and lease liabilities were approximately $9.8 million and $14.2 million at September 30, 2020 and 2019, respectively.

The remainder of Other than repurchasesassets is comprised of:

•Deferred tax asset, net - Refer to Note 14 of soldthese Condensed Consolidated Financial Statements for more information on tax-related activities.
•Derivative assets dueat fair value - Refer to standard representationsthe "Offsetting of Financial Assets" table in Note 11 to these Condensed Consolidated Financial Statements for the detail of these amounts.
•Equity method investments - The Company makes certain equity investments in various limited partnerships, some of which are considered VIEs, that invest in and warranties,lend to qualified community development entities, such as renewable energy investments, through the NMTC and CRA programs. The Company acts only in a limited partner capacity in connection with these partnerships, so the Company has no exposuredetermined that it is not the primary beneficiary of the partnerships because it does not have the power to loss as a resultdirect the activities of itsthe partnerships that most significantly impact the partnerships' economic performance.
•MSRs - See further discussion on the valuation of the MSRs in Note 12.
•Income tax receivables - Refer to Note 14 of these Condensed Consolidated Financial Statements for more information on tax-related activities.
•OREO and Other repossessed assets includes property and vehicles recovered through foreclosure and repossession.
•Miscellaneous assets and receivables includes subvention receivables in connection with the agreement with Chrysler Capital, investment and capital market receivables, derivatives trading receivables, and unapplied payments.

38




NOTE 7. VIEs

The Company transfers RICs and vehicle leases into newly formed Trusts that then issue one or more classes of notes payable backed by the collateral. The Company’s continuing involvement with these VIEs.Trusts is in the form of servicing the assets and, generally, through holding residual interests in the Trusts. The Trusts are considered VIEs under GAAP, and the Company may or may not consolidate these VIEs on its Condensed Consolidated Balance Sheets.


A summaryFor further description of the cash flows received from the off-balance sheet Trusts for the periods indicated is as follows:
  Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 30,
  2017 2016 2017 2016
  (in thousands)
Assets securitized (1)
 $1,347,010
 $—
 $2,583,341
 $—
         
Net proceeds from new securitizations $1,347,430
 $—
 $2,588,227
 $—
Cash received for servicing fees 12,309
 10,027
 25,677
 38,885
Total cash received from Trusts $1,359,739
 $10,027
 $2,613,904
 $38,885

(1) Represents the UPB at the timeCompany’s securitization activities, involvement with VIEs and accounting policies regarding consolidation of original securitization.


NOTE 7. GOODWILL AND OTHER INTANGIBLES

Goodwill

The following table presentsVIEs, see Part II, Item 8 - Financial Statements and Supplementary Data Note 7 in the Company's goodwill by its reporting units at September 30, 2017:2019 Annual Report on Form 10-K.

  Consumer and Business Banking Commercial Real Estate Commercial Banking Global Corporate Banking SC Santander BanCorp Total
  (in thousands)
Goodwill at September 30, 2017 $1,880,303

$870,411

$542,584

$131,130

$1,019,960

$10,537

$4,454,925

There were no impairments, additions, or re-allocations of goodwill for the Nine-Month Period Ended September 30, 2017.

The Company, including its Santander BanCorp subsidiary, conducted its last annual goodwill impairment tests as of October 1, 2016 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.


40


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 7. GOODWILL AND OTHER INTANGIBLES (continued)

Other Intangible Assets

The following table details amounts related to the Company's intangible assets subject to amortization for the dates indicated.
 September 30, 2020December 31, 2019
(in thousands)Net Carrying
Amount		Accumulated
Amortization		Net Carrying
Amount		Accumulated
Amortization
Intangibles subject to amortization:
Dealer networks$318,571 $(261,429)$347,982 $(232,018)
Chrysler relationship38,750 (100,000)50,000 (88,750)
Trade name12,600 (5,400)13,500 (4,500)
Other intangibles2,077 (55,097)4,722 (52,450)
Total intangibles subject to amortization$371,998 $(421,926)$416,204 $(377,718)
 September 30, 2017 December 31, 2016
 
Net
Carrying
Amount
 
Accumulated
Amortization
 
Net
Carrying
Amount
 
Accumulated
Amortization
 (in thousands)
Intangibles subject to amortization:       
Dealer networks$436,214
 $(143,786) $465,625
 $(114,375)
Chrysler relationship83,750
 (55,000) 95,000
 (43,750)
Core deposit intangibles—
 —
 —
 (295,842)
Trade name16,200
 (1,800) 17,100
 (900)
Other intangibles14,877
 (54,654) 19,519
 (98,492)
Total intangibles subject to amortization$551,041
 $(255,240) $597,244
 $(553,359)


At September 30, 20172020 and December 31, 2016,2019, the Company did not0t have any intangibles, other than goodwill, that were not subject to amortization.


Amortization expense on intangible assets was $15.3$14.7 million and $46.2 million and $17.2 million and $52.9$44.2 million, for the three-month and nine-month periods ended September 30, 20172020, respectively, and September 30, 2016,$14.7 million and $44.3 million for the corresponding periods in 2019, 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.
36




NOTE 5. 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:
YearCalendar Year AmountRecorded To DateRemaining Amount To Record
(in thousands)
2020$58,661 $44,211 $14,450 
202139,904 — 39,904 
202239,901 — 39,901 
202328,649 — 28,649 
202424,792 — 24,792 
Thereafter224,302 — 224,302 


Year Calendar Year Amount Recorded To Date Remaining Amount To Record
  (in thousands)
2017 $61,491
 $46,204
 $15,287
2018 60,644
 —
 60,644
2019 58,975
 —
 58,975
2020 58,642
 —
 58,642
2021 55,603
 —
 55,603
Thereafter 301,890
 —
 301,890

41


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 8.6. OTHER ASSETS


The following is a detail of items that comprise othercomprised Other assets at September 30, 20172020 and December 31, 2016:2019:
(in thousands)September 30, 2020December 31, 2019
Operating lease ROU assets$576,691 $656,472 
Deferred tax assets0 503,681 
Accrued interest receivable660,348 545,148 
Derivative assets at fair value1,403,599 555,880 
Other repossessed assets252,778 217,184 
Equity method investments270,990 271,656 
MSRs81,776 132,683 
OREO43,015 66,828 
Income tax receivables236,962 272,699 
Prepaid expense332,688 352,331 
Miscellaneous assets and receivables
566,195 629,654 
Total other assets$4,425,042 $4,204,216 

Operating lease ROU assets

We have operating leases for real estate and non-real estate assets. Real estate leases relate to office space and bank/lending retail branches. Non-real estate leases include data centers, ATMs, vehicles and certain equipment leases. Real estate leases may include one or more options to renew, with renewal terms that can extend the lease term generally from one to five years. ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease.

For the three-month and nine-month periods ended September 30, 2020, operating lease expenses were $36.8 million and $112.6 million, respectively, compared to $35.8 million and $110.0 million for the corresponding periods in 2019. Sublease income was $0.7 million and $3.3 million, respectively, for three-month and nine-month periods ended September 30, 2020 compared to $1.1 million and $3.0 million for the corresponding periods in 2019. These are reported within Occupancy and equipment expenses in the Company’s Condensed Consolidated Statements of Operations.

37



  September 30, 2017 December 31, 2016
  (in thousands)
Income tax receivables $319,045
 $294,796
Derivative assets at fair value 431,267
 413,779
Other repossessed assets 159,468
 177,592
MSRs 146,958
 150,343
Prepaid expenses 160,222
 172,559
Other real estate owned ("OREO") 146,362
 116,705
Deferred tax asset, net 958,214
 989,767
Miscellaneous assets and receivables 770,730
 567,327
Total other assets $3,092,266
 $2,882,868
NOTE 6. OTHER ASSETS (continued)


IncomeSupplemental balance sheet information related to leases was as follows:
Maturity of Lease Liabilities at September 30, 2020Total Operating leases
(in thousands)
2020$36,423 
2021132,421 
2022121,301 
2023109,015 
202495,345 
Thereafter207,511 
Total lease liabilities$702,016 
Less: Interest(63,824)
Present value of lease liabilities$638,192 

Supplemental Balance Sheet InformationSeptember 30, 2020December 31, 2019
Operating lease ROU assets$576,691 $656,472 
Other liabilities638,192 711,666 
Weighted-average remaining lease term (years)6.67.1
Weighted-average discount rate2.9 %3.1 %

Nine-Month Period Ended September 30,
Other Information20202019
(in thousands)
Operating cash flows from operating leases(1)
$(105,497)$(98,110)
Leased assets obtained in exchange for new operating lease liabilities$34,921 $813,090 
(1) Activity is included within the net change in other liabilities on the Consolidated SCF.

The Company made approximately $3.0 million and $2.9 million in payments during the nine-month periods ended September 30, 2020 and 2019, respectively, to Santander for rental of certain office space. The related ROU assets and lease liabilities were approximately $9.8 million and $14.2 million at September 30, 2020 and 2019, respectively.

The remainder of Other assets is comprised of:

•Deferred tax receivablesasset, net - Refer to Note 14 of these Condensed Consolidated Financial Statements for more information on tax-related activities.

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"Offsetting of financial assetsFinancial Assets" table in Note 11 to these Condensed Consolidated Financial Statements for the detail of these amounts.

MSRs

Residential real estate

•Equity method investments - The Company maintains an MSR asset for sold residential real estate loans serviced for others. At September 30, 2017makes certain equity investments in various limited partnerships, some of which are considered VIEs, that invest in and December 31, 2016,lend to qualified community development entities, such as renewable energy investments, through the balance of these loans serviced for others accounted for at fair value was $15.1 billionNMTC and $15.4 billion, respectively.CRA programs. The Company accounts foracts only in a majority of its residential MSRs usinglimited partner capacity in connection with these partnerships, so the FVO. Changes in fair value are recorded throughCompany has determined that it is not the Mortgage banking income, net lineprimary beneficiary of the Condensed Consolidated Statements of Operations. The fair valuepartnerships because it does not have the power to direct the activities of the partnerships that most significantly impact the partnerships' economic performance.
•MSRs at September 30, 2017 and December 31, 2016 was $143.5 million and $146.6 million, respectively.- See further discussion on the valuation of the MSRs in Note 16. As deemed appropriate, the Company economically hedges MSRs using interest rate swaps and forward contracts12.
•Income tax receivables - Refer to purchase MBS. See further discussion on these derivative activities in Note 11 to14 of these Condensed Consolidated Financial Statements. The remainder of MSRs not accountedStatements for using the FVO are accounted for at lower of cost or market.more information on tax-related activities.

For the three-month•OREO and nine-month periods ended September 30, 2017, the Company recorded net changes in the fair value of MSRs due to valuation totaling $(1.6) million and $(1.3) million, respectively, compared to $7.7 million and $(18.1) million for the corresponding periods in 2016.

The following table presents a summary of activity for the Company's residential MSRs that are included in the Condensed Consolidated Balance Sheets.

42


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 8. OTHER ASSETS (continued)

 Three-Month Period Ended Nine-Month Period Ended
 September 30, 2017 September 30, 2016 September 30, 2017 September 30, 2016
 (in thousands)
Fair value at beginning of period(1)
$146,091
 $117,792
 $146,589
 $147,233
Mortgage servicing assets recognized4,099
 6,057
 12,696
 14,450
Principal reductions(5,088) (5,446) (14,446) (17,456)
Change in fair value due to valuation assumptions(1,578) 7,711
 (1,315) (18,113)
Fair value at end of period(1)
$143,524
 $126,114
 $143,524
 $126,114

(1) The Company had total MSRs of $147.0 million and $150.3 million as of September 30, 2017, and December 31, 2016, respectively. The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or market and are not presented within this table.

Fee income and gain on sale of mortgage loans

Included in Mortgage banking income, net on the Condensed Consolidated Statements of Operations was mortgage servicing fee income of $10.2 million and $31.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $10.8 million and $32.4 million for the corresponding periods in 2016. The Company had gains on sales of mortgage loans included in Mortgage banking income, net on the Condensed Consolidated Statements of Operations of $13.6 million and $19.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $8.0 million and $18.1 million for the corresponding periods in 2016.

Other repossessed assets includes property and OREOvehicles recovered through foreclosure and repossession.

Other repossessed assets primarily consist of SC's vehicle inventory, which is obtained through repossession. OREO consists primarily of the Company's foreclosed properties.

Deferred tax assets, net

The Company recorded $958.2 million of deferred tax assets, net as of September 30, 2017, compared to $989.8 million at December 31, 2016.

Miscellaneous assets and receivables

•Miscellaneous assets and receivables includes subvention receivables in connection with the agreement with Chrysler Agreement,Capital, investment and capital market receivables, derivatives trading receivables, and unapplied payments.

38




NOTE 7. VIEs

The third quarter increaseCompany transfers RICs and vehicle leases into newly formed Trusts that then issue one or more classes of notes payable backed by the collateral. The Company’s continuing involvement with these Trusts is in the form of servicing the assets and, generally, through holding residual interests in the Trusts. The Trusts are considered VIEs under GAAP, and the Company may or may not consolidate these VIEs on its Condensed Consolidated Balance Sheets.

For further description of the Company’s securitization activities, involvement with VIEs and accounting policies regarding consolidation of VIEs, see Part II, Item 8 - Financial Statements and Supplementary Data Note 7 in the Company's 2019 Annual Report on Form 10-K.

On-balance sheet VIEs

The assets of consolidated VIEs that are included in the Company's Condensed Consolidated Financial Statements presented based upon the legal transfer of the underlying assets in order to reflect legal ownership, and that can be used only to settle obligations of the consolidated VIEs and the liabilities of those entities for which creditors (or beneficial interest holders) do not have recourse to the Company's general credit, were as follows(1):
(in thousands)September 30, 2020December 31, 2019
Assets
Restricted cash$1,763,252 $1,629,870 
Loans HFI22,711,254 26,532,328 
Operating lease assets, net16,195,376 16,461,982 
Various other assets870,229 625,359 
Total Assets$41,540,111 $45,249,539 
Liabilities
Notes payable$31,265,215 $34,249,851 
Various other liabilities117,997 188,093 
Total Liabilities$31,383,212 $34,437,944 
(1) Certain amounts shown above are greater than the amounts shown in the corresponding line items in the accompanying Condensed Consolidated Balance Sheets due to intercompany eliminations between the VIEs and other entities consolidated by the Company. For example, for most of its securitizations, the Company retains one or more of the lowest tranches of bonds. Rather than showing investment in bonds as an asset and the associated debt as a receivableliability, these amounts are eliminated in consolidation as required by GAAP.    

The Company retains servicing rights for trade date sale of $110.0 million at SBNA, $81.0 million relatedreceivables transferred to the Trusts and receives a receivable from customers and brokers associated with unsettled security trades, and $16.4 million related to capital market receivable at SIS, offset by a decreasemonthly servicing fee on the outstanding principal balance. Supplemental fees, such as late charges, for servicing the receivables are reflected in subvention receivables of $59.1 million asMiscellaneous income, net.

As of September 30, 2017.2020 and December 31, 2019, the Company was servicing $27.7 billion and $27.3 billion, respectively, of gross RICs that have been transferred to consolidated Trusts. The remainder of the Company’s RICs remains unpledged.


43
39




NOTE 7. VIEs (continued)

A summary of the cash flows received from the consolidated Trusts for the three-month and nine-month periods ended September 30, 2020 and 2019 is as follows:
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
(in thousands)2020201920202019
Assets securitized$5,282,901 $5,498,705 $15,845,707 $15,340,428 
Net proceeds from new securitizations (1)
$4,662,211 $4,475,722 $11,470,857 $12,232,777 
Net proceeds from sale of retained bonds1,293 2,414 57,286 119,719 
Cash received for servicing fees (2)
242,245 242,801 735,533 740,760 
Net distributions from Trusts (2)
1,173,276 1,018,301 2,730,657 2,689,735 
Total cash received from Trusts$6,079,025 $5,739,238 $14,994,333 $15,782,991 
(1) Includes additional advances on existing securitizations.
(2) These amounts are not reflected in the accompanying Consolidated SCF because the cash flows are between the VIEs and other entities included in the consolidation.

Off-balance sheet VIEs

During the three-month and nine-month periods ended September 30, 2020, SC sold $636.3 million and $1.1 billion, respectively, of gross RICs to third-party investors in off-balance sheet securitizations for a loss of $13.7 million and $40.6 million, respectively. The losses were recorded in Investment losses, net, in the accompanying Condensed Consolidated Statements of Income. There were 0 sales during the three-month and nine-month periods ended September 30, 2019.

As of September 30, 2020 and December 31, 2019, the Company was servicing $2.6 billion and $2.4 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:
(in thousands)September 30, 2020December 31, 2019
Related party SPAIN securitizations$1,418,346 $2,149,008 
Third party SCART serviced securitizations1,032,639 0 
Third party Chrysler Capital securitizations103,579 259,197 
Total serviced for other portfolio$2,554,564 $2,408,205 

Other than repurchases of sold assets due to standard representations and warranties, the Company has 0 exposure to loss as a result of its involvement with these VIEs.

A summary of cash flows received from Trusts for the three-month and nine-month periods ended September 30, 2020 and 2019, respectively, were as follows:
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
(in thousands)2020201920202019
Receivables securitized (1)
$636,301 $0 $1,148,587 $0 
Net proceeds from new securitizations592,455 0 1,052,541 0 
Cash received for servicing fees6,598 7,859 17,856 27,467 
Total cash received from Trusts$599,053 $7,859 $1,070,397 $27,467 
(1) Represents the unpaid principal balance at the time of original securitization.



40
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS






NOTE 9.8. DEPOSITS AND OTHER CUSTOMER ACCOUNTS


Deposits and other customer accounts are summarized as follows:
September 30, 2020December 31, 2019
September 30, 2017 December 31, 2016
Balance Percent of total deposits Balance Percent of total deposits
(in thousands)
(dollars in thousands)(dollars in thousands)BalancePercent of total depositsBalancePercent of total deposits
Interest-bearing demand deposits$8,635,650
 14.0% $11,284,881
 16.8%Interest-bearing demand deposits$10,280,571 14.8 %$10,301,133 15.3 %
Non-interest-bearing demand deposits15,950,662
 25.8% 15,413,609
 22.9%Non-interest-bearing demand deposits18,176,964 26.2 %14,922,974 22.2 %
Savings6,012,896
 9.7% 5,988,852
 8.9%Savings4,648,842 6.7 %5,632,164 8.4 %
Customer repurchase accounts918,033
 1.5% 868,544
 1.3%Customer repurchase accounts366,336 0.5 %407,477 0.6 %
Money market24,625,925
 39.8% 24,511,906
 36.5%Money market31,387,665 45.5 %26,687,677 39.6 %
Certificates of deposit ("CDs")5,734,642
 9.2% 9,172,898
 13.6%
Total Deposits (1)
$61,877,808
 100.0% $67,240,690
 100.0%
CDsCDs4,385,602 6.3 %9,375,281 13.9 %
Total deposits (1)
Total deposits (1)
$69,245,980 100.0 %$67,326,706 100.0 %
(1) Includes foreign deposits, as defined by the FRB, of $9.8$5.4 billion and $10.7$8.9 billion at September 30, 20172020 and December 31, 2016,2019, respectively.


Deposits collateralized by investment securities, loans, and other financial instruments totaled $2.3 billion and $3.0$3.5 billion at September 30, 20172020 and December 31, 2016,2019, respectively.


Demand deposit overdrafts that have been reclassified as loan balances were $46.2$149.0 million and $42.3$79.2 million at September 30, 20172020 and December 31, 2016,2019, respectively.

At September 30, 2020 and December 31, 2019, the Company had $882.7 million and $1.5 billion, respectively, of CDs greater than $250 thousand.



NOTE 10.9. BORROWINGS


Total borrowings and other debt obligations at September 30, 20172020 were $41.4$48.1 billion, compared to $43.5$50.7 billion at December 31, 2016.2019. The Company's debt agreements impose certain limitations on dividends other payments and transactions. The Company is currently in compliance with these limitations.


Periodically, as part of the Company's wholesale funding management, it opportunistically repurchases outstanding borrowings in the open market and subsequently retires the obligations.


Bank

During the first quarter of 2017, the Bank repurchased $881.0 million of its 2.00% senior notes due 2018 and senior floating rate notes due 2018.

During the second quarter of 2017, the Bank repurchased $14.2 million of its real estate investment trust ("REIT") preferred debt.

Subsequent to the third quarter, on October 18, 2017, the Bank repurchased $307.8 million of its 8.75% subordinated notes due 2018. The Bank recorded loss on debt extinguishment related to this repurchase of $14.0 million.


The Bank did not repurchase any outstanding borrowingshad no new securities issuances in the open market during the three- ornine-month periods ended September 30, 2020 and 2019.

During the nine-month period ended September 30, 2016.2020, the Bank repurchased the following borrowings and other debt obligations:

•$126.4 million of its REIT preferred debt.
SHUSA•$1.0 billion prepayment of FHLB advances.


During the first quarternine-month period ended September 30, 2019, the Bank repurchased the following borrowings and other debt obligations:
•$27.9 million of 2017,its subordinated notes due August 2022.
•$21.2 million of its REIT preferred debt.

SHUSA

During the nine-month period ended September 30, 2020, the Company issued $1.0$2.1 billion in aggregate principal amountof debt, consisting of:
•$500.0 million 5.83% senior fixed-rate notes due March 2023 to Santander, an affiliate.
•$447.1 million of its 3.70%senior fixed-rate notes due April 2023.
•$1.0 billion 3.45% senior fixed-rate notes due June 2025.
•$125.0 million 2.0% short-term note due February 2021 to an affiliate.

41



NOTE 9. BORROWINGS (continued)

During the nine-month period ended September 30, 2020, the Company repurchased the following borrowings and other debt obligations:
•$1.0 billion of its 2.65% senior notes due March 2022. The proceedsApril 2020.
•$114.5 million of thesesenior floating rate notes were primarily used for general corporate purposes.due September 2020.



44


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10. BORROWINGS (continued)

During the second quarter of 2017,nine-month period ended September 30, 2019, the Company issued $759.7$2.5 billion of debt, consisting of:
•$1.0 billion of its 3.50% senior notes due 2024,
•$720.9 million in aggregate principal amount of its senior floating rate notes in two separate private offerings. Thesedue 2022.
•$750.0 million of its 2.88% senior fixed rate 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.due 2024 with BSSA, an affiliate.


During the third quarter of 2017,nine-month period ended September 30, 2019, the Company issued $1.24 billion in aggregate principal amountrepurchased the following borrowings and other debt obligations:
•$178.7 million of its senior notes, comprised of an additional $440.0 million of 3.70% senior notes due March 2022 and $800.0 million of 4.40%2.70% senior notes, due May 2027. The Company also repurchased $255.42019.
•$388.7 million of its 3.45% senior notes due in August 2018. In addition, the Company redeemed and extinguished $70.3 million and $10.0 million of its Capital Trust VI junior subordinated debentures due June 2036. The Company did not repurchase any outstanding borrowings in the open market during the three- or nine-month periods ended September 30, 2016.

On October 6, 2017, the Company issued $302.6 million in aggregate principal amount of its senior floating rate notes. Thesenotes, due July 2019.
•$371.0 million of its senior floating rate notes, have a floating rate equal to the three-month LIBOR plus 100 basis points, with a maturity of January 2020. The proceeds of these notes will be used for general corporate purposes.due September 2019.

The Company recorded loss on debt extinguishment related to debt repurchases and early repayments at SHUSA and the Bank of $5.6 million and $16.3 million in total for the three-month and nine-month periods ended September 30, 2017, respectively. During the three-month and nine-month periods ended September 30, 2016, the Company recorded loss on debt extinguishment related to repurchases of FHLB advances of $10.2 million and $88.7 million, respectively.

45


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS




NOTE 10. BORROWINGS (continued)


Parent Company and other IHC EntitiesSubsidiary Borrowings and Debt Obligations


The following table presents information regarding the Parent Company and its subsidiaries' borrowings and other debt obligations at the dates indicated:
 September 30, 2017 December 31, 2016
 Balance 
Effective
Rate
 Balance 
Effective
Rate
 (dollars in thousands)
Parent Company       
Senior notes, due November 2017 (1)
$599,861
 2.93% $599,206
 2.67%
3.45% senior notes, due August 2018244,213
 3.62% 498,604
 3.62%
2.70% senior notes, due May 2019998,060
 2.82% 997,207
 2.82%
2.65% senior notes, due April 2020995,842
 2.82% 994,672
 2.82%
3.70% senior notes, due March 2022 (2)
1,440,039
 3.74% —
 —%
4.50% senior notes, due July 20251,095,324
 4.56% 1,094,955
 4.56%
4.40% senior notes, due July 2027794,838
 4.48% —
 —%
Junior subordinated debentures - Capital Trust VI , due June 2036 (3)
—
 —% 69,798
 7.91%
Common securities - Capital Trust VI (3)
—
 —% 10,000
 7.91%
Junior subordinated debentures - Capital Trust IX, due July 2036149,455
 3.13% 149,434
 2.49%
Common securities - Capital Trust IX4,640
 3.13% 4,640
 2.49%
Senior notes, due July 2019 (4)
388,532
 2.27% —
 —%
Senior notes, due September 2019 (4)
370,730
 2.30% —
 —%
Other IHC Entities       
Overnight Funds Purchase, due within one year, due October 2017580
 1.05% 830
 0.50%
 2.00% subordinated debt, maturing through 204240,793
 2.00% 40,457
 2.00%
Short-term borrowings, due within one year, due October 2017194,000
 1.13% 54,000
 0.63%
Total due to others overnight, due within one year, due October 201715,000
 1.13% 17,000
 0.63%
Short-term borrowings, due within one year, October 201754,471
 0.25% 207,173
 0.25%
Total Parent Company and other subsidiaries' borrowings and other debt obligations$7,386,378
 3.35% $4,737,976
 3.21%

 September 30, 2020December 31, 2019
(dollars in thousands)BalanceEffective
Rate		BalanceEffective
Rate
Parent Company
2.65% senior notes due April 2020$0 0 %$999,502 2.82 %
4.45% senior notes due December 2021604,862 4.61 %604,172 4.61 %
3.70% senior notes due March 2022848,998 3.74 %849,465 3.74 %
3.40% senior notes due January 2023996,980 3.54 %996,043 3.54 %
3.50% senior notes due June 2024996,462 3.60 %995,797 3.60 %
4.50% senior notes due July 20251,096,930 4.56 %1,096,508 4.56 %
4.40% senior notes due July 20271,049,825 4.40 %1,049,813 4.40 %
2.88% senior notes due January 2024 (4)
750,000 2.88 %750,000 2.88 %
5.83% senior notes due March 2023 (4)
500,000 5.83 %0 0 %
3.24% senior notes due November 2026911,870 3.97 %907,844 3.97 %
3.45% senior notes, due June 2025994,599 3.58 %0 0 %
3.50% senior notes, due April 2023447,022 3.52 %0 0 %
Senior notes due September 2020 (2)
0 0 %112,358 3.36 %
Senior notes due June 2022(1)
427,916 2.05 %427,889 3.47 %
Senior notes due January 2023 (3)
720,893 2.29 %720,861 3.29 %
Senior notes due July 2023 (3)
439,007 2.29 %438,962 2.48 %
Short-term borrowing due within one year, with an affiliate124,067 2.00 %0 0 %
Subsidiaries
2.00% subordinated debt maturing through 202011 2.00 %602 2.00 %
Short-term borrowing due within one year, maturing October 20208,000 0.50 %1,831 0.38 %
Total Parent Company and subsidiaries' borrowings and other debt obligations$10,917,442 3.69 %$9,951,647 3.68 %
(1) These notes bear interest at a rate equal to the three-month LIBOR plus 145 basis points per annum.
(2) During the first quarter of 2017, the Company issued $1.0 billion in aggregate principal amount of its 3.70% senior notes due March 2022. During the third quarter of 2017, the Company issued an additional $440.0 million of 3.70% senior notes due March 2022.
(3) The Company redeemed and extinguished $70.3 million and $10.0 million of its Capital Trust VI junior subordinated debentures and common securities due June 2036.
(4) These notes bear interest at a rate equal to the three-month LIBOR plus 100 basis points per annum.

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

(3) This note will bear interest at a rate equal to the three-month LIBOR plus 110 basis points per annum.
(4) These notes are with SHUSA's parent company, Santander.


46
42





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 10.9. 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:
 September 30, 2017 December 31, 2016
 Balance 
Effective
Rate
 Balance 
Effective
Rate
 (dollars in thousands)
2.00% senior notes, due January 2018$77,001
 2.24% $748,143
 2.24%
Senior notes, due January 2018(1)
41,900
 2.35% 249,705
 1.99%
8.750% subordinated debentures, due May 2018 (2)
499,456
 8.92% 498,882
 8.92%
Subordinated term loan, due February 2019111,697
 7.12% 122,313
 6.78%
FHLB advances, maturing through July 20194,550,000
 1.41% 5,950,000
 0.85%
Securities sold under repurchase agreements20,000
 1.35% —
 —%
REIT preferred, due May 2020 (3)
143,814
 13.30% 156,457
 13.46%
Subordinated term loan, due August 202228,524
 8.89% 29,202
 8.35%
     Total Bank borrowings and other debt obligations$5,472,392
 2.58% $7,754,702
 1.92%
 September 30, 2020December 31, 2019
(dollars in thousands)BalanceEffective
Rate		BalanceEffective
Rate
FHLB advances, maturing through May 2022$3,050,000 0.55 %$7,035,000 2.15 %
REIT preferred, callable May 20200 0 %125,943 13.17 %
     Total Bank borrowings and other debt obligations$3,050,000 0.55 %$7,160,943 2.34 %

(1) These notes bear interest at a rate equal to the three-month LIBOR plus 93 basis points per annum.
(2) On October 18, 2017 the Bank repurchased $307.8 million of its 8.75% subordinated notes due 2018.
(3) During the second quarter of 2017, the Company repurchased $14.2 million of the REIT preferred notes.


The Bank had outstanding irrevocable letters of credit totaling $762.5$280.0 million from the FHLB of Pittsburgh at September 30, 2017,2020 used to secure uninsured deposits placed with the Bank by state and local governments and their political subdivisions.

47


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 September 30, 20172020 and December 31, 2016:
2019, respectively:
 September 30, 2017
 Balance Committed Amount 
Effective
Rate
 Assets Pledged Restricted Cash Pledged
 (dollars in thousands)
Warehouse line, maturing on various dates(1)
$258,545
 $1,250,000
 1.21% $387,668
 $11,554
Warehouse line, due November 201857,820
 500,000
 4.54% 63,712
 2,215
Warehouse line, due August 2018(2)
—
 780,000
 1.39% 2,329
 121
Warehouse line, due August 2018(3)
2,766,543
 3,120,000
 2.22% 3,724,088
 61,367
Warehouse line, due October 2018445,277
 1,800,000
 3.45% 661,090
 12,644
Warehouse line, due October 201887,965
 400,000
 3.72% 132,197
 2,852
Warehouse line, due January 2018181,083
 500,000
 2.96% 276,519
 —
Warehouse line, due November 2018274,499
 1,000,000
 3.44% 401,219
 7,920
Warehouse line, due October 2017(4)
235,700
 300,000
 2.67% 276,521
 9,278
Repurchase facility, due December 2017(5)
254,120
 254,120
 3.35% —
 13,708
Repurchase facility, due April 2018(5)
202,311
 202,311
 2.62% —
 —
Repurchase facility, due March 2018(5)
148,690
 148,690
 3.88% —
 —
Repurchase facility, due November 2017(5)
53,335
 53,335
 2.43% —
 —
Line of credit with related party, due December 2017(6)
—
 1,000,000
 3.04% —
 —
Line of credit with related party, due December 2018(6)
—
 1,000,000
 3.09% —
 —
Line of credit with related party, due December 2018(6)
265,400
 750,000
 3.77% —
 —
     Total SC revolving credit facilities$5,231,288
 $13,058,456
 2.63% $5,925,343
 $121,659

 September 30, 2020
(dollars in thousands)BalanceCommitted AmountEffective
Rate		Assets PledgedRestricted Cash Pledged
Warehouse line due March 2021$500,445 $1,250,000 1.27 %$1,151,745 $1 
Warehouse line due November 2021166,600 500,000 1.04 %495,011 0 
Warehouse line due July 20210 500,000 1.53 %497,994 0 
Warehouse line due October 20210 2,100,000 4.18 %0 0 
Warehouse line due August 2022166,000 500,000 2.54 %267,776 0 
Warehouse line due January 2022400,000 1,000,000 1.43 %572,755 0 
Warehouse line due July 20220 900,000 3.10 %0 1,684 
Warehouse line due October 2021(3)
92,800 1,500,000 2.69 %819,518 0 
Warehouse line due October 2021(1)
1,165,943 3,500,000 3.27 %1,272,926 0 
Repurchase facility due January 2021(2)
263,272 263,272 1.66 %377,550 0 
Repurchase facility due November 2020(2)
48,624 48,624 1.79 %69,945 0 
     Total facilities with third parties$2,803,684 $12,061,896 2.28 %$5,525,220 $1,685 
Promissory note with Santander due June 2022$2,000,000 $2,000,000 1.40 %$0 $0 
Promissory note with Santander due September 20222,000,000 2,000,000 1.04 %0 0 
     Total facilities with related parties$4,000,000 $4,000,000 1.22 %$0 $0 
     Total SC revolving credit facilities$6,803,684 $16,061,896 1.66 %$5,525,220 $1,685 
(1) As of September 30, 2017, half of the outstanding balance on this facility will mature in March 2018 and half matures in March 2019.
(2)    This line is held exclusively for financing of Chrysler Capital loans.leases. In April 2020, the commitment amount was reduced by $500 million.
(3) This line is held exclusively for financing of Chrysler Capital leases.
(4) In October 2017, the warehouse line that matured was extended to December 2017.
(5) These(2)    The repurchase facilities are collateralized by securitization notes payable retained by SC. NoAs the borrower, SC is exposed to liquidity risk due to changes in the market value of retained securities pledged. In some instances, SC places or receives cash collateral with counterparties under collateral arrangements associated with SC's repurchase agreements.
(3)    During the three months ended March 31, 2020 the Chrysler Finance loan credit facility was reactivated with a $1 billion commitment. In April 2020, the commitment amount increased by $500 million.
43



NOTE 9. BORROWINGS (continued)
 December 31, 2019
(dollars in thousands)BalanceCommitted AmountEffective
Rate		Assets PledgedRestricted Cash Pledged
Warehouse line due March 2021$516,045 $1,250,000 3.10 %$734,640 $1 
Warehouse line due November 2020471,320 500,000 2.69 %505,502 186 
Warehouse line due July 2021500,000 500,000 3.64 %761,690 302 
Warehouse line due October 2021896,077 2,100,000 3.44 %1,748,325 7 
Warehouse line due June 2021471,284 500,000 3.32 %675,426 0 
Warehouse line due November 2020970,600 1,000,000 2.57 %1,353,305 0 
Warehouse line due June 202153,900 600,000 7.02 %62,601 94 
Warehouse line due October 2021(1)
1,098,443 5,000,000 4.43 %1,898,365 1,756 
Repurchase facility due January 2020(2)
273,655 273,655 3.80 %377,550 0 
Repurchase facility due March 2020(2)
100,756 100,756 3.04 %151,710 0 
Repurchase facility due March 2020(2)
47,851 47,851 3.15 %69,945 0 
     Total SC revolving credit facilities$5,399,931 $11,872,262 3.44 %$8,339,059 $2,346 
(1), (2)    See corresponding footnotes to the September 30, 2020 credit facilities table above.

The warehouse lines and repurchase facilities are fully collateralized by a designated portion of these facilities is unsecured. These facilities have rolling maturities of up to one year.
(6) These lines are also collateralized bySC's RICs, leased vehicles, securitization notes payable and residuals retained by SC. As of September 30, 2017, no portion of these facilities was unsecured.



48


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 2018202,000
 400,000
 2.22% 290,867
 5,435
Warehouse line, due January 2018153,784
 500,000
 3.17% 213,578
 —
Warehouse line, due November 2018578,999
 1,000,000
 1.56% 850,758
 17,642
Warehouse line, due October 2017243,100
 300,000
 2.38% 295,045
 9,235
Warehouse line, due November 2018—
 500,000
 2.07% —
 —
Repurchase facility, due December 2017(4)
507,800
 507,800
 2.83% —
 22,613
Repurchase facility, due April 2017(4)
235,509
 235,509
 2.04% —
 —
Line of credit with related party, due December 2017(5)
1,000,000
 1,000,000
 2.86% —
 —
Line of credit with related party, due December 2017(5)
500,000
 500,000
 3.04% —
 —
Line of credit with related party, due December 2018(5)
175,000
 500,000
 3.87% —
 —
Line of credit with related party, due December 2018(5)
1,000,000
 1,000,000
 2.88% —
 —
     Total SC revolving credit facilities$9,414,817
 $13,393,309
 2.36% $8,606,745
 $188,730
(1) Half of the outstanding balance on this facility had matured in March 2017 and half will mature in March 2018.
(2) This line is held exclusively for financing of Chrysler Capital loans.
(3) This line is held exclusively for financing of Chrysler Capital leases.
(4) These repurchase facilities are 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.
(5) These lines are also collateralized by securitization notes payable and residuals retained by SC. As of December 31, 2016, $1.3 billion of the aggregate outstanding balances on these credit facilities was unsecured.

Secured Structured Financings


The following tables present information regarding SC's secured structured financings as of September 30, 20172020 and December 31, 2016:2019, respectively:
 September 30, 2017
 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)
$14,930,690
 $35,870,432
 0.90% - 2.80% $19,625,345
 $1,487,227
SC privately issued amortizing notes, maturing on various dates(1)
8,330,626
 12,229,241
 0.88% - 2.86% 9,923,095
 371,117
     Total SC secured structured financings$23,261,316
 $48,099,673
 0.88% - 2.86% $29,548,440
 $1,858,344

September 30, 2020
(dollars in thousands)Balance
Initial Note Amounts Issued(3)
Initial Weighted Average Interest Rate Range
Collateral(2)
Restricted Cash
SC public securitizations maturing on various dates between April 2022 and May 2028(1)(4)
$18,809,455 $44,397,355  0.76% - 3.42%$24,283,300 $1,737,179 
SC privately issued amortizing notes maturing on various dates between June 2022 and December 2027 (3)
8,554,634 11,097,563  1.28% - 3.90%12,495,119 24,388 
     Total SC secured structured financings$27,364,089 $55,494,918  0.76% - 3.90%$36,778,419 $1,761,567 
(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.

49


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.

(2) Secured structured financings may be collateralized by SC's collateral overages of other issuances.
(3) Excludes securitizations which no longer have outstanding debt and excludes any incremental borrowings.
(4) As of September 30, 2020, $7.2 million in secured structured financing is held by Santander.
December 31, 2019
(dollars in thousands)BalanceInitial Note Amounts IssuedInitial Weighted Average Interest Rate RangeCollateralRestricted Cash
SC public securitizations maturing on various dates between April 2021 and February 2027$18,807,773 $43,982,220  1.35% - 3.42%$24,697,158 $1,606,646 
SC privately issued amortizing notes maturing on various dates between July 2019 and November 20269,334,112 10,397,563  1.05% - 3.90%12,048,217 20,878 
     Total SC secured structured financings$28,141,885 $54,379,783  1.05% - 3.90%$36,745,375 $1,627,524 

Most of SC's secured structured financings are in the form of public, SEC-registered securitizations. The CompanySC also executes private securitizations under Rule 144A of the Securities Act, and periodically issues private term amortizing notes, which are structured similarly to securitizations but are acquired by banks and conduits. The Company'sSC's securitizations and private issuances are collateralized by vehicle RICs and loans or leases. As of September 30, 2020 and December 31, 2019, SC had private issuances of notes backed by vehicle leases.leases outstanding totaling $10.0 billion and $10.2 billion, respectively.

44



NOTE 10. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS)
The following table presents the components of AOCI, net of related tax, for the three-month and nine-month periods ended September 30, 2020, and 2019, respectively.
Total Other
Comprehensive Income/(Loss)		Total Accumulated
Other Comprehensive (Loss)/Income
Three-Month Period Ended September 30, 2020June 30, 2020September 30, 2020
(in thousands)Pretax
Activity		Tax
Effect		Net ActivityBeginning
Balance		Net
Activity		Ending
Balance
Change in AOCI on cash flow hedge derivative financial instruments$(34,921)$(4,073)$(38,994)   
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments(1)
274 18 292    
Net unrealized (losses) on cash flow hedge derivative financial instruments(34,647)(4,055)(38,702)$135,539 $(38,702)$96,837 
Change in unrealized (losses) on investments in debt securities AFS(15,446)2,124 (13,322)   
Reclassification adjustment for (gains) included in net income/(expense) on debt securities AFS (2)(4)
(32,731)4,502 (28,229)
Net unrealized gains on investments in debt securities AFS(48,177)6,626 (41,551)168,240 (41,551)126,689 
Pension and post-retirement actuarial gain(3)
18,368 (128)18,240 (44,093)18,240 (25,853)
As of September 30, 2020$(64,456)$2,443 $(62,013)$259,686 $(62,013)$197,673 

Total Other
Comprehensive (Loss)/Income		Total Accumulated
Other Comprehensive Loss
Three-Month Period Ended September 30, 2019March 31, 2019September 30, 2019
(in thousands)Pretax
Activity		Tax
Effect		Net ActivityBeginning
Balance		Net
Activity		Ending
Balance
Change in AOCI on cash flow hedge derivative financial instruments$2,509 $1,974 $4,483 
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments(1)
5,293 (1,559)3,734 
Net unrealized gains on cash flow hedge derivative financial instruments7,802 415 8,217 $(11,676)$8,217 $(3,459)
Change in unrealized gains on investment securities47,439 (12,642)34,797 
Reclassification adjustment for net (gains) included in net income/(expense) on non-OTTI securities (2)(4)
(267)71 (196)
Net unrealized (losses) on investment securities AFS47,172 (12,571)34,601 (40,973)34,601 (6,372)
Pension and post-retirement actuarial gain(3
728 (186)542 (43,870)542 (43,328)
As of September 30, 2019$55,702 $(12,342)$43,360 $(96,519)$43,360 $(53,159)
(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 debt securities AFS.
(3)    Included in the computation of net periodic pension costs.
(4) As discussed in Note 1, includes unrealized gains / losses reclassified in connection with the sale of SBC.

45



NOTE 10. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS) (continued)
Total OCI/(Loss)Total Accumulated
Other Comprehensive (Loss)/Income
Nine-Month Period Ended September 30, 2020December 31, 2019September 30, 2020
(in thousands)Pretax
Activity		Tax
Effect		Net ActivityBeginning
Balance		Net
Activity		Ending
Balance
Change in AOCI on cash flow hedge derivative financial instruments$180,139 $(63,520)$116,619 
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments(1)
411 (79)332 
Net unrealized gains on cash flow hedge derivative financial instruments180,550 (63,599)116,951 $(20,114)$116,951 $96,837 
Change in unrealized gains on investments in debt securities257,976 (70,309)187,667 
Reclassification adjustment for net (gains) included in net income/(expense) on debt securities AFS (2)
(55,246)17,148 (38,098)
Net unrealized gains on investments in debt securities202,730 (53,161)149,569 (22,880)149,569 126,689 
Pension and post-retirement actuarial gain(3)
19,874 (514)19,360 (45,213)19,360 (25,853)
As of September 30, 2020$403,154 $(117,274)$285,880 $(88,207)$285,880 $197,673 
Total OCI/(Loss)Total Accumulated
Other Comprehensive (Loss)/Income
Nine-Month Period Ended September 30, 2019December 31, 2018September 30, 2019
(in thousands)Pretax
Activity		Tax
Effect		Net ActivityBeginning
Balance		Net
Activity		Ending
Balance
Change in AOCI on cash flow hedge derivative financial instruments$26,549 $(10,361)$16,188    
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments(1)
235 (69)166    
Net unrealized gains on cash flow hedge derivative financial instruments26,784 (10,430)16,354 $(19,813)$16,354 $(3,459)
Change in unrealized gains on investment securities323,169 (81,798)241,371    
Reclassification adjustment for net (gains) included in net income/(expense) on debt securities AFS (2)
(2,646)670 (1,976)
Net unrealized gains on investment securities320,523 (81,128)239,395 (245,767)239,395 (6,372)
Pension and post-retirement actuarial gain(3)
13,303 (559)12,744 (56,072)12,744 (43,328)
As of September 30, 2019$360,610 $(92,117)$268,493 $(321,652)$268,493 $(53,159)
(1) - (3) Refer to the corresponding explanations in the table above.
46




NOTE 11. DERIVATIVES


General

The Company uses derivative financial instruments primarily to help manage exposure to interest rate, foreign exchange, equity and credit risk, as well as to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. The Company also enters into derivatives with customers to facilitate their risk management activities. The Company uses derivative financial instruments as risk management tools and not for speculative trading purposes. The fair value of all derivative balances is recorded within Other assets and Other liabilities on the Condensed Consolidated Balance Sheet.

See Note 16 for discussion of the valuation methodology for derivative instruments.


Derivatives represent contracts between parties that usually require little or no initial net investment and result in one partyor both parties delivering cash or another type of asset to the other party based on a notional amount and an underlying asset, index, 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 derivative contract is calculated to determine required payments under the derivative contract. The Company controls the credit risk of its derivative contracts through credit approvals, limits and monitoring procedures. The underlying asset is typically a referenced interest rate (commonly the Overnight Indexed Swap ("OIS")OIS rate or LIBOR), security, credit spread or index.


The Company’s capital markets and mortgage banking activities are subject to price risk. The Company employs various tools to measure and manage price risk in its portfolios. In addition, the Board of Directors has established certain limits relative to positions and activities. The level of price risk exposure at any given time depends on the market environment and expectations of future price and market movements and will vary from period to period.



See Note 12 to these Condensed Consolidated Financial Statements for discussion of the valuation methodology for derivative instruments.
50


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")ISDA Master Agreements if the Company's ratings fall below a specified level, typically investment grade. As of September 30, 2017,2020, derivatives in this category had a fair value of $7.8$0.3 million. The credit ratings of the Company and the Bank are currently considered investment grade. During the third quarter of 2017, no2020, 0 additional collateral would be required if there were a further 1- or 2- notch downgrade by either Standard & Poor's ("S&P")&P or Moody's Investor Services ("Moody's").Moody's.

47



NOTE 11. DERIVATIVES (continued)

As of September 30, 20172020 and December 31, 2016,2019, 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 $21.2$9.3 million and $27.0$7.8 million,, respectively. The Company had $19.1$21.7 million and $28.3$8.6 million in cash and securities collateral posted to cover those positions as of September 30, 20172020 and December 31, 2016,2019, 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 nine-month periods ended September 30, 2017. The Company terminated the interest rate swap during the three-month period ended September 30, 2017.


Cash Flow Hedges


The Company has outstanding interest rate swap agreements designed to hedge a portion of the Company’s floating rate assets and liabilities (including its borrowed funds). All of these swaps have been deemed as highly effective cash flow hedges. The effective portiongain or loss on the derivative instrument is reported as a component of accumulated OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same Condensed Consolidated Statements of Operations line item as the earnings effect of the hedging gains and losses associated with these hedges is recorded in accumulated other comprehensive income; the ineffective portion of the hedging gains and losses is recorded in earnings.hedged item.

The last of the hedges is scheduled to expire in December 2030.March 2024. The Company includes all components of each derivative's gain or loss in the assessment of hedge effectiveness. The earnings impact of the ineffective portion of these hedges was not material for the nine-month periods ended September 30, 2017 and 2016. As of September 30, 2017,2020, the Company expected $1.4$31.1 million of gross gains recorded in accumulated other comprehensive lossincome (loss) to be reclassified to earnings during the subsequent twelve months as the future cash flows occur.



51


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 11. DERIVATIVES (continued)


Derivatives Designated in Hedge Relationships – Notional and Fair Values


Derivatives designated as accounting hedges at September 30, 20172020 and December 31, 20162019 included:

(dollars in thousands)Notional
Amount		AssetLiabilityWeighted Average Receive RateWeighted Average Pay
Rate		Weighted Average Life
(Years)
September 30, 2020      
Cash flow hedges:     
Pay fixed — receive variable interest rate swaps$2,750,000 $0 $79,350 0.18 %1.49 %1.93
Pay variable - receive fixed interest rate swaps7,520,000 169,363 250 1.29 %0.15 %1.95
Interest rate floor4,000,000 42,273 0 1.42 %0 %1.16
Total$14,270,000 $211,636 $79,600 1.11 %0.37 %1.73
December 31, 2019      
Cash flow hedges:      
Pay fixed — receive variable interest rate swaps$2,650,000 $2,807 $39,128 1.85 %1.91 %1.86
Pay variable - receive fixed interest rate swaps7,570,000 7,462 29,209 1.43 %1.73 %2.39
Interest rate floor3,800,000 18,762 0 0.19 %0 %1.28
Total$14,020,000 $29,031 $68,337 1.17 %1.29 %1.99
48



 
Notional
Amount
 Asset Liability 
Weighted Average Receive
Rate
 
Weighted Average Pay
Rate
 
Weighted Average Life
(Years)
 (dollars in thousands)
September 30, 2017           
Cash flow hedges:           
Pay fixed — receive floating interest rate swaps5,235,818
 40,173
 5,304
 1.27% 1.25% 2.26
Pay variable - receive fixed interest rate swaps4,000,000
 467
 51,508
 1.41% 1.24% 3.23
Total$9,235,818
 $40,640
 $56,812
 1.33% 1.24% 2.68
            
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
NOTE 11. DERIVATIVES (continued)
(1) The prior period amounts have been revised. The revision had no impact on the Company's Consolidated Balance Sheets or its results of operations.

During the third quarter of 2017, the Company terminated fair value hedges with a notional of $650.0 million. The fair value mark of the previously hedged debt will be amortized into interest expense over the remaining term of the debt. The amounts previously deferred in AOCI will be amortized into interest expense as the hedged cash flows impact interest expense.

See Note 13 for detail of the amounts included in accumulated other comprehensive income related to derivatives activity.

Other Derivative Activities


The Company also enters into derivatives that are not designated as accounting hedges under GAAP. The majority of these derivatives are customer-related derivatives relating to foreign exchange and lending arrangements, as well as derivatives to hedge interest rate risk on SC's secured structured financings and the borrowings under its revolving credit facilities. SC uses both interest rate swaps and interest rate caps to satisfy these requirements and to hedge the variability of cash flows on securities issued by Trusts and borrowings under its warehouse facilities. In addition, derivatives are used to manage risks related to residential and commercial mortgage banking and investing activities. Although these derivatives are used to hedge risk and are considered economic hedges, they are not designated as accounting hedges because the contracts they are hedging are 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 and adjustable rate residential mortgages. It sells a portion of this production to the FHLMC, the FNMA, and private investors. The Company uses forward sales as a means of hedging against the economic impact of changes in interest rates on the mortgages that are originated for sale and on interest rate lock commitments.


52


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 11. DERIVATIVES (continued)


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


Customer-related derivatives


The Company offers derivatives to its customers in connection with their risk management needs.needs and requirements. These financial derivative transactions primarily consist of interest rate swaps, caps, floors and foreign exchange contracts. Risk exposure from customer positions is managed through transactions with other dealers, including Santander.


Other derivative activities


The Company uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. Foreign exchange contracts, which include spot and forward contracts as well as cross-currency swaps, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date.date and may or may not be physically settled depending on the Company’s needs. Exposure to gains and losses on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate.


Other derivative instruments primarily include forward contracts related to certain investment securities sales, an OIS, a total return swap on Visa, Inc. Class B common shares, and equity options, which manage the Company's market risk associated with certain investments and customer deposit products.



49



NOTE 11. DERIVATIVES (continued)

Derivatives Not Designated in Hedge Relationships – Notional and Fair Values


Other derivative activities at September 30, 20172020 and December 31, 20162019 included:
NotionalAsset derivatives
Fair value		Liability derivatives
Fair value
(in thousands)September 30, 2020December 31, 2019September 30, 2020December 31, 2019September 30, 2020December 31, 2019
Mortgage banking derivatives:
Forward commitments to sell loans$556,145 $452,994 $0 $18 $308 $360 
Interest rate lock commitments328,370 167,423 16,118 3,042 0 0 
Mortgage servicing660,000 510,000 46,887 15,134 21,624 2,547 
Total mortgage banking risk management1,544,515 1,130,417 63,005 18,194 21,932 2,907 
Customer-related derivatives:
Swaps receive fixed15,737,287 11,225,376 1,053,859 375,541 287 12,330 
Swaps pay fixed16,209,340 11,975,313 4,288 23,271 1,030,761 336,361 
Other3,724,883 3,532,959 10,494 3,457 9,482 4,848 
Total customer-related derivatives35,671,510 26,733,648 1,068,641 402,269 1,040,530 353,539 
Other derivative activities:
Foreign exchange contracts3,577,947 3,724,007 44,856 33,749 47,854 34,428 
Interest rate swap agreements250,000 1,290,560 0 0 14,393 11,626 
Interest rate cap agreements11,117,779 9,379,720 5,999 62,552 0 0 
Options for interest rate cap agreements11,117,779 9,379,720 0 0 5,999 62,552 
Other320,189 1,087,986 9,462 10,536 10,077 13,025 
Total$63,599,719 $52,726,058 $1,191,963 $527,300 $1,140,785 $478,077 
 Notional 
Asset derivatives
Fair value
 
Liability derivatives
Fair value
 September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016 September 30, 2017 December 31, 2016
 (in thousands)
Mortgage banking derivatives:           
Forward commitments to sell loans$354,698
 $693,137
 $586
 $8,577
 $—
 $—
Interest rate lock commitments181,810
 253,568
 2,564
 2,316
 —
 —
Mortgage servicing330,000
 295,000
 3,334
 838
 605
 1,635
Total mortgage banking risk management866,508
 1,241,705
 6,484
 11,731
 605
 1,635
            
Customer related derivatives:           
Swaps receive fixed9,175,060
 9,646,151
 106,446
 127,123
 42,410
 49,642
Swaps pay fixed9,441,107
 9,785,170
 74,067
 85,877
 74,939
 97,759
Other2,214,898
 1,611,342
 15,507
 3,421
 13,891
 1,989
Total customer related derivatives20,831,065
 21,042,663
 196,020
 216,421
 131,240
 149,390
            
Other derivative activities:           
Foreign exchange contracts3,056,076
 3,366,483
 33,767
 56,742
 35,550
 46,430
Interest rate swap agreements1,507,232
 1,064,289
 8,801
 2,075
 1,884
 2,647
Interest rate cap agreements11,927,449
 9,491,468
 116,646
 76,387
 26,255
 —
Options for interest rate cap agreements11,900,578
 9,463,935
 26,304
 —
 116,563
 76,281
Total return settlement—
 658,471
 —
 —
 —
 30,618
Other1,239,201
 1,265,583
 9,307
 12,293
 14,292
 16,325
Total$51,328,109
 $47,594,597
 $397,329
 $375,649
 $326,389
 $323,326


53


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 11. DERIVATIVES (continued)

The Company purchased price holdback payments and total return settlement payments that were considered to be derivatives, collectively referred to herein as total return settlement, and accordingly were marked to fair value each reporting period. The Company was obligated to make purchase price holdback payments on a periodic basis to a third-party originator of loans that the Company has purchased, when losses are lower than originally expected. The Company also was obligated to make total return settlement payments to this third-party originator in 2016 and 2017 if returns on the purchased loans are greater than originally expected. All purchase price holdback payments and all total return settlement payments due in 2016 and 2017 have been made and as of September 30, 2017, the derivative instrument has been settled.


Gains (Losses) on All Derivatives


The following Condensed Consolidated Statement of Operations line items were impacted by the Company’s derivative activities for the three-month and nine-month periods ended September 30, 20172020 and 2016:2019:
(in thousands)(in thousands) Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
Line Item202020192020 2019
   Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 30,
Derivative Activity(1)
 Line Item 2017 2016 2017 2016
Derivative Activity(1)
 (in thousands)
Fair value hedges:        
Cross-currency swaps (2)
 Miscellaneous income $—
 $—
 $—
 $174
Interest rate swaps Miscellaneous income (235) 190
 (2,397) 1,959
Cash flow hedges:    
  
    
Cash flow hedges:    
Pay fixed-receive variable interest
rate swaps
 Net interest income (1,846) (254) (8,317) (4,379)Pay fixed-receive variable interest rate swapsInterest expense on borrowings$(8,939)$8,283 $(17,260)$35,065 
Pay variable receive-fixed interest rate swap Net interest income (1,668) —
 (7,955) —
Pay variable receive-fixed interest rate swapInterest income on loans34,767 (11,324)57,691 (34,022)
Other derivative activities:    
  
    
Other derivative activities:   
Forward commitments to sell loans Mortgage banking income (667) 4,128
 (7,991) (4,348)Forward commitments to sell loansMiscellaneous income, net3,175 5,349 85 6,183 
Interest rate lock commitments Mortgage banking income (332) (793) 248
 6,645
Interest rate lock commitmentsMiscellaneous income, net(316)(373)13,077 1,421 
Mortgage servicing Mortgage banking income 1,525
 (2,803) 3,525
 21,024
Mortgage servicingMiscellaneous income, net62 9,886 32,175 31,187 
Customer related derivatives Miscellaneous income 627
 24,108
 (2,385) 18,985
Customer-related derivativesCustomer-related derivativesMiscellaneous income, net5,741 10,559 13,861 (5,791)
Foreign exchange Miscellaneous income 1,951
 967
 5,097
 4,694
Foreign exchangeMiscellaneous income, net755 (4,518)13,560 25,459 
Interest rate swaps, caps, and options Miscellaneous income 1,918
 4,329
 3,429
 (1,790)Interest rate swaps, caps, and optionsMiscellaneous income, net(567)2,479 (11,253)10,345 
Net interest income (552) 12,391
 3,110
 42,563
        
Total return settlement Other administrative expenses —
 343
 (505) (2,337)
Other Miscellaneous income (303) (765) (1,247) 974
OtherMiscellaneous income, net4,502 453 583 85 
(1)    Gains are disclosed as positive numbers while losses are shown as a negative number regardless of the line item being affected.
(2) Cross currency swaps designated as hedges matured
50



NOTE 11. DERIVATIVES (continued)

The net amount of change recognized in OCI for cash flow hedge derivatives was a loss of $39.0 million and a gain of $116.6 million, net of tax, for the first quarterthree-month and nine-month periods ended September 30, 2020, respectively, and gains of 2016.$4.5 million and $16.2 million, net of tax, for the three-month and nine-month periods ended September 30, 2019, respectively.


The net amount of changes reclassified from OCI into earnings for cash flow hedge derivatives were losses of $0.3 million and $0.3 million, net of tax, for the three-month and nine-month periods ended September 30, 2020, respectively, and losses of $3.7 million and $0.2 million, net of tax, for the three-month and nine-month periods ended September 30, 2019, respectively.

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 ISDAapplicable 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.


54


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 11. DERIVATIVES (continued)


The Company has elected to present derivative balances on a gross basis even if the derivative is subject to a legally enforceable master nettingnettable ISDA Master Agreement for all trades executed after April 1, 2013. Collateral that is received or pledged for these transactions is disclosed within the “Gross amounts not offsetAmounts Not Offset in the Condensed Consolidated Balance Sheet”Sheets” section of the tables below. Prior to April 1, 2013, the Company had elected to net all caps, floors, and interest rate swaps when it had an ISDA Master Agreement with the counterparty. The collateral received or pledged in connection with these transactions is disclosed within the “Gross amounts offsetAmounts Offset in the Condensed Consolidated Balance Sheet"Sheets" section of the tables below.


Information about financial assets and liabilities that are eligible for offset on the Condensed Consolidated Balance SheetSheets as of September 30, 20172020 and December 31, 2016,2019, respectively, is presented in the following tables:

Offsetting of Financial Assets
Gross Amounts Not Offset in the Consolidated Balance Sheets
(in thousands)Gross Amounts of Recognized AssetsGross Amounts Offset in the Consolidated Balance SheetsNet Amounts of Assets Presented in the Consolidated Balance Sheets
Collateral Received (3)
Net Amount
September 30, 2020
Cash flow hedges$211,636 $0 $211,636 $141,067 $70,569 
Other derivative activities(1)
1,175,845 0 1,175,845 9,705 1,166,140 
Total derivatives subject to a master netting arrangement or similar arrangement1,387,481 0 1,387,481 150,772 1,236,709 
Total derivatives not subject to a master netting arrangement or similar arrangement(2)
16,118 — 16,118 0 16,118 
Total Derivative Assets$1,403,599 $0 $1,403,599 $150,772 $1,252,827 
December 31, 2019
Cash flow hedges$29,031 $0 $29,031 $17,790 $11,241 
Other derivative activities(1)
524,258 435 523,823 51,437 472,386 
Total derivatives subject to a master netting arrangement or similar arrangement553,289 435 552,854 69,227 483,627 
Total derivatives not subject to a master netting arrangement or similar arrangement(2)
3,042 — 3,042 0 3,042 
Total Derivative Assets$556,331 $435 $555,896 $69,227 $486,669 
(1)Includes customer-related and other derivatives.
(2)Includes mortgage banking derivatives.
(3)Collateral received includes cash, cash equivalents, and other financial instruments. Cash collateral received is reported in Other liabilities, as applicable, in the Condensed Consolidated Balance Sheets. Financial instruments that are pledged to the Company are not reflected in the accompanying Condensed Consolidated Balance Sheets since the Company does not control or have the ability to re-hypothecate these instruments.
51
  Offsetting of Financial Assets
        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)
September 30, 2017            
Cash flow hedges 40,640
 —
 40,640
 —
 22,524
 18,116
Other derivative activities(1)
 394,520
 6,702
 387,818
 4,940
 90,510
 292,368
Total derivatives subject to a master netting arrangement or similar arrangement 435,160
 6,702
 428,458
 4,940
 113,034
 310,484
Total derivatives not subject to a master netting arrangement or similar arrangement(2)
 2,809
 —
 2,809
 —
 —
 2,809
Total Derivative Assets $437,969
 $6,702
 $431,267
 $4,940
 $113,034
 $313,293
             
             
December 31, 2016            
Cash flow hedges $45,681
 $—
 $45,681
 $—
 $21,690
 $23,991
Other derivative activities(1)
 374,052
 7,551
 366,501
 4,484
 39,474
 322,543
Total derivatives subject to a master netting arrangement or similar arrangement 419,733
 7,551
 412,182
 4,484
 61,164
 346,534
Total derivatives not subject to a master netting arrangement or similar arrangement(2)
 1,597
 —
 1,597
 —
 —
 1,597
Total Derivative Assets $421,330
 $7,551
 $413,779
 $4,484
 $61,164
 $348,131



(1)Includes customer-related and other derivatives.
(2)Includes mortgage banking derivatives.

55


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS






NOTE 11. DERIVATIVES (continued)

Offsetting of Financial Liabilities
Gross Amounts Not Offset in the Consolidated Balance Sheets
(in thousands)Gross Amounts of Recognized LiabilitiesGross Amounts Offset in the Consolidated Balance SheetsNet Amounts of Liabilities Presented in the Consolidated Balance Sheets
Collateral Pledged (3)
Net Amount
September 30, 2020
Cash flow hedges$79,600 $0 $79,600 $79,350 $250 
Other derivative activities(1)
1,140,477 3,861 1,136,616 659,094 477,522 
Total derivatives subject to a master netting arrangement or similar arrangement1,220,077 3,861 1,216,216 738,444 477,772 
Total derivatives not subject to a master netting arrangement or similar arrangement(2)
308 — 308 106 202 
Total Derivative Liabilities$1,220,385 $3,861 $1,216,524 $738,550 $477,974 
December 31, 2019
Cash flow hedges$68,337 $0 $68,337 $68,337 $0 
Other derivative activities(1)
477,717 9,406 468,311 436,301 32,010 
Total derivatives subject to a master netting arrangement or similar arrangement546,054 9,406 536,648 504,638 32,010 
Total derivatives not subject to a master netting arrangement or similar arrangement(2)
360 — 360 273 87 
Total Derivative Liabilities$546,414 $9,406 $537,008 $504,911 $32,097 
(1)Includes customer-related and other derivatives.
(2)Includes mortgage banking derivatives.
(3)Cash collateral pledged and financial instruments pledged is reported in Other assets in the Condensed Consolidated Balance Sheets. In certain instances, the Company is over-collateralized since the actual amount of collateral pledged exceeds the associated financial liability. As a result, the actual amount of collateral pledged that is reported in Other assets may be greater than the amount shown in the table above.


  Offsetting of Financial Liabilities
         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)
September 30, 2017           
Cash flow hedges (3)
 56,812
 —
 56,812
  150,150
 —
Other derivative activities(1)
 326,389
 21,503
 304,886
  68,896
 235,990
Total derivatives subject to a master netting arrangement or similar arrangement 383,201
 21,503
 361,698
  219,046
 235,990
            
Reverse repurchase, securities borrowing, and similar arrangement 20,000
 —
 20,000
  —
 20,000
Total Financial Liabilities $403,201
 $21,503
 $381,698
  $219,046
 $255,990
            
December 31, 2016           
Cash flow hedges (3)
 $59,812
 $—
 $59,812
  $110,856
 $—
Other derivative activities(1)
 292,708
 34,197
 258,511
  95,138
 163,373
Total derivatives subject to a master netting arrangement or similar arrangement 352,520
 34,197
 318,323
  205,994
 163,373
Total derivatives not subject to a master netting arrangement or similar arrangement(2)
 30,618
 —
 30,618
  —
 30,618
Total Derivative Liabilities $383,138
 $34,197
 $348,941
  $205,994
 $193,991

(1)Includes customer-related and other derivatives
(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 may be greater than the amount shown. The prior period have been revised to conform with current period presentation.



NOTE 12. INCOME TAXESFAIR VALUE


An income tax provisionFair value measurement requires that valuation techniques maximize the use of $93.4observable inputs and minimize the use of unobservable inputs, and also establishes a fair value hierarchy that categorizes the inputs to valuation techniques used to measure fair value into three levels as follows:

•Level 1 inputs are quoted prices in active markets for identical assets or liabilities that can be accessed as of the measurement date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.
•Level 2 inputs are those other than quoted prices included in Level 1 that are observable for the assets or liabilities, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
•Level 3 inputs are those that are unobservable or not readily observable for the asset or liability and are used to measure fair value to the extent relevant observable inputs are not available.

Assets and liabilities measured at fair value, by their nature, result in a higher degree of financial statement volatility. When available, the Company uses quoted market prices or matrix pricing in active markets to determine fair value and classifies such items as Level 1 or Level 2 assets or liabilities. If quoted market prices in active markets are not available, fair value is determined using third-party broker quotes and/or DCF models incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using broker quotes and/or DCF models are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation.
52



NOTE 12. FAIR VALUE (continued)

The Company values assets and liabilities based on the principal market in which each would be sold (in the case of assets) or transferred (in the case of liabilities). The principal market is the forum with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market. In the absence of observable market transactions, the Company considers liquidity valuation adjustments to reflect the uncertainty in pricing the instruments. The fair value of a financial asset is measured on a stand-alone basis and cannot be measured as a group, with the exception of certain financial instruments held and managed on a net portfolio basis. In measuring the fair value of a nonfinancial asset, the Company assumes the highest and best use of the asset by a market participant, not just the intended use, to maximize the value of the asset. The Company also considers whether any credit valuation adjustments are necessary based on the counterparty's credit quality.

Any models used to determine fair values or validate dealer quotes based on the descriptions below are subject to review and testing as part of the Company's model validation and internal control testing processes.

The Company's Market Risk Department is responsible for determining and approving the fair values of all assets and liabilities valued at fair value, including the Company's Level 3 assets and liabilities. Price validation procedures are performed and the results are reviewed for Level 3 assets and liabilities by the Market Risk Department. Price validation procedures performed for these assets and liabilities can include comparing current prices to historical pricing trends by collateral type and vintage, comparing prices by product type to indicative pricing grids published by market makers, and obtaining corroborating dealer prices for significant securities.

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.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the assets and liabilities that are measured at fair value on a recurring basis by major product category and fair value hierarchy as of September 30, 2020 and December 31, 2019.
(in thousands)Level 1Level 2Level 3Balance at
September 30, 2020		Level 1Level 2Level 3Balance at
December 31, 2019
Financial assets:    
U.S. Treasury securities$0 $215,654 $0 $215,654 $0 $4,090,938 $0 $4,090,938 
Corporate debt0 172,908 0 172,908 0 139,713 0 139,713 
ABS0 60,575 50,566 111,141 0 75,165 63,235 138,400 
State and municipal securities0 3 0 3 0 9 0 9 
MBS0 10,579,266 0 10,579,266 0 9,970,698 0 9,970,698 
Investment in debt securities AFS(3)
0 11,028,406 50,566 11,078,972 0 14,276,523 63,235 14,339,758 
Other investments - trading securities2,359 40,105 0 42,464 379 718 0 1,097 
RICs HFI(4)
0 0 61,448 61,448 0 17,634 84,334 101,968 
LHFS (1)(5)
0 240,190 0 240,190 0 289,009 0 289,009 
MSRs (2)
0 0 81,776 81,776 0 0 130,855 130,855 
Other assets - derivatives (3)
0 1,387,232 16,367 1,403,599 0 553,222 3,109 556,331 
Total financial assets (6)
$2,359 $12,695,933 $210,157 $12,908,449 $379 $15,137,106 $281,533 $15,419,018 
Financial liabilities:    
Other liabilities - derivatives (3)
0 1,214,548 5,837 1,220,385 0 543,560 2,854 546,414 
Total financial liabilities$0 $1,214,548 $5,837 $1,220,385 $0 $543,560 $2,854 $546,414 
(1)    LHFS disclosed on the Condensed Consolidated Balance Sheets also includes LHFS that are held at the lower of cost or fair value and are not presented within this table.
(2)    The Company had total MSRs of $81.8 million and $264.4$132.7 million was recordedas of September 30, 2020 and December 31, 2019, 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 2 for the fair value of investment securities and to Note 11 for the fair values of derivative assets and liabilities on a further disaggregated basis.
(4) RICs collateralized by vehicle titles at SC and RV/marine loans at SBNA.
(5) Residential mortgage loans.
(6) Approximately $210.2 million of these financial assets were measured using model-based techniques, or Level 3 inputs, and represented approximately 1.6% of total assets measured at fair value on a recurring basis and approximately 0.1% of total consolidated assets.
53



NOTE 12. 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:

Investments in debt securities AFS

Investments in debt securities AFS are accounted for at fair value. The Company utilizes a third-party pricing service to value its investment securities portfolios on a global basis. Its primary pricing service has consistently proved to be a high quality third-party pricing provider. For those investments not valued by pricing vendors, other trusted market sources are utilized. The Company monitors and validates the reliability of vendor pricing on an ongoing basis, which can include pricing methodology reviews, performing detailed reviews of the assumptions and inputs used by the vendor to price individual securities, and price validation testing. Price validation testing is performed independently of the risk-taking function and can include corroborating the prices received from third-party vendors with prices from another third-party source, reviewing valuations of comparable instruments, comparison to internal valuations, or by reference to recent sales of similar securities.

The classification of securities within the fair value hierarchy is based upon the activity level in the market for the security type and the observability of the inputs used to determine their fair values. Actively traded quoted market prices for debt securities AFS, such as U.S. Treasury and government agency securities, corporate debt, state and municipal securities, and MBS, are not readily available. The Company's principal markets for its investment securities are the secondary institutional markets with an exit price that is predominantly reflective of bid-level pricing in these markets. These investment securities are priced by third-party pricing vendors. The third-party vendors use a variety of methods when pricing these securities that incorporate relevant observable market data to arrive at an estimate of what a buyer in the marketplace would pay for a security under current market conditions. These investment securities are, therefore, considered Level 2.

Certain ABS are valued using DCF models. The DCF models are obtained from a third-party pricing vendor which uses observable market data and therefore are classified as Level 2. Other ABS that could not be valued using a third-party pricing service are valued using an internally-developed DCF model and are classified as Level 3.

Realized gains and losses on investments in debt securities are recognized in the Condensed Consolidated Statements of Operations through Net gain(loss) on sale of investment securities.

RICs HFI

For certain RICs reported in LHFI, net, the Company has elected the FVO. At December 31, 2019, the Company has used the most recent purchase price as the fair value for certain loans and hence classified those RICs as Level 2. The estimated fair value of the all RICs HFI at September 30, 2020 is estimated using a DCF model and are classified as Level 3.

LHFS

The Company's LHFS portfolios that are measured at fair value on a recurring basis consist primarily of residential mortgage LHFS. The fair values of LHFS are estimated using published forward agency prices to agency buyers such as FNMA and FHLMC. The majority of the residential mortgage LHFS portfolio is sold to these two agencies. The fair value is determined using current secondary market prices for portfolios with similar characteristics, adjusted for servicing values and market conditions.

These loans are regularly traded in active markets, and observable pricing information is available from market participants. The prices are adjusted as necessary to include the embedded servicing value in the loans as well as the specific characteristics of certain loans that are priced based on the pricing of similar loans. These adjustments represent unobservable inputs to the valuation, and are not significant given the relative insensitivity of the value to changes in these inputs to the fair value of the loans. Accordingly, residential mortgage LHFS are classified as Level 2. Gains and losses on residential mortgage LHFS are recognized in the Condensed Consolidated Statements of Operations through Miscellaneous income, net. See further discussion below in the section captioned "FVO for Financial Assets and Financial Liabilities."

54



NOTE 12. FAIR VALUE (continued)

MSRs

The model to value MSRs estimates the present value of the future net cash flows from mortgage servicing activities based on various assumptions. These cash flows include servicing and ancillary revenue, offset by the estimated costs of performing servicing activities. Significant assumptions used in the valuation of residential MSRs include CPRs and the discount rate, reflective of a market participant's required return on an investment for similar assets. Other important valuation assumptions include market-based servicing costs and the anticipated earnings on escrow and similar balances held by the Company in the normal course of mortgage servicing activities. All of these assumptions are considered to be unobservable inputs. Historically, servicing costs and discount rates have been less volatile than CPR and earnings rates, both of which are directly correlated with changes in market interest rates. Increases in prepayment speeds, discount rates and servicing costs result in lower valuations of MSRs. Decreases in the anticipated earnings rate on escrow and similar balances result in lower valuations of MSRs. For each of these items, the Company makes assumptions based on current market information and future expectations. All of the assumptions are based on standards that the Company believes would be utilized by market participants in valuing MSRs and are derived and/or benchmarked against independent public sources. Accordingly, MSRs are classified as Level 3. Gains and losses on MSRs are recognized on the Condensed Consolidated Statements of Operations through Miscellaneous income, net.

Listed below are the most significant inputs that are utilized by the Company in the evaluation of residential MSRs:
• A 10% and 20% increase in the CPR speed would decrease the fair value of the residential servicing asset by $4.7 million and $9.0 million, respectively, at September 30, 2020.
•A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $2.3 million and $4.5 million, respectively, at September 30, 2020.

Significant increases/(decreases) in any of those inputs in isolation would result in significantly (lower)/higher fair value measurements, respectively. These sensitivity calculations are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change. Prepayment estimates generally increase when market interest rates decline and decrease when market interest rates rise. Discount rates typically increase when market interest rates increase and/or credit and liquidity risks increase, and decrease when market interest rates decline and/or credit and liquidity conditions improve.

Derivatives

The valuation of these instruments is determined using commonly accepted valuation techniques, including DCF analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable and unobservable market-based inputs. The fair value represents the estimated amount the Company would receive or pay to terminate the contract or agreement, taking into account current interest rates, foreign exchange rates, equity prices and, when appropriate, the current creditworthiness of the counterparties.

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

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


55



NOTE 12. 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 11 to these Consolidated Financial Statements for a discussion of derivatives activity.

Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis

The tables below present the changes in Level 3 balances for the three-month and nine-month periods ended September 30, 2017,2020 and 2019, respectively, comparedfor those assets and liabilities measured at fair value on a recurring basis.
Three-Month Period Ended September 30, 2020Three-Month Period Ended September 30, 2019
(in thousands)Investments
AFS		RICs HFIMSRsDerivatives, netTotalInvestments
AFS		RICs HFIMSRsDerivatives, netTotal
Balances, beginning of period$50,664 $72,862 $88,674 $9,970 $222,170 $324,979 $104,193 $129,913 $1,939 $561,024 
Losses in OCI(97)0 0 0 (97)(634)0 0 0 (634)
Gains/(losses) in earnings0 3,895 (2,834)495 1,556 0 2,841 (8,878)(2,395)(8,432)
Additions/Issuances0 0 3,365 0 3,365 0 0 10,353 0 10,353 
Settlements(1)
(1)(15,309)(7,429)65 (22,674)(250,815)(13,641)(4,897)117 (269,236)
Balances, end of period$50,566 $61,448 $81,776 $10,530 $204,320 $73,530 $93,393 $126,491 $(339)$293,075 
Changes in unrealized gains (losses) included in earnings related to balances still held at end of period$0 $3,895 $(2,834)$812 $1,873 $0 $2,841 $(8,878)$(2,022)$(8,059)
Nine-Month Period Ended September 30, 2020Nine-Month Period Ended September 30, 2019
(in thousands)Investments
AFS		RICs HFIMSRsDerivatives, netTotalInvestments
AFS		RICs HFIMSRsDerivatives, netTotal
Balances, beginning of period$63,235 $84,334 $130,855 $255 $278,679 $327,199 $126,312 $149,660 $1,866 $605,037 
Losses in OCI(2)
(416)0 0 0 (416)(2,136)0 0 0 (2,136)
Gains/(losses) in earnings0 10,845 (38,457)10,045 (17,567)0 9,793 (32,815)(2,496)(25,518)
Additions/Issuances0 2,512 9,788 0 12,300 0 2,079 21,456 0 23,535 
Transfer from level 2(3)
0 17,634 0 0 17,634 0 0 0 0 0 
Settlements(1)
(12,253)(53,877)(20,410)230 (86,310)(251,533)(44,791)(11,810)291 (307,843)
Balances, end of period$50,566 $61,448 $81,776 $10,530 $204,320 $73,530 $93,393 $126,491 $(339)$293,075 
Changes in unrealized gains (losses) included in earnings related to balances still held at end of period$0 $10,845 $(38,457)$(3,031)$(30,643)$0 $9,793 $(32,815)$(3,917)$(26,939)
(1)Settlements include charge-offs, prepayments, paydowns and maturities.
(2)Losses in OCI during the three-month period ended September 30, 2020 increased by $0.1 million from the prior reporting date of June 30, 2020.
(3)The Company transferred RIC's from Level 2 to $108.3 million and $340.0 millionLevel 3 during 2020 because the fair value for the corresponding periods in 2016. This resulted in an effective tax rate ("ETR")these assets cannot be determined by using readily observable inputs as of 28.3% and 27.7% forSeptember 30, 2020. There were no other transfers into or out of Level 3 during the three-month and nine-month periods ended September 30, 2017, respectively,2020 and 2019.


56



NOTE 12. 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:
(in thousands)Level 1Level 2Level 3Balance at
September 30, 2020		Level 1Level 2Level 3Balance at
December 31, 2019
Impaired commercial LHFI$0 $47,237 $160,798 $208,035 $0 $133,640 $356,220 $489,860 
Foreclosed assets0 9,926 34,739 44,665 0 17,168 51,080 68,248 
Vehicle inventory0 374,071 0 374,071 0 346,265 0 346,265 
LHFS(1)
0 0 907,389 907,389 0 0 1,131,214 1,131,214 
Auto loans impaired due to bankruptcy0 188,226 0 188,226 0 200,504 503 201,007 
Goodwill0 0 350,000 350,000 0 0 0 0 
MSRs0 0 0 0 0 0 8,197 8,197 
(1)    These amounts include $763.3 million and $1.0 billion of personal LHFS that were impaired as of September 30, 2020 and December 31, 2019, respectively.

Valuation Processes and Techniques - Nonrecurring Fair Value Assets and Liabilities

Impaired commercial LHFI in the table above represents the recorded investment of impaired commercial loans for which the Company measures impairment during the period based on the fair value of the underlying collateral supporting the loan. Written offers to purchase a specific impaired loan are considered observable market inputs, which are considered Level 1 inputs. Appraisals are obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and are considered Level 2 inputs. Loans for which the value of the underlying collateral is determined using a combination of real estate appraisals, field examinations and internal calculations are classified as Level 3. The inputs in the internal calculations may include the loan balance, estimation of the collectability of the underlying receivables held by the customer used as collateral, sale and liquidation value of the inventory held by the customer used as collateral and historical loss-given-default parameters. In cases in which the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized. The net carrying value of these loans was $192.7 million and $448.8 million at September 30, 2020 and December 31, 2019, 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 RIC LHFS. The estimated fair value of these LHFS is calculated based on a combination of estimated market rates for similar loans with similar credit risks and a DCF analysis in which the Company uses significant unobservable inputs on key assumptions, including historical default rates and adjustments to reflect voluntary prepayments, prepayment rates, discount rates reflective of the cost of funding, and credit loss expectations. The lower of cost or fair value adjustment for personal LHFS includes customer default activity and adjustments related to the net change in the portfolio balance during the reporting period.

For loans that are considered collateral-dependent, such as certain bankruptcy loans, impairment is measured based on the fair value of the collateral less its estimated cost to sell. For the underlying collateral, the estimated fair value is obtained using historical auction rates and current market levels of used car prices.
57



NOTE 12. FAIR VALUE (continued)

The estimated fair value of goodwill is valued using unobservable inputs and is classified as Level 3. Fair value is calculated using widely-accepted valuation techniques, such as the guideline public company market approach (earnings and price-to-tangible book value multiples of comparable public companies) and the income approach (the DCF method). The Company uses a combination of these accepted methodologies to determine the fair valuation of reporting units. Several factors are taken into account, including actual operating results, future business plans, economic projections, and market data. On a quarterly basis, the Company assesses whether or not impairment indicators are present. For information on the Company's goodwill impairment test and the results of the most recent goodwill impairment test, see Note 5 for a description of the Company's goodwill valuation methodology.

Fair Value Adjustments

The following table presents the increases and decreases in value of certain assets that are measured at fair value on a nonrecurring basis for which a fair value adjustment has been included in the Condensed Consolidated Statements of Operations relating to assets held at period-end:
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
(in thousands)Statement of Operations Location2020201920202019
Impaired LHFICredit loss expense$(12,036)$(3,877)$(5,883)$(9,990)
Foreclosed assets
Miscellaneous income, net (1)
(736)(4,014)(3,857)(7,798)
LHFS
Miscellaneous income, net (1)
(56,598)(67,021)(387,900)(239,059)
Auto loans impaired due to bankruptcyCredit loss expense0 1,943 0 (9,721)
Goodwill impairment
Impairment of goodwill (1)(2)
0 0 (1,848,228)0 
MSRs
Miscellaneous income, net (1)
0 (128)(138)(483)
(1)    Gains are disclosed as positive numbers while losses are shown as a negative number regardless of the line item being affected.
(2)    In the period ended September 30, 2020, Goodwill totaling $2.2 billion was written down to its implied fair value of $350.0 million, resulting in a goodwill impairment charge of $1.8 billion.

Level 3 Inputs - Significant Recurring and Nonrecurring Fair Value Assets and Liabilities

The following table presents quantitative information about the significant unobservable inputs within significant Level 3 recurring and nonrecurring assets and liabilities at September 30, 2020 and December 31, 2019, respectively:
(dollars in thousands)Fair Value at September 30, 2020Valuation TechniqueUnobservable InputsRange
(Weighted Average)
Financial Assets:
ABS
Financing bonds$50,566 DCF
Discount rate (1)
 0.32% - 0.32% (0.32% )
RICs HFI61,448 DCF
CPR (2)
6.66 %
Discount rate (3)
 9.5% - 14.5% (11.66%)
Recovery rate (4)
 25% - 43% (42.22%)
Personal LHFS (8)
763,292 Lower of market or Income approachMarket participant view 60.00% - 70.00%
Discount rate 20.00% - 30.00%
Default rate 40.00% - 50.00%
Net principal & interest payment rate 65.00% - 75.00%
Loss severity rate 90.00% - 95.00%
MSRs (7)
81,776 DCF
CPR (5)
  [0.00% - 30.60%] (16.30%)
Discount rate (6)
9.38 %
(1)    Based on the applicable term and discount index.
(2)    Based on the analysis of available data from a comparable market securitization of similar assets.
(3)    Based on the cost of funding of debt issuance and recent historical equity yields. Weighted average amount was developed by weighting the associated relative unpaid principal balances.
(4)    Based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. Weighted average amount was developed by weighting the associated relative unpaid principal balances.
(5)    Average CPR projected from collateral stratified by loan type and note rate. Weighted average amount was developed by weighting the associated relative unpaid principal balances.
(6)    Average discount rate from collateral stratified by loan type and note rate. Weighted average amount was developed by weighting the associated relative unpaid principal balances.
(7)    Excludes MSR valued on a non-recurring basis for which we do not consider there to be significant unobservable assumptions.
58



NOTE 12. FAIR VALUE (continued)

(8)    Excludes non-significant Level 3 LHFS portfolios. The estimated fair value for personal LHFS (Bluestem) is calculated based on the lower of market participant view, a DCF analysis in which the Company uses significant unobservable inputs on key assumptions, and also considers the possible outcomes of the Bluestem bankruptcy process.

(dollars in thousands)Fair Value at December 31, 2019Valuation TechniqueUnobservable InputsRange
(Weighted Average)
Financial Assets:
ABS
Financing bonds$51,001 DCF
Discount rate (1)
 1.64% - 1.64% (1.64% )
Sale-leaseback securities12,234 
Consensus pricing (9)
Offered quotes (10)
103.00 %
RICs HFI84,334 DCF
CPR (2)
6.66 %
Discount rate (3)
 9.50% - 14.50% (13.16%)
Recovery rate (4)
 25% - 43% (41.12%)
Personal LHFS (8)
1,007,105 Lower of market or Income approachMarket participant view 70.00% - 80.00%
Discount rate 15.00% - 25.00%
Default rate 30.00% - 40.00%
Net principal & interest payment rate 70.00% - 85.00%
Loss severity rate90.00% - 95.00%
MSRs (7)
130,855 DCF
CPR (5)
 7.83% - 100.00% (11.97%)
Discount rate (6)
9.63 %
(1), (2), (3), (4), (5), (6), (7), (8) - See corresponding footnotes to the September 30, 2020 Level 3 significant inputs table above.
(9)    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.
(10)    Based on the nature of the input, a range or weighted average does not exist. The Company owns one sale-leaseback security.

Fair Value of Financial Instruments

The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company's financial instruments are as follows:
 September 30, 2020December 31, 2019
(in thousands)Carrying ValueFair ValueLevel 1Level 2Level 3Carrying ValueFair ValueLevel 1Level 2Level 3
Financial assets:    
Cash and cash equivalents$8,871,504 $8,871,504 $8,871,504 $0 $0 $7,644,372 $7,644,372 $7,644,372 $0 $0 
Investments in debt securities AFS11,078,972 11,078,972 0 11,028,406 50,566 14,339,758 14,339,758 0 14,276,523 63,235 
Investments in debt securities HTM5,488,576 5,668,891 0 5,668,891 0 3,938,797 3,957,227 0 3,957,227 0 
Other investments (3)
792,464 792,465 2,359 790,106 0 1,097 1,097 379 718 0 
LHFI, net85,377,508 89,460,378 0 47,237 89,413,141 89,059,251 90,490,760 0 1,142,998 89,347,762 
LHFS1,147,578 1,147,579 0 240,190 907,389 1,420,223 1,420,295 0 289,009 1,131,286 
Restricted cash5,827,423 5,827,423 5,827,423 0 0 3,881,880 3,881,880 3,881,880 0 0 
MSRs(1)
81,776 81,776 0 0 81,776 132,683 139,052 0 0 139,052 
Derivatives1,403,599 1,403,599 0 1,387,232 16,367 556,331 556,331 0 553,222 3,109 
Financial liabilities:    
Deposits (2)
4,385,602 4,421,527 0 4,421,527 0 9,375,281 9,384,994 0 9,384,994 0 
Borrowings and other debt obligations48,135,215 49,010,598 0 32,953,345 16,057,253 50,654,406 51,232,798 0 36,114,404 15,118,394 
Derivatives1,220,385 1,220,385 0 1,214,548 5,837 546,414 546,414 0 543,560 2,854 
(1)    The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or fair value.
(2) This line item excludes deposit liabilities with no defined or contractual maturities in accordance with ASU 2016-01.
(3) This line item includes CDs with a maturity greater than 90 days and investments in trading securities.

59



NOTE 12. 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 do they reflect potential taxes and the expenses that would be incurred in an actual sale or settlement. Accordingly, the aggregate fair value amounts presented above do not represent the underlying value of the Company.

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

Cash, cash equivalents and restricted cash

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

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

Investments in debt securities HTM

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

LHFI, net

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

LHFS

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

Deposits

For deposits with no stated maturity, such as non-interest-bearing and interest-bearing demand deposit accounts, savings accounts and certain money market accounts, the carrying value approximates fair values. The fair value of fixed-maturity deposits is estimated by discounting cash flows using currently offered rates for deposits of similar remaining maturities and have been classified as Level 2.

60



NOTE 12. FAIR VALUE (continued)

Borrowings and other debt obligations

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

FVO for Financial Assets and Financial Liabilities

LHFS

The Company's LHFS portfolios that are measured using the FVO consist of residential mortgage LHFS. The adoption of the FVO for residential mortgage loans classified as HFS allows the Company to record the mortgage LHFS portfolio at fair market value compared to 32.4%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 35.8%related hedges are carried at fair value, which reduces earnings volatility, as the amounts more closely offset.

RICs HFI

To reduce accounting and operational complexity, the Company elected the FVO for certain of its RICs HFI. These loans consisted primarily of SC’s RICs accounted for by SC under ASC 310-30 and non-performing loans acquired by SC under optional clean up calls from its non-consolidated Trusts.

The following table summarizes the differences between the fair value and the principal balance of LHFS and RICs measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019:
September 30, 2020December 31, 2019
(in thousands)Fair ValueAggregate UPBDifferenceFair ValueAggregate UPBDifference
LHFS(1)
$240,190 $227,691 $12,499 $289,009 $284,111 $4,898 
RICs HFI61,448 64,646 (3,198)101,968 113,863 (11,895)
Nonaccrual loans2,343 3,036 (693)10,616 12,917 (2,301)
(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.

Residential MSRs

The Company maintains an MSR asset for sold residential real estate loans serviced for others. The Company elected to account for the corresponding periodsmajority of its existing portfolio of MSRs at fair value. This election created greater flexibility with regard to risk management of the asset by aligning the accounting for the MSRs with the accounting for risk management instruments, which are also generally carried at fair value. At September 30, 2020 and December 31, 2019, the balance of these loans serviced for others accounted for at fair value was $13.4 billion and $15.0 billion, respectively. Changes in 2016.fair value are recorded through Miscellaneous income, net on the Condensed Consolidated Statements of Operations. As deemed appropriate, the Company economically hedges MSRs using interest rate swaps and forward contracts to purchase MBS. See further discussion on these derivative activities in Note 11 to these Condensed Consolidated Financial Statements. The remainder of the MSRs are accounted for using the lower of cost or fair value and are presented above in the section captioned "Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis."


61



NOTE 13. NON-INTEREST INCOME AND OTHER EXPENSES

The decreasefollowing table presents the details of the Company's Non-interest income for the following periods:
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
(in thousands)2020201920202019
Non-interest income:
Consumer and commercial fees$123,834 $133,049 $356,907 $412,566 
Lease income742,946 735,783 2,269,613 2,116,503 
Miscellaneous income, net
Mortgage banking income, net14,115 15,343 47,243 38,067 
BOLI14,855 15,338 43,764 45,769 
Capital market revenue56,949 48,326 179,417 146,290 
Net gain on sale of operating leases120,387 48,490 170,484 120,980 
Asset and wealth management fees52,984 45,020 156,575 132,224 
Loss on sale of non-mortgage loans(56,684)(87,399)(241,324)(238,771)
Other miscellaneous (loss) / income, net105,616 44,915 (25,994)83,290 
Net gain on sale of investment securities(148)2,267 31,646 2,646 
Total Non-interest income$1,174,854 $1,001,132 $2,988,331 $2,859,564 
Disaggregation of Revenue from Contracts with Customers

The following table presents the Company's Non-interest income disaggregated by revenue source:
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
(in thousands)2020201920202019
Non-interest income:
In-scope of revenue from contracts with customers:
Depository services(1)
$45,674 $63,016 $144,703 $179,298 
Commission and trailer fees(2)
47,466 39,971 144,730 119,607 
Interchange income, net(2)
15,648 16,891 47,567 49,854 
Underwriting service fees(2)
35,186 27,043 110,593 77,835 
Asset and wealth management fees(2)
32,283 35,169 101,574 109,166 
Other revenue from contracts with customers(2)
13,577 9,924 52,168 30,303 
Total in-scope of revenue from contracts with customers189,834 192,014 601,335 566,063 
Out-of-scope of revenue from contracts with customers:
Consumer and commercial fees(3)
64,860 59,432 178,248 200,972 
Lease income742,946 735,783 2,269,613 2,116,503 
Miscellaneous loss(3)
177,362 11,636 (92,511)(26,620)
Net gain/(loss) on sale of investment securities(148)2,267 31,646 2,646 
Total out-of-scope of revenue from contracts with customers985,020 809,118 2,386,996 2,293,501 
Total non-interest income$1,174,854 $1,001,132 $2,988,331 $2,859,564 
(1) Primarily recorded in the ETRCompany's Consolidated Statements of Operations within Consumer and commercial fees.
(2) Primarily recorded in the Company's Consolidated Statements of Operations within Miscellaneous income, net.
(3) The balance presented excludes certain revenue streams that are considered in-scope and presented above.
62



NOTE 13. NON-INTEREST INCOME AND OTHER EXPENSES (continued)

Other Expenses

The following table presents the Company's other expenses for the following periods:
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
(in thousands)202020192020
2019(1)
Other expenses:
Amortization of intangibles$14,724 $14,742 $44,211 $44,250 
Deposit insurance premiums and other expenses13,440 11,104 39,779 53,348 
Loss on debt extinguishment0 6 1,026 1,133 
Other administrative expenses115,909 145,870 313,344 404,399 
Other miscellaneous expenses6,176 18,407 29,618 33,236 
Total Other expenses$150,249 $190,129 $427,978 $536,366 
(1) The nine-month period ended September 30, 2019 includes $25.3 million of FDIC insurance premiums that relates to periods from the first quarter of 2015 through the fourth quarter of 2018. The Company has concluded that the out-of-period correction is immaterial to all impacted periods.


NOTE 14. INCOME TAXES

An income tax benefit of $53.3 million and a provision of $112.9 million were recorded for the three-month periods ended September 30, 2020 and 2019, respectively. An income tax benefit of $272.9 million and a provision of $384.5 million were recorded for the nine-month periods ended September 30, 2017 was predominantly due2020 and 2019, respectively. This resulted in an ETR of (6.5)% and 29.5% for the three-month periods ended September 30, 2020 and 2019, respectively, and 19.3% and 29.6% for the nine-month periods ended September 30, 2020 and 2019, respectively. The lower ETR for the three-month period ended September 30, 2020, compared to the undistributed net earningsthree-month period ended September 30, 2019, was primarily the result of a Puerto Rico subsidiaryan expected pre-tax loss for 2020, compared to pre-tax income in 2019 and the reversal of the deferred tax liability associated with the book over tax basis difference for the investment in SC in the third quarter of 2020. The lower ETR for the nine-month period ended September 30, 2020, compared to the nine-month period ended September 30, 2019, was primarily the result of an expected pre-tax loss for 2020, compared to pre-tax income in 2019, and the impairment of goodwill that will be indefinitely reinvested outsideis non-deductible for tax purposes, offset with the U.S.reversal of the deferred tax liability associated with the book over tax basis difference for the Company's investment in SC, as described further below.


56


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 12. INCOME TAXES (continued)


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


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

63
The Company filed a lawsuit against


NOTE 14. INCOME TAXES (continued)

On September 5, 2019, the United States in 2009 in Federal District Court in Massachusetts entered a stipulated judgment resolving the Company’s litigation relating to the proper tax consequences of two2 financing transactions with an international bank through which the Company borrowed $1.2 billion. As a result of these financing transactions,billion that was previously disclosed within its Form 10-K for 2018. That stipulated judgment resolved the Company paid foreign taxes of $264.0 million duringCompany’s tax liability for the years 2003 through 2007 and claimed a corresponding foreign2005 tax credit for foreign taxes paid during those years which the Internal Revenue Service ("IRS") disallowed. The IRS also disallowed the Company's deductions for interest expense and transaction costs, totaling $74.6 million in tax liability, and assessed penalties and interest totaling approximately $92.5 million.with no material effect on net income. The Company has paid the taxes, penalties and interest associatedagreed with the IRS adjustmentsto resolve the treatment of the same financing transactions for allthe 2006 and 2007 tax years on terms consistent with the September 5, 2019, stipulated judgment. The Congressional Joint Committee on Taxation has completed its review of the proposed resolution of the 2006 and 2007 tax years with no objection. The Company and the lawsuitIRS are now finalizing that resolution, which will determine whether the Company is entitled to a refund of the amounts paid.have no impact on net income.

On November 13, 2015, the Federal District Court issued a written opinion in favor of the Company on all contested issues, and in a judgment issued on January 13, 2016, ordered amounts assessed by the IRS for the years 2003 through 2005 to be refunded to the Company. The IRS appealed that judgment. On December 15, 2016, 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, 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 be remanded to the Federal District Court for further proceedings to determine, among other issues, whether penalties should be sustained. On March 16, 2017, the Company filed a petition requesting 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. On remand, the parties are awaiting the Court’s decision on motions for summary judgment filed by the Company regarding the remaining issues.

In response to the First Circuit's decision, the Company, at December 31, 2016, used its previously established $230.1 million tax reserve to write off deferred tax assets and a portion of the receivable that would not be realized under the Court's decision. Additionally, the Company established a $36.0 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 $36.0 million to an increase of zero.


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.

57


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS)
The following table presentsCompany applies an aggregate portfolio approach whereby income tax effects from AOCI are released only when an entire portfolio (i.e., all related units of account) of a particular type is liquidated, sold or extinguished. 

The Company had a net deferred tax liability balance of $69.2 million at September 30, 2020, compared to a net deferred tax liability balance of $1.0 billion at December 31, 2019 (consisting of a deferred tax asset balance of $503.7 million and a deferred tax liability balance of $1.5 billion). During the componentsquarter, the Company’s ownership of accumulated other comprehensive income/(loss),SC reached the 80% threshold which requires SC to file a consolidated federal tax return with the Company. Due to the filing of the consolidated federal tax return, SC and SHUSA's deferred tax assets and liabilities are now offset and reported on a net basis. SHUSA also reversed its deferred tax liability of related tax,$306.6 million for the three-monthbook over tax basis difference in its investment in SC as SHUSA now has the ability and expects to recover its investment in SC in a tax free manner. The $948.2 million decrease in net deferred liability for the nine-month periodsperiod ended September 30, 20172020 was primarily due to the adoption of the CECL standard during the first quarter of 2020 and 2016, respectively.


Total Other
Comprehensive Income/(Loss)
Total Accumulated
Other Comprehensive (Loss)/Income

Three-Month Period Ended September 30, 2017
June 30, 2017


September 30, 2017

Pretax
Activity
Tax
Effect
Net Activity
Beginning
Balance
Net
Activity
Ending
Balance

(in thousands)
Change in accumulated gains/(losses) on cash flow hedge derivative financial instruments$5,298

$(955)
$4,343

 
 
 
Reclassification adjustment for net (losses)/gains on cash flow hedge derivative financial instruments (1)
(6,837)
2,002

(4,835)
 
 
 
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments(1,539)
1,047

(492)
$(2,689)
$(492)
$(3,181)















Change in unrealized gains/(losses) on investment securities available-for-sale16,795

(5,910)
10,885

 
 
 
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities (2)
(6,707)
2,360

(4,347)





Reclassification adjustment for net (gains)/losses included in net income/(expense) on OTTI securities—

—

—






Net unrealized gains/(losses) on investment securities available-for-sale10,088

(3,550)
6,538

(94,436)
6,538

(87,898)


















Pension and post-retirement actuarial gains/(losses)(3)
912

(355)
557

(54,688)
557

(54,131)


















As of September 30, 2017$9,461

$(2,858)
$6,603

$(151,813)
$6,603

$(145,210)
            

(1) Net (losses)/gains reclassified into Interest on borrowings and other debt obligations in the Condensed Consolidated Statementreversal 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 Operationsdeferred tax liability for the salebook over tax basis difference associated with the Company’s investment in SC during the third quarter of available-for-sale securities.2020.
(3) Included in the computation of net periodic pension costs.



58


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS






NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS) (continued)

 Total Other
Comprehensive Income/(Loss)		 Total Accumulated
Other Comprehensive (Loss)/Income
 Nine-Month Period Ended September 30, 2017 December 31, 2016 
 September 30, 2017
 Pretax
Activity		 Tax
Effect		 Net Activity Beginning
Balance		 Net
Activity		 Ending
Balance
 (in thousands)
Change in accumulated gains/(losses) on cash flow hedge derivative financial instruments$12,469
 $(2,950) $9,519
      
Reclassification adjustment for net (losses)/gains on cash flow hedge derivative financial instruments (1)
(8,315) 2,340
 (5,975)      
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments4,154
 (610) 3,544
 $(6,725) $3,544
 $(3,181)
            
Change in unrealized gains/(losses) on investment securities available-for-sale83,175
 (29,892) 53,283
      
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities (2)
(16,276) 5,849
 (10,427)      
Reclassification adjustment for net (gains)/losses included in net income/(expense) on OTTI securities—
 —
 —
      
Net unrealized gains/(losses) on investment securities available-for-sale66,899
 (24,043) 42,856
 (130,754) 42,856
 (87,898)
            
Pension and post-retirement actuarial gains/(losses)(3)
2,736
 (1,138) 1,598
 (55,729) 1,598
 (54,131)
            
As of September 30, 2017$73,789

$(25,791)
$47,998

$(193,208)
$47,998

$(145,210)
            

(1) Net (losses)/gains 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.


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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS) (continued)

 Total Other
Comprehensive (Loss)/Income		 Total Accumulated
Other Comprehensive Loss
 Three-Month Period Ended September 30, 2016 June 30, 2016   September 30, 2016
 Pretax
Activity		 Tax
Effect		 Net Activity Beginning
Balance		 Net
Activity		 Ending
Balance
 (in thousands)
Change in accumulated gains/(losses) on cash flow hedge derivative financial instruments$69,464
 $(15,775) $53,689
      
Reclassification adjustment for net gains/(losses) on cash flow hedge derivative financial instruments (1)
254
 (115) 139
      
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments69,718
 (15,890) 53,828
 $(63,881) $53,828
 $(10,053)
            
Change in unrealized (losses)/gains on investment securities available-for-sale(105,270) 38,852
 (66,418)      
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities (2)
—
 —
 —
      
Reclassification adjustment for net losses/(gains) included in net income/(expense) on OTTI securities (3)
—
 —
 —
      
Reclassification adjustment for net (gains)/losses included in net income—
 —
 —
      
Net unrealized (losses)/gains on investment securities available-for-sale(105,270) 38,852
 (66,418) 83,262
 (66,418) 16,844
            
Pension and post-retirement actuarial losses(4)
(4,085) (364) (4,449) (56,877) (4,449) (61,326)
            
As of September 30, 2016$(39,637) $22,598
 $(17,039) $(37,496) $(17,039) $(54,535)
            

(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) 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.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 13. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS) (continued)

            
 Total Other
Comprehensive Income/(Loss)		 Total Accumulated
Other Comprehensive (Loss)/Income
 Nine-Month Period Ended September 30, 2016 December 31, 2015   September 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$(11,538) $15,117
 $3,579
      
Reclassification adjustment for net gains/(losses) on cash flow hedge derivative financial instruments(1)
4,379
 (1,430) 2,949
      
Net unrealized (losses)/gains on cash flow hedge derivative financial instruments(7,159) 13,687
 6,528
 $(16,581) $6,528
 $(10,053)
            
Change in unrealized gains/(losses) on investment securities available-for-sale246,508
 (99,376) 147,132
      
Reclassification adjustment for net (gains)/losses included in net income/(expense) on non-OTTI securities (2)
(57,770) 23,398
 (34,372)      
Reclassification adjustment for net losses/(gains) included in net income/(expense) on OTTI securities (3)
44
 (18) 26
      
Reclassification adjustment for net (gains)/losses included in net income(57,726) 23,380
 (34,346)      
Net unrealized gains/(losses) on investment securities available-for-sale188,782
 (75,996) 112,786
 (95,942) 112,786
 16,844
            
Pension and post-retirement actuarial losses(4)
(2,227) (1,092) (3,319) (58,007) (3,319) (61,326)
            
As of September 30, 2016$179,396
 $(63,401) $115,995
 $(170,530) $115,995
 $(54,535)

(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) 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.





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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 14.15. 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 11 to these Condensed Consolidated Financial Statements for discussion of all derivative contract commitments.


64



NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

The following table details the amount of commitments at the dates indicated:
Other CommitmentsSeptember 30, 2020December 31, 2019
 (in thousands)
Commitments to extend credit$32,140,936 $30,685,478 
Letters of credit1,626,932 1,592,726 
Commitments to sell loans44,193 21,341 
Unsecured revolving lines of credit0 24,922 
Recourse exposure on sold loans26,957 53,667 
Total commitments$33,839,018 $32,378,134 
Other Commitments September 30, 2017 December 31, 2016
  (in thousands)
Commitments to extend credit $29,128,608
 $28,889,904
Letters of credit 1,608,257
 2,071,089
Unsecured revolving lines of credit 27,126
 30,547
Recourse exposure on sold loans 70,036
 69,877
Commitments to sell loans 29,010
 49,121
Total commitments $30,863,037
 $31,110,538


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 September 30, 20172020 and December 31, 20162019 are $6.8$6.0 billion and $6.3$5.7 billion, respectively, of commitments that can be canceled by the Company without notice.


The following table details the amount of commitments to extend credit expiring per period as of the dates indicated:
  September 30, 2017 December 31, 2016
  (in thousands)
1 year or less $5,223,450
 $5,656,552
Over 1 year to 3 years 5,226,031
 5,265,685
Over 3 years to 5 years 3,909,397
 4,680,057
Over 5 years (1)
 14,769,730
 13,287,610
Total $29,128,608
 $28,889,904

(1)Includes certain commitments to extend credit that do not have a contractual maturity date, but are expected to be outstanding more than 5 years.



62


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Unsecured Revolving Lines of Credit

Such commitments, included in the Commitments to extend credit table above, arise primarily from agreements with customers for unused lines of credit on unsecured revolving accounts and credit cards, provided there is no violation of conditions in the underlying agreement. These commitments, substantially all of whichalso include amounts committed by the Company can terminate at any timeto fund its investments in CRA, LIHTC, and other equity method investments in which do not necessarily represent future cash requirements, are periodically reviewed based on account usage, customer creditworthiness and loan qualifications.it is a limited partner.


Letters of Credit


The Company’s letters of credit meet the definition of a guarantee. Letters of credit commit the Company to make payments on behalf of its customers if specified future events occur. The guarantees are primarily issued to support public and private borrowing arrangements. The weighted average term of these commitments at September 30, 20172020 was 13.314 months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the event of a requested draw by the beneficiary that complies with the terms of the letter of credit, the Company would be required to honor the commitment. The Company has various forms of collateral for these letters of credit, including real estate assets and other customer business assets. The maximum undiscounted exposure related to these commitments at September 30, 20172020 was $1.6 billion. The fees related to letters of credit are deferred and amortized over the life of the respective commitments, and were immaterial to the Company’s financial statements at September 30, 2017.2020. Management believes that the utilization rate of these letters of credit will continue to be substantially less than the amount of the commitments, as has been the Company’s experience to date. As of September 30, 2017 and December 31, 2016, the liability related to these letters of credit was $15.0 million and $8.1 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 withinAs of September 30, 2020 and December 31, 2019, the reserve forliability related to unfunded lending commitments at September 30, 2017of $148.0 million and December 31, 2016 were$89.6 million, respectively.

Unsecured Revolving Lines of Credit

Such commitments arise primarily from agreements with customers for unused lines of credit outstandingon unsecured revolving accounts and credit cards, provided there is no violation of $101.1 millionconditions in the underlying agreement. These commitments, substantially all of which the Company can terminate at any time and $114.4 million, respectively.which do not necessarily represent future cash requirements, are reviewed periodically based on account usage, customer creditworthiness and loan qualifications.

The following table details the amount of letters of credit expiring per period as of the dates indicated:
  September 30, 2017 December 31, 2016
  (in thousands)
1 year or less $1,047,330
 $1,360,495
Over 1 year to 3 years 463,334
 399,866
Over 3 years to 5 years 68,451
 283,975
Over 5 years 29,142
 26,753
Total $1,608,257
 $2,071,089


Loans Sold with Recourse


The Company has loans sold with recourse that meet the definition of a guarantee. For loans sold with recourse under the terms of its multifamily sales program with the FNMA, the Company retained a portion of the associated credit risk. The UPB outstanding of loans sold in these programs was $152.6 million as of September 30, 2017 and $341.7 million as of December 31, 2016. As a result of its agreement with FNMA, the Company retained a 100% first loss position on each multifamily loan sold to FNMA until the earlier to occur of (i) the aggregate approved losses on multifamily loans sold to FNMA reaching the maximum loss exposure for the portfolio as a whole of $34.4 million as of September 30, 2017 and $34.4 million as of December 31, 2016, or (ii) the time when such loans sold to FNMA under this program are fully paid off. Any losses sustained as a result of impediments in standard representations and warranties would be in addition to the maximum loss exposure.


63
65





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 14.15. 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 internal specific information and an industry-based default curve with a range of estimated losses. At September 30, 2017 and December 31, 2016, the Company had $1.6 million and $3.8 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.


SC Commitments


The following table summarizes liabilities recorded for commitments and contingencies as of September 30, 2020 and December 31, 2019, all of which are included in Accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets:
Agreement or Legal MatterCommitment or ContingencySeptember 30, 2020December 31, 2019
(in thousands)
Chrysler AgreementRevenue-sharing and gain/(loss), net-sharing payments$50,809 $12,132 
Agreement with Bank of AmericaServicer performance fee1,508 2,503 
Agreement with CBPLoss-sharing payments392 1,429 
Other contingenciesConsumer arrangements25,099 1,991 

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

Chrysler Agreement

Under the terms of the Chrysler Agreement, SC must make revenue sharing payments to FCA and also must share with FCA when residual gains/(losses) on leased vehicles exceed a specified threshold. The agreement also requires that SC maintain at least $5.0 billion in funding available for floor plan loans and $4.5 billion of financing dedicated to FCA retail financing. In turn, FCA must provide designated minimum threshold percentages of its subvention business to SC.

Agreement with Bank of America

Until January 2017, SC had a flow agreement with Bank of America whereby SC was committed to sell up to $300.0 million of eligible loans to the bank each month. SC retains servicing on all sold loans and may receive or pay a servicer performance payment based on an agreed-upon formula if performance on the sold loans is better or worse, respectively, than expected performance at the time of sale. Servicer performance payments are due six years from the cut-off date of each loan sale.

Agreement with CBP

Until May 2017, SC sold loans to CBP under terms of a flow agreement and predecessor sale agreements. SC retained servicing on the sold loans and owes CBP a loss-sharing payment capped at 0.5% of the original pool balance if losses exceed a specified threshold, established on a pool-by-pool basis. Loss-sharing payments are due the month in which net losses exceed the established threshold of each loan sale.

66



NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Agreements

Bluestem

SC is party to agreements with Bluestem whereby SC is committed to purchase certain new advances on personal revolving financings originated by a third-party retailer,receivables, along with existing balances on accounts with new advances, originated by Bluestem for an initial term ending in April 2020 and renewing through April 2022 at Bluestem's option. As of September 30, 2020 and December 31, 2019, the retailer's option. total unused credit available to customers was $2.8 billion and $3.0 billion, respectively. In 2020, SC purchased $0.8 billion of receivables out of the $3.0 billion unused credit available to customers as of December 31, 2019. In 2019, SC purchased $1.2 billion of receivables out of the $3.1 billion unused credit available to customers as of December 31, 2018. In addition, SC purchased $151.2 million and $137.8 million of receivables related to newly-opened customer accounts during the nine-month periods ended September 30, 2020 and 2019, respectively.

Each customer account generated under the agreements generally is approved with a credit limit higher than the amount of the initial purchase, with each subsequent purchase automatically approved as long as it does not cause the account to exceed its limit and the customer is in good standing. As of September 30, 20172020 and December 31, 2016,2019, SC was obligated to purchase $12.9$13.3 million and $12.6$10.6 million, respectively, in receivables that had been originated by the retailerBluestem but not yet purchased by SC. SC also is required to make a profit-sharing payment to the retailerBluestem 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,The agreement, among other provisions, increases the profit-sharing percentage retained by SC, gives the retailerBluestem the right to repurchase up to 9.99% of the existing portfolio at any time during the term of the agreement and, providedprovides that, if the repurchase right is exercised, gives the retailerBluestem has the right to retain up to 20%20.00% of new accounts subsequently originated.


On March 9, 2020, Bluestem and certain of its subsidiaries and affiliates filed Chapter 11 bankruptcy in the United States District Court for the District of Delaware. On August 28, 2020, BLST Operating Company LLC. purchased the Bluestem assets from bankruptcy and assumed Bluestem's obligations under the parties' agreement.

Others

Under terms of an application transfer agreement with an original equipment manufacturer (“OEM") other than Fiat Chrysler Automobiles US LLC ("FCA"),Nissan, SC has the first opportunity to review for its own portfolio any credit applications turned down by the OEM'sNissan’s captive finance company. The agreement does not require SC to originate any loans, but for each loan originated SC will pay the OEMNissan a referral fee.


In connection with the sale of RICs through securitizations and other sales, SC has made standard representations and warranties customary to the consumer finance industry. Violations of these representations and warranties may require SC to repurchase loans previously sold to on- or off-balance sheet Trusts or other third parties. As of September 30, 2017,2020, there were no loans that were the subject of a demand to repurchase or replace for breach of representations and warranties for SC's ABS or other sales. In the opinion of management, the potential exposure of other recourse obligations related to SC’s RIC salesRICs sale agreements willis not expected to have a material adverse effect on the Company's or SC’s business, consolidated financial position, results of operations, or cash flows.


Santander has provided guarantees on the covenants, agreements, and obligations of SC under the governing documents of its warehouse facilities and privately issued amortizing notes. These guarantees are limited to the obligations of SC as servicer.


Under terms of the Chrysler Agreement,In November 2015, 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 $13.3 million and $10.1 million at September 30, 2017 and December 31, 2016, respectively, related to these obligations.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

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 September 30, 2017. If the Chrysler Agreement were to terminate, there could be a materially adverse impact to our and SC's business financial condition and results of operations.

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 $8.1 million and $9.8 million at September 30, 2017 and December 31, 2016, respectively, related to this obligation.

Until May 1, 2017, SC sold loans to Citizens Bank of Pennsylvania ("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 $4.9 million and $4.6 million at September 30, 2017 and December 31, 2016, respectively, related to this obligation.

As of September 30, 2017, SC was party toexecuted a forward flow asset sale agreement with a third party under the terms of which SC is committed to sell $350.0 million in charged-off loan receivables in bankruptcy status on a quarterly basis 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.basis. However, any sale of more than $275.0 millionis subject to a market price check. AsThe remaining aggregate commitment as of September 30, 20172020 and December 31, 2016, the remaining aggregate commitments were $108.42019 not subject to a market price check was $27.7 million and $166.2$39.8 million, respectively.


Pursuant to the terms of a separation agreement among SC`s former Chief Executive Officer ("CEO") Thomas G. Dundon, SC, DDFS LLC, the Company and Santander, upon satisfaction of applicable conditions, including receipt of required regulatory approvals, SC will owe Mr. Dundon a cash payment of up to $115.1 million. Refer to Note 15 for additional transactions involving the Company and the former CEO of SC.

SC is or may be subject to potential liability under various other contingent exposures. SC had accrued $8.6 million and zero at September 30, 2017 and December 31, 2016, 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 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 in the entire island, which resulted in extended delays in BSPR returning to normal operations.

65


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

The Company assessed the potential additional credit losses related to its consumer and commercial lending exposures in the greater Texas, Florida and Puerto Rico regions and has increased its allowance for loan losses by approximately $95 million in the third quarter of 2017. However, for credit exposures in Puerto Rico, given the current state in the region, the Company has had limited information with which to estimate probable credit losses. As of September 30, 2017, the Company has approximately $3.6 billion of loan exposures in Puerto Rico consisting of $1.7 billion in consumer loans, $1.6 billion in commercial loans, and $300 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.
See discussion under the "Puerto Rico FINRA Arbitrations" section of Note 14 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.

67



NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Legal and Regulatory Proceedings


Periodically,The Company, including its subsidiaries, is and in the Company isfuture periodically expects to be party to, or otherwise involved in, various claims, disputes, lawsuits, investigations, regulatory matters and other legal matters and proceedings that arise in the ordinary course of business. In view of the inherent difficulty of predicting the outcome of any such claim, dispute, lawsuit, investigation, regulatory matter and/or legal proceeding, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of the matters, or the eventual loss, fines or penalties related to the matter.matters, if any. Accordingly, except as provided below, the Company is unable to reasonably estimate a range of its potential exposure, if any, to these claims, disputes, lawsuits, investigations, regulatory matters and other legal proceedings at this time. However, itIt 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 onmaterially and adversely affect the Company's business, financial position, liquidity, and results of operations.


In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation, investigation,legal and 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, investigationlegal or regulatory matterproceeding develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether the matter presents a material loss contingency that is probable and estimable. If a determination is made during a given quarter that a material loss contingency is probable and estimable, an accrued liability is established during such quarter with respect to such loss contingency;contingency, and the Company continues to monitor the matter for further developments that could affect the amount of the accrued liability previously established.


As of September 30, 20172020 and December 31, 2016,2019, the Company has accrued aggregate legal and regulatory liabilities of $63.7approximately $161 million and $98.8$295 million, respectively. Further, the Company believes that the estimate ofestimates the aggregate range of reasonably possible losses for legal and regulatory proceedings, in excess of reserves established, of up to $18.0approximately $147 million as of September 30, 2017. Descriptions2020. Set forth below are descriptions of the material lawsuits, regulatory matters and other legal proceedings to which the Company is subject are set forth below.subject.



SHUSA Matters
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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

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. On March 26, 2015, the Bank21, 2017, SC and SHUSA entered into a Consent Cease and Desist Order ("SIP Consent Order")written agreement with the OCC regarding identified deficiencies in SBNA's billing practices with regard to SIP. Pursuant to the SIP Consent Order, the Bank paid a civil monetary penalty ("CMP")FRB of $6.0 million and agreed to remediate customers who paid for but may not have received certain benefits of SIP. Prior to entering into the SIP Consent Order, the Bank made $37.3 million in remediation payments to customers, representing the total amount paid for product enrollment.

Subsequently, the Bank commenced a further review in order to remediate checking account customers who may have been charged an overdraft fee and credit card customers who may have been charged an over limit fee and/or finance charge related to SIP product fees. The approximate amount of the expected additional remediation is $5.2 million. On June 26, 2015, the 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, the actions and remediation set forth in the action plans are underway, as is ongoing quarterly reporting to the OCC.

CFPB Overdraft Coverage Consent Order

On April 1, 2014, the Bank received a civil investigative demand from the CFPB requesting information and documents in connection with the Bank’s marketing to consumers of overdraft coverage for automated teller machine ("ATM") and onetime debit card transactions through a third-party vendor. On July 14, 2016, the Bank entered into a consent order with the CFPB regarding these practices. Pursuant toBoston. Under the terms of the consent order, the Bank paid a CMPthat agreement, SC is required to enhance its compliance risk management program, board oversight of $10.0 millionrisk management and agreedsenior management oversight of risk management, and SHUSA is required to validate the elections made by customers who opted in to overdraft coverage for ATMenhance its oversight of SC's management and onetime debit card transactions in connection with telemarketing by the third-party vendor. operations. 

Mortgage Escrow Interest Putative Class Action

The Bank is also required to make certain changes to its third-party vendor oversight policy and its customer complaint policy.  By letter dated July 31, 2017, the CFPB indicated that it does not object to the Bank’s validation plan. The Bank is currently executing that 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

On May 22, 2013, the Bank receiveddefendant in a subpoena from the U.S. Attorney's Office for the Southern District of New York seeking information regarding claims for foreclosure expenses incurred in connection with the foreclosure of loans insured or guaranteed by the Federal Housing Agency, the FNMA or 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.

SC Matters

Periodically, SC is party to, or otherwise involved in, various lawsuits and other legal proceedings that arise in the ordinary course of business.

On August 26, 2014, a purported securitiesputative class action lawsuit was filed(the “Tepper Lawsuit”) in the United States District Court, Southern District of New York, captioned SteckDaniel and Rebecca Ruf-Tepper v. Santander Bank, N.A., No. 20-cv-00501. The Tepper Lawsuit, filed in January 2020, alleges that the Bank is obligated to pay interest on mortgage escrow accounts pursuant to state law. Plaintiffs filed an amended complaint and the Bank has filed a motion to dismiss.

Congressional Inquiry into PPP

After June 15, 2020, SBNA and seven other financial institutions received a request from the Congressional Select Subcommittee on the Coronavirus Crisis to provide information and documents related to PPP implementation.SBNA produced documents in response to this request and continues to cooperate with the subcommittee. On October 16, 2020, the Subcommittee issued its staff report on the investigation entitled “Undeserved and Unprotected: How the Trump Administration Neglected the Neediest Small Businesses in the PPP.”
68



NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

SC Matters

Securities Class Action and Shareholder Derivative Lawsuits

Deka Lawsuit: SC is a defendant in a purported securities class action lawsuit (the "Deka Lawsuit") in the United States District Court, Northern District of Texas, captioned Deka Investment GmbH et al. v. Santander Consumer USA Holdings Inc. et al., No. 1:14-cv-06942 (the "Deka Lawsuit").3:15-cv-2129-K. The Deka Lawsuit, which was filed in August 2014, was brought against SC, certain of its current and former directors and executive officers and certain institutions that served as underwriters in SC's 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 complaint alleges, among other things, that 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.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

The amended class action complaint in 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. OnIn 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. OnIn 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. Onclasses. In 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). In October 2018, the court vacated the order staying the Deka Lawsuit and ordered that merits discovery in the Deka Lawsuit be stayed until the court ruled on the issue of class certification. On July 28, 2020, the Company entered into a Stipulation of Settlement with the plaintiffs in the Deka Lawsuit that fully resolves all of the plaintiffs' claims, for a cash payment of $47 million. On August 13, 2020, the Court entered an order preliminarily approving the settlement and providing for notice, setting the final settlement hearing for January 12, 2021.


OnIn Re Santander Consumer USA Holdings, Inc. Derivative Litigation: In 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. 1161411614-VCG (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. OnIn December 29, 2015, the Feldman Lawsuit was stayed pending the resolution of the Deka Lawsuit.

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.

On In 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. # 12775No. 12775-VCG (the "Jackie888 Lawsuit"). The Jackie888 Lawsuit names as defendants current and former members of SC’s Board of Directors, and names SC as a nominal defendant. The complaint alleges, among other things, that the director defendants breached their fiduciary duties in connection with SC’s accounting practices and controls. The complaint seeks unspecifiedunspecified damages and equitable relief. OnIn April 13, 2017, the Jackie888 Lawsuit was stayed pending the resolution of the Deka Lawsuit. In March 2018, the Feldman Lawsuit and Jackie888 Lawsuit were consolidated under the caption In Re Santander Consumer USA Holdings, Inc. Derivative Litigation, Consol. C.A. No. 11614-VCG. In January 2020, the Company executed a Stipulation and Agreement of Settlement, Compromise and Release with the plaintiffs in the consolidated action that, subject to court approval, fully resolves all of the plaintiffs’ claims in the Feldman Lawsuit and the Jackie888 Lawsuit. The Stipulation provides for the settlement of the consolidated action and, in return the Company has enacted or will enact and implement certain corporate governance reforms and enhancements. The settlement hearing at which the Court would consider the settlement was scheduled for May 27, 2020, but a shareholder filed its notice of intent to object to the settlement and the parties agreed to postpone the settlement hearing to a later date.


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.


68Regulatory Investigations and Proceedings


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)


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,FRB of Boston, the CFPB, the DOJ, the SEC, the Federal Trade Commission and various state regulatory and enforcement agencies.


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NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Currently, such proceedingsmatters include, but are not limited to, the following:

•SC received a civil subpoena from the DOJ in 2014 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 securitizationsecuritization of nonprime auto loans since 2007,vehicle loans. SC has responded to these requests within the deadlines specified in the subpoenas and from the SEC requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime auto loans since 2013.

On March 21, 2017, SC and SHUSA entered into a written agreement (the "2017 Written Agreement")has otherwise cooperated with the FRBB. Under the terms of the 2017 Written Agreement, SC is requiredDOJ with respect 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.this matter.

•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. On May 19, 2020, all of the Consortium members and SC has been informed that theseannounced a settlement of the investigation requiring SC to: (1) pay a total of $65 million to the states serve as an executive committee on behalffor consumer remediation; (2) pay $5 million to the states for investigation costs; (3) pay up to $2 million in settlement administration costs; (4) provide $45 million in prospective debt forgiveness; (5) provide deficiency waivers for a defined class of a group of 30 state Attorneys General. The subpoenas and/orSC customers; and (6) implement certain enhancements to its loan underwriting process.
•In August 2017, SC received CIDs from the executive committee states contained broadCFPB. The stated purpose of the CIDs are to determine whether SC has complied with the Fair Credit Reporting Act and related regulations. SC has responded to these requests for informationwithin the applicable deadlines and documents relatedhas otherwise cooperated with the CFPB with respect to SC's underwriting, securitization, servicing and collection of nonprime auto loans. SC believes that several other companiesthis matter. In February 2020, the Company received a communication from the CFPB inviting the Company to respond to the CFPB’s identified issues in the auto finance sector have received similar subpoenasform of a Notice of Opportunity to Respond and CIDs.Advise, in which the CFPB identified potential claims it might bring against SC. SC is cooperatingresponded to the CFPB and continues to cooperate in connection with the Attorneys General of the states involved. SC believes that it is reasonably possible that it will suffer a loss related to the Attorneys General, however, any such loss is not currently estimable.investigation.


On January 10, 2017, theMississippi Attorney General of the State ofLawsuit

In January 2017, Mississippi (the "Mississippi AG")AG filed a lawsuit against SC in the Chancery Court of the First Judicial District of Hinds County, State of Mississippi, captioned State of Mississippi ex rel. Jim Hood, Attorney General of the State of Mississippi v. Santander Consumer USA Inc., C.A. # G-2017-28. The complaint alleges that SC engaged in unfair and deceptive business practices to induce Mississippi consumers to apply for loans that they could not afford. The complaint asserts claims under the Mississippi Consumer Protection Act (the "MCPA") and seeks unspecified civil penalties, equitable relief and other relief. OnIn March 31, 2017, SC filed motions to dismiss the Mississippi AG’s lawsuit. On May 18, 2017, SC 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, 2017, the Mississippi AG filed an opposition to the motion to stay, and on June 14, 2017, SC filed a reply to the Mississippi AG’s opposition. On September 25, 2017, the court granted the motion to stay and ordered a stay of all proceedings, excluding discovery and final briefing on motions to discuss.

On February 25, 2015, SC entered into a consent order with the DOJ, approved by the United States District Court for the Northern District of Texas, which resolves the DOJ's claims against the Company that certain of its repossession and collection activities during the period between January 2008 and February 2013 violated the Servicemen’s Civil Relief Act ("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’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.parties are proceeding with discovery.



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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 14. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

IHC MattersFair Value Adjustments


Periodically, SSLLC is party to pendingThe following table presents the increases and threatened legal actions and proceedings, including Financial Industry Regulatory Authority (“FINRA”) arbitration actions and class action claims.

Puerto Rico FINRA Arbitrations

As of September 30, 2017, SSLLC had received 270 FINRA arbitration cases related to Puerto Rico bonds and Puerto Rico closed-end funds. Most of these cases are based upon concerns regarding the local Puerto Rico securities market. The statements of claims allege, among other things, fraud, negligence, breach of fiduciary duty, breach of contract, unsuitability, over-concentration and failure to supervise. There were 181 arbitration cases that remained pending as of September 30, 2017.

As a result of the recent hurricane impacting the Puerto Rico market including declinesdecreases in Puerto Rico bond and closed-end fund ("CEF") prices, it is possible that additional arbitration claims and/or increased claim amounts may be asserted in future periods.

Puerto Rico Closed-End Funds Shareholder Derivative and Class Action

On September 12, 2016, customersvalue of certain Puerto Rico CEFs filed a shareholder derivative and class action in the Court of First Instance of the Commonwealth of Puerto Rico, Superior Court of San Juan, captioned Dionisio Trigo González 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 management of those entities. 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 to the detriment of the Funds and their shareholders. Brought on behalf of the Funds and Puerto 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 case was removed to U.S. District Court, District of Puerto Rico. Plaintiffs moved to remand the action back to state court, Plaintiffs' motion is pending.

On October 13, 2017, a putative class action was filed in Puerto federal court against SSLLC 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 captioned Jorge Ponsa-Rabell, et. Al. v. SSLLC, Civ. No. 3:17-cv-02243 (D.PR. 2017).The complaint alleges that SSLLC defrauded purchasers by instructing its financial consultants to omit material facts to the purchasers or concealing material facts from the financial consultants to prevent disclosures to the purchasers regarding changes in the Puerto Rico market. SSLLC has not yet been served with the complaint.

SHUSA does not believe that there are any other proceedings, threatened or pending, that, if determined adversely, would have a material adverse effect on the consolidated financial position, results of operations, or liquidity of the Company.

NOTE 15. RELATED PARTY TRANSACTIONS

The Company has various debt agreements with Santander. For a listing of these debt agreements, see Note 11 to the Condensed Consolidated Financial Statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2016. 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.

On March 28, 2017, SHUSA received a $9.0 million capital contribution from Santander.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 15. RELATED PARTY TRANSACTIONS (continued)

On March 29, 2017, SC entered into a Master Securities Purchase Agreement with Santander, whereby it has the option to sell a contractually determined amount of eligible prime loans to Santander, through the SPAIN securitization platform, for a term ending in December 2018. SC will provide servicing on all loans originated under this arrangement. For the nine months ended September 30, 2017, SC sold $1.2 billion of loans under this arrangement. Under a separate securities purchase agreement, SC sold $1.3 billion of prime loans to Santander during the three months ended September 30, 2017. A total loss of $6.8 million and $13.0 million was recognized for the three and nine-months period ended September 30, 2017, which is included in Miscellaneous income, net in the Condensed Consolidated Statement of Operations. SC had $14.1 million of collections due to Santander as of September 30, 2017.

During the third quarter of 2017, SBNA sold $372.1 million of commercial loans to Santander. The sale resulted in $2.4 million of net gain for the nine-month period ended September 30, 2017, which is included in Miscellaneous Income, net in the Condensed Consolidated Statement of Operations.

Employment and Related Agreements

On July 2, 2015, SC announced the departure of Mr. Dundon from his roles as Chairman of the Board and CEO 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 September 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.

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 an 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 September 30, 2017 and December 31, 2016, had an UPB 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 $928.3 million plus interest that has accrued since the Call End Date. To date, the Call Transaction has not been consummated.


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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 15. RELATED PARTY TRANSACTIONS (continued)

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. 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 specified 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 rate 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's New York branch ("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.


NOTE 16. FAIR VALUE

General

A portion of the Company’s assets and liabilities are carried at fair value, including AFS investment securities and derivative instruments. In addition, the Company elects to account for its residential mortgages held for sale and a portion of its MSRs at fair value. Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include impairments for certain loans and foreclosed assets.

As of September 30, 2017, $18.2 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 $179.5 million of these financial assets were measured using quoted market prices for identical instruments, or Level 1 inputs. Approximately $17.3 billion of these financial assets were measured using valuation methodologies involving market-based and market-derived information, or Level 2 inputs. Approximately $721.0 million of these financial assets were measured using model-based techniques, or Level 3 inputs, and represented approximately 4.0% of total assets measured at fair value 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:

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 16. FAIR VALUE (continued)

•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 nine-month periods ended September 30, 2017 and 2016 for any assets or liabilities valued at fair value on a recurring basis.

73


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 nonrecurring basis for which a fair value adjustment has been included in the Condensed Consolidated Statements of Operations relating to assets held at period-end:
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
(in thousands)Statement of Operations Location2020201920202019
Impaired LHFICredit loss expense$(12,036)$(3,877)$(5,883)$(9,990)
Foreclosed assets
Miscellaneous income, net (1)
(736)(4,014)(3,857)(7,798)
LHFS
Miscellaneous income, net (1)
(56,598)(67,021)(387,900)(239,059)
Auto loans impaired due to bankruptcyCredit loss expense0 1,943 0 (9,721)
Goodwill impairment
Impairment of goodwill (1)(2)
0 0 (1,848,228)0 
MSRs
Miscellaneous income, net (1)
0 (128)(138)(483)
(1)    Gains are disclosed as positive numbers while losses are shown as a negative number regardless of the line item being affected.
(2)    In the period ended September 30, 2020, Goodwill totaling $2.2 billion was written down to its implied fair value of $350.0 million, resulting in a goodwill impairment charge of $1.8 billion.

Level 3 Inputs - Significant Recurring and Nonrecurring Fair Value Assets and Liabilities

The following table presents quantitative information about the significant unobservable inputs within significant Level 3 recurring and nonrecurring assets and liabilities at September 30, 2020 and December 31, 2019, respectively:
(dollars in thousands)Fair Value at September 30, 2020Valuation TechniqueUnobservable InputsRange
(Weighted Average)
Financial Assets:
ABS
Financing bonds$50,566 DCF
Discount rate (1)
 0.32% - 0.32% (0.32% )
RICs HFI61,448 DCF
CPR (2)
6.66 %
Discount rate (3)
 9.5% - 14.5% (11.66%)
Recovery rate (4)
 25% - 43% (42.22%)
Personal LHFS (8)
763,292 Lower of market or Income approachMarket participant view 60.00% - 70.00%
Discount rate 20.00% - 30.00%
Default rate 40.00% - 50.00%
Net principal & interest payment rate 65.00% - 75.00%
Loss severity rate 90.00% - 95.00%
MSRs (7)
81,776 DCF
CPR (5)
  [0.00% - 30.60%] (16.30%)
Discount rate (6)
9.38 %
(1)    Based on the applicable term and discount index.
(2)    Based on the analysis of available data from a comparable market securitization of similar assets.
(3)    Based on the cost of funding of debt issuance and recent historical equity yields. Weighted average amount was developed by weighting the associated relative unpaid principal balances.
(4)    Based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. Weighted average amount was developed by weighting the associated relative unpaid principal balances.
(5)    Average CPR projected from collateral stratified by loan type and note rate. Weighted average amount was developed by weighting the associated relative unpaid principal balances.
(6)    Average discount rate from collateral stratified by loan type and note rate. Weighted average amount was developed by weighting the associated relative unpaid principal balances.
(7)    Excludes MSR valued on a non-recurring basis by major product categoryfor which we do not consider there to be significant unobservable assumptions.
58



NOTE 12. FAIR VALUE (continued)

(8)    Excludes non-significant Level 3 LHFS portfolios. The estimated fair value for personal LHFS (Bluestem) is calculated based on the lower of market participant view, a DCF analysis in which the Company uses significant unobservable inputs on key assumptions, and also considers the possible outcomes of the Bluestem bankruptcy process.

(dollars in thousands)Fair Value at December 31, 2019Valuation TechniqueUnobservable InputsRange
(Weighted Average)
Financial Assets:
ABS
Financing bonds$51,001 DCF
Discount rate (1)
 1.64% - 1.64% (1.64% )
Sale-leaseback securities12,234 
Consensus pricing (9)
Offered quotes (10)
103.00 %
RICs HFI84,334 DCF
CPR (2)
6.66 %
Discount rate (3)
 9.50% - 14.50% (13.16%)
Recovery rate (4)
 25% - 43% (41.12%)
Personal LHFS (8)
1,007,105 Lower of market or Income approachMarket participant view 70.00% - 80.00%
Discount rate 15.00% - 25.00%
Default rate 30.00% - 40.00%
Net principal & interest payment rate 70.00% - 85.00%
Loss severity rate90.00% - 95.00%
MSRs (7)
130,855 DCF
CPR (5)
 7.83% - 100.00% (11.97%)
Discount rate (6)
9.63 %
(1), (2), (3), (4), (5), (6), (7), (8) - See corresponding footnotes to the September 30, 2020 Level 3 significant inputs table above.
(9)    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.
(10)    Based on the nature of the input, a range or weighted average does not exist. The Company owns one sale-leaseback security.

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 of September 30, 2017 and December 31, 2016.
follows:
 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other
Observable Inputs (Level 2)		 Significant
Unobservable Inputs (Level 3)		 Balance at
September 30, 2017
 (in thousands)
Financial assets:       
U.S. Treasury securities$179,473
 $1,488,634
 $—
 $1,668,107
Corporate debt—
 43,895
 —
 43,895
ABS—
 165,649
 370,184
 535,833
Equity securities(1)
—
 —
 —
 —
State and municipal securities—
 25
 —
 25
MBS—
 14,974,359
 —
 14,974,359
Total investment securities AFS(1)
179,473
 16,672,562
 370,184
 17,222,219
Trading securities1
 9,097
 —
 9,098
RICs held-for-investment—
 —
 204,694
 204,694
LHFS (2)
—
 198,254
 —
 198,254
MSRs (3)
—
 —
 143,524
 143,524
Derivatives:       
Cash flow—
 40,640
 —
 40,640
Mortgage banking interest rate lock commitments—
 —
 2,564
 2,564
Mortgage banking forward sell commitments—
 577
 9
 586
Customer related—
 196,020
 —
 196,020
Foreign exchange—
 33,767
 —
 33,767
Mortgage servicing—
 3,334
 —
 3,334
Interest rate swap agreements—
 8,801
 —
 8,801
Interest rate cap agreements—
 142,950
 —
 142,950
Other—
 9,307
 —
 9,307
Total financial assets$179,474
 $17,315,309
 $720,975
 $18,215,758
Financial liabilities:       
Derivatives:       
Cash flow$—
 $56,812
 $—
 $56,812
Customer related—
 131,240
 —
 131,240
Foreign exchange—
 35,550
 —
 35,550
Mortgage servicing—
 605
 —
 605
Interest rate swaps—
 1,884
 —
 1,884
Interest rate cap agreements—
 26,255
 —
 26,255
Option for interest rate cap—
 116,563
 —
 116,563
Total return settlement—
 —
 —
 —
Other—
 13,597
 695
 14,292
Total financial liabilities$—
 $382,506
 $695
 $383,201

 September 30, 2020December 31, 2019
(in thousands)Carrying ValueFair ValueLevel 1Level 2Level 3Carrying ValueFair ValueLevel 1Level 2Level 3
Financial assets:    
Cash and cash equivalents$8,871,504 $8,871,504 $8,871,504 $0 $0 $7,644,372 $7,644,372 $7,644,372 $0 $0 
Investments in debt securities AFS11,078,972 11,078,972 0 11,028,406 50,566 14,339,758 14,339,758 0 14,276,523 63,235 
Investments in debt securities HTM5,488,576 5,668,891 0 5,668,891 0 3,938,797 3,957,227 0 3,957,227 0 
Other investments (3)
792,464 792,465 2,359 790,106 0 1,097 1,097 379 718 0 
LHFI, net85,377,508 89,460,378 0 47,237 89,413,141 89,059,251 90,490,760 0 1,142,998 89,347,762 
LHFS1,147,578 1,147,579 0 240,190 907,389 1,420,223 1,420,295 0 289,009 1,131,286 
Restricted cash5,827,423 5,827,423 5,827,423 0 0 3,881,880 3,881,880 3,881,880 0 0 
MSRs(1)
81,776 81,776 0 0 81,776 132,683 139,052 0 0 139,052 
Derivatives1,403,599 1,403,599 0 1,387,232 16,367 556,331 556,331 0 553,222 3,109 
Financial liabilities:    
Deposits (2)
4,385,602 4,421,527 0 4,421,527 0 9,375,281 9,384,994 0 9,384,994 0 
Borrowings and other debt obligations48,135,215 49,010,598 0 32,953,345 16,057,253 50,654,406 51,232,798 0 36,114,404 15,118,394 
Derivatives1,220,385 1,220,385 0 1,214,548 5,837 546,414 546,414 0 543,560 2,854 
(1) Investment securities AFS disclosed on the Condensed Consolidated Balance Sheet at September 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 $147.0 million as of September 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.
(2) This line item excludes deposit liabilities with no defined or contractual maturities in accordance with ASU 2016-01.
(3) This line item includes CDs with a maturity greater than 90 days and investments in trading securities.

59



NOTE 12. 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 within this table.above for certain instruments cannot be substantiated by comparison to independent markets. In addition, the fair values do not reflect any premium or discount that could result from offering for sale at one time an entity’s entire holding of a particular financial instrument, nor do they reflect potential taxes and the expenses that would be incurred in an actual sale or settlement. Accordingly, the aggregate fair value amounts presented above do not represent the underlying value of the Company.


74


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 AFS(1)
225,050
 15,974,001
 814,567
 17,013,618
Trading securities214
 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 disclosedThe 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 SheetSheets:

Cash, cash equivalents and restricted cash

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

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

Investments in debt securities HTM

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

LHFI, net

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

LHFS

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

Deposits

For deposits with no stated maturity, such as non-interest-bearing and interest-bearing demand deposit accounts, savings accounts and certain money market accounts, the carrying value approximates fair values. The fair value of fixed-maturity deposits is estimated by discounting cash flows using currently offered rates for deposits of similar remaining maturities and have been classified as Level 2.

60



NOTE 12. FAIR VALUE (continued)

Borrowings and other debt obligations

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

FVO for Financial Assets and Financial Liabilities

LHFS

The Company's LHFS portfolios that are measured using the FVO consist of residential mortgage LHFS. The adoption of the FVO for residential mortgage loans classified as HFS allows the Company to record the mortgage LHFS portfolio at fair market value compared to the lower of cost, net of deferred fees, deferred origination costs, or market. The Company economically hedges its residential LHFS portfolio, which is reported at fair value. A lower of cost or market accounting treatment would not allow the Company to record the excess of the fair market value over book value, but would require the Company to record the corresponding reduction in value on the hedges. Both the loans and related hedges are carried at fair value, which reduces earnings volatility, as the amounts more closely offset.

RICs HFI

To reduce accounting and operational complexity, the Company elected the FVO for certain of its RICs HFI. These loans consisted primarily of SC’s RICs accounted for by SC under ASC 310-30 and non-performing loans acquired by SC under optional clean up calls from its non-consolidated Trusts.

The following table summarizes the differences between the fair value and the principal balance of LHFS and RICs measured at fair value on a recurring basis as of September 30, 2020 and 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.2019:
(2)
September 30, 2020December 31, 2019
(in thousands)Fair ValueAggregate UPBDifferenceFair ValueAggregate UPBDifference
LHFS(1)
$240,190 $227,691 $12,499 $289,009 $284,111 $4,898 
RICs HFI61,448 64,646 (3,198)101,968 113,863 (11,895)
Nonaccrual loans2,343 3,036 (693)10,616 12,917 (2,301)
(1)    LHFS disclosed on the Condensed Consolidated Balance SheetSheets also includes LHFS that are held at the lower of cost or fair value andthat are not presented within this table. There were no nonaccrual loans related to the LHFS measured using the FVO.
(3)
Residential MSRs

The Company had total MSRs of $150.3 million as of December 31, 2016.maintains an MSR asset for sold residential real estate loans serviced for others. The Company has elected to account for the majority of its MSRexisting portfolio of MSRs at fair value. This election created greater flexibility with regard to risk management of the asset by aligning the accounting for the MSRs with the accounting for risk management instruments, which are also generally carried at fair value. At September 30, 2020 and December 31, 2019, the balance of these loans serviced for others accounted for at fair value was $13.4 billion and $15.0 billion, respectively. Changes in fair value are recorded through Miscellaneous income, net on the Condensed Consolidated Statements of Operations. As deemed appropriate, the Company economically hedges MSRs using the FVO, while theinterest rate swaps and forward contracts to purchase MBS. See further discussion on these derivative activities in Note 11 to these Condensed Consolidated Financial Statements. The remainder of the MSRs are accounted for using the lower of cost or fair value and are not presented within this table.


75


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 16. FAIR VALUE (continued)

Assetsabove in the section captioned "Assets and Liabilities Measured at Fair Value on a Nonrecurring BasisBasis."

61



NOTE 13. NON-INTEREST INCOME AND OTHER EXPENSES

The following table presents the details of the Company's Non-interest income for the following periods:
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
(in thousands)2020201920202019
Non-interest income:
Consumer and commercial fees$123,834 $133,049 $356,907 $412,566 
Lease income742,946 735,783 2,269,613 2,116,503 
Miscellaneous income, net
Mortgage banking income, net14,115 15,343 47,243 38,067 
BOLI14,855 15,338 43,764 45,769 
Capital market revenue56,949 48,326 179,417 146,290 
Net gain on sale of operating leases120,387 48,490 170,484 120,980 
Asset and wealth management fees52,984 45,020 156,575 132,224 
Loss on sale of non-mortgage loans(56,684)(87,399)(241,324)(238,771)
Other miscellaneous (loss) / income, net105,616 44,915 (25,994)83,290 
Net gain on sale of investment securities(148)2,267 31,646 2,646 
Total Non-interest income$1,174,854 $1,001,132 $2,988,331 $2,859,564 
Disaggregation of Revenue from Contracts with Customers

The following table presents the Company's Non-interest income disaggregated by revenue source:
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
(in thousands)2020201920202019
Non-interest income:
In-scope of revenue from contracts with customers:
Depository services(1)
$45,674 $63,016 $144,703 $179,298 
Commission and trailer fees(2)
47,466 39,971 144,730 119,607 
Interchange income, net(2)
15,648 16,891 47,567 49,854 
Underwriting service fees(2)
35,186 27,043 110,593 77,835 
Asset and wealth management fees(2)
32,283 35,169 101,574 109,166 
Other revenue from contracts with customers(2)
13,577 9,924 52,168 30,303 
Total in-scope of revenue from contracts with customers189,834 192,014 601,335 566,063 
Out-of-scope of revenue from contracts with customers:
Consumer and commercial fees(3)
64,860 59,432 178,248 200,972 
Lease income742,946 735,783 2,269,613 2,116,503 
Miscellaneous loss(3)
177,362 11,636 (92,511)(26,620)
Net gain/(loss) on sale of investment securities(148)2,267 31,646 2,646 
Total out-of-scope of revenue from contracts with customers985,020 809,118 2,386,996 2,293,501 
Total non-interest income$1,174,854 $1,001,132 $2,988,331 $2,859,564 
(1) Primarily recorded in the Company's Consolidated Statements of Operations within Consumer and commercial fees.
(2) Primarily recorded in the Company's Consolidated Statements of Operations within Miscellaneous income, net.
(3) The balance presented excludes certain revenue streams that are considered in-scope and presented above.
62



NOTE 13. NON-INTEREST INCOME AND OTHER EXPENSES (continued)

Other Expenses

The following table presents the Company's other expenses for the following periods:
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
(in thousands)202020192020
2019(1)
Other expenses:
Amortization of intangibles$14,724 $14,742 $44,211 $44,250 
Deposit insurance premiums and other expenses13,440 11,104 39,779 53,348 
Loss on debt extinguishment0 6 1,026 1,133 
Other administrative expenses115,909 145,870 313,344 404,399 
Other miscellaneous expenses6,176 18,407 29,618 33,236 
Total Other expenses$150,249 $190,129 $427,978 $536,366 
(1) The nine-month period ended September 30, 2019 includes $25.3 million of FDIC insurance premiums that relates to periods from the first quarter of 2015 through the fourth quarter of 2018. The Company has concluded that the out-of-period correction is immaterial to all impacted periods.


NOTE 14. INCOME TAXES

An income tax benefit of $53.3 million and a provision of $112.9 million were recorded for the three-month periods ended September 30, 2020 and 2019, respectively. An income tax benefit of $272.9 million and a provision of $384.5 million were recorded for the nine-month periods ended September 30, 2020 and 2019, respectively. This resulted in an ETR of (6.5)% and 29.5% for the three-month periods ended September 30, 2020 and 2019, respectively, and 19.3% and 29.6% for the nine-month periods ended September 30, 2020 and 2019, respectively. The lower ETR for the three-month period ended September 30, 2020, compared to the three-month period ended September 30, 2019, was primarily the result of an expected pre-tax loss for 2020, compared to pre-tax income in 2019 and the reversal of the deferred tax liability associated with the book over tax basis difference for the investment in SC in the third quarter of 2020. The lower ETR for the nine-month period ended September 30, 2020, compared to the nine-month period ended September 30, 2019, was primarily the result of an expected pre-tax loss for 2020, compared to pre-tax income in 2019, and the impairment of goodwill that is non-deductible for tax purposes, offset with the reversal of the deferred tax liability associated with the book over tax basis difference for the Company's investment in SC, as described further below.

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

Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. The Company reviews its tax balances quarterly and, as new information becomes available, the balances are adjusted as appropriate. The Company is subject to ongoing tax examinations and assessments in various jurisdictions.
63



NOTE 14. INCOME TAXES (continued)

On September 5, 2019, the Federal District Court in Massachusetts entered a stipulated judgment resolving the Company’s litigation relating to the proper tax consequences of 2 financing transactions with an international bank through which the Company borrowed $1.2 billion that was previously disclosed within its Form 10-K for 2018. That stipulated judgment resolved the Company’s tax liability for the 2003 through 2005 tax years with no material effect on net income. The Company has agreed with the IRS to resolve the treatment of the same financing transactions for the 2006 and 2007 tax years on terms consistent with the September 5, 2019, stipulated judgment. The Congressional Joint Committee on Taxation has completed its review of the proposed resolution of the 2006 and 2007 tax years with no objection. The Company and the IRS are now finalizing that resolution, which will have no impact on net income.

With few exceptions, the Company is no longer subject to federal, state and non-U.S. income tax examinations by tax authorities for years prior to 2006.

The Company applies an aggregate portfolio approach whereby income tax effects from AOCI are released only when an entire portfolio (i.e., all related units of account) of a particular type is liquidated, sold or extinguished. 

The Company had a net deferred tax liability balance of $69.2 million at September 30, 2020, compared to a net deferred tax liability balance of $1.0 billion at December 31, 2019 (consisting of a deferred tax asset balance of $503.7 million and a deferred tax liability balance of $1.5 billion). During the quarter, the Company’s ownership of SC reached the 80% threshold which requires SC to file a consolidated federal tax return with the Company. Due to the filing of the consolidated federal tax return, SC and SHUSA's deferred tax assets and liabilities are now offset and reported on a net basis. SHUSA also reversed its deferred tax liability of $306.6 million for the book over tax basis difference in its investment in SC as SHUSA now has the ability and expects to recover its investment in SC in a tax free manner. The $948.2 million decrease in net deferred liability for the nine-month period ended September 30, 2020 was primarily due to the adoption of the CECL standard during the first quarter of 2020 and the reversal of the deferred tax liability for the book over tax basis difference associated with the Company’s investment in SC during the third quarter of 2020.


NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES

Off-Balance Sheet Risk - Financial Instruments

In the normal course of business, the Company utilizes a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers and manage its exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, letters of credit, loans sold with recourse, forward contracts, and interest rate and cross currency swaps, caps and floors. These financial instruments may involve, to varying degrees, elements of credit, liquidity, and interest rate risk in excess of the amount recognized on the Condensed Consolidated Balance Sheets. The contractual or notional amounts of these financial instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, letters of credit and loans sold with recourse is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For forward contracts and interest rate swaps, caps and floors, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of its forward contracts and interest rate swaps, caps and floors through credit approvals, limits and monitoring procedures. See Note 11 to these Condensed Consolidated Financial Statements for discussion of all derivative contract commitments.

64



NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

The following table details the amount of commitments at the dates indicated:
Other CommitmentsSeptember 30, 2020December 31, 2019
 (in thousands)
Commitments to extend credit$32,140,936 $30,685,478 
Letters of credit1,626,932 1,592,726 
Commitments to sell loans44,193 21,341 
Unsecured revolving lines of credit0 24,922 
Recourse exposure on sold loans26,957 53,667 
Total commitments$33,839,018 $32,378,134 

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 September 30, 2020 and December 31, 2019 are $6.0 billion and $5.7 billion, respectively, of commitments that can be canceled by the Company without notice.

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

Letters of Credit

The Company’s letters of credit meet the definition of a guarantee. Letters of credit commit the Company to make payments on behalf of its customers if specified future events occur. The guarantees are primarily issued to support public and private borrowing arrangements. The weighted average term of these commitments at September 30, 2020 was 14 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 measure certainhonor the commitment. The Company has various forms of collateral for these letters of credit, including real estate assets and liabilitiesother customer business assets. The maximum undiscounted exposure related to these commitments at fair value on a nonrecurring basis in accordanceSeptember 30, 2020 was $1.6 billion. The fees related to letters of credit are deferred and amortized over the life of the respective commitments, and were immaterial to the Company’s financial statements at September 30, 2020. Management believes that the utilization rate of these letters of credit will continue to be substantially less than the amount of the commitments, as has been the Company’s experience to date. The credit risk associated with GAAP from timeletters of credit is monitored using the same risk rating system utilized within the loan and financing lease portfolio. As of September 30, 2020 and December 31, 2019, the liability related to time. These adjustments to fair value usually result from applicationunfunded lending commitments of lower-of-cost-or-fair value accounting or certain impairment measures. Assets measured at fair value on a nonrecurring basis that were still held on the balance sheet were as follows:
 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Fair Value
 (in thousands)
September 30, 2017       
Impaired LHFI$—
 $201,030
 $303,996
 $505,026
Foreclosed assets—
 21,875
 117,124
 138,999
Vehicle inventory—
 206,076
 —
 206,076
LHFS(1)
—
 —
 1,789,860
 1,789,860
Auto loans impaired due to bankruptcy—
 101,990
 —
 101,990
MSRs—
 —
 9,276
 9,276
        
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(1)
—
 —
 2,133,040
 2,133,040
MSRs—
 —
 10,287
 10,287

(1) These amounts include $929.5$148.0 million and $1.1 billion$89.6 million, respectively.

Unsecured Revolving Lines of personalCredit

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

Loans Sold with Recourse

The Company has loans heldsold with recourse that meet the definition of a guarantee. For loans sold with recourse under the terms of its multifamily sales program with the FNMA, the Company retained a portion of the associated credit risk.
65



NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Commitments to Sell Loans

The Company enters into forward contracts relating to its mortgage banking business to hedge the exposures from commitments to make new residential mortgage loans with existing customers and from mortgage loans classified as LHFS. These contracts mature in less than one year.

SC Commitments

The following table summarizes liabilities recorded for sale that are impairedcommitments and contingencies as of September 30, 20172020 and December 31, 2016,2019, all of which are included in Accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets:
Agreement or Legal MatterCommitment or ContingencySeptember 30, 2020December 31, 2019
(in thousands)
Chrysler AgreementRevenue-sharing and gain/(loss), net-sharing payments$50,809 $12,132 
Agreement with Bank of AmericaServicer performance fee1,508 2,503 
Agreement with CBPLoss-sharing payments392 1,429 
Other contingenciesConsumer arrangements25,099 1,991 

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

Chrysler Agreement

Under the terms of the Chrysler Agreement, SC must make revenue sharing payments to FCA and also must share with FCA when residual gains/(losses) on leased vehicles exceed a specified threshold. The agreement also requires that SC maintain at least $5.0 billion in funding available for floor plan loans and $4.5 billion of financing dedicated to FCA retail financing. In turn, FCA must provide designated minimum threshold percentages of its subvention business to SC.

Agreement with Bank of America

Until January 2017, SC had a flow agreement with Bank of America whereby SC was committed to sell up to $300.0 million of eligible loans to the bank each month. SC retains servicing on all sold loans and may receive or pay a servicer performance payment based on an agreed-upon formula if performance on the sold loans is better or worse, respectively, than expected performance at the time of sale. Servicer performance payments are due six years from the cut-off date of each loan sale.

Agreement with CBP

Until May 2017, SC sold loans to CBP under terms of a flow agreement and predecessor sale agreements. SC retained servicing on the sold loans and owes CBP a loss-sharing payment capped at 0.5% of the original pool balance if losses exceed a specified threshold, established on a pool-by-pool basis. Loss-sharing payments are due the month in which net losses exceed the established threshold of each loan sale.

66



NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Agreements

Bluestem

SC is party to agreements with Bluestem whereby SC is committed to purchase certain new advances on personal revolving financings receivables, along with existing balances on accounts with new advances, originated by Bluestem for an initial term ending in April 2020 and renewing through April 2022 at Bluestem's option. As of September 30, 2020 and December 31, 2019, the total unused credit available to customers was $2.8 billion and $3.0 billion, respectively. In 2020, SC purchased $0.8 billion of receivables out of the $3.0 billion unused credit available to customers as of December 31, 2019. In 2019, SC purchased $1.2 billion of receivables out of the $3.1 billion unused credit available to customers as of December 31, 2018. In addition, SC purchased $151.2 million and $137.8 million of receivables related to newly-opened customer accounts during the nine-month periods ended September 30, 2020 and 2019, respectively.


Valuation ProcessesEach 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 Techniquesthe customer is in good standing. As of September 30, 2020 and December 31, 2019, SC was obligated to purchase $13.3 million and $10.6 million, respectively, in receivables that had been originated by Bluestem but not yet purchased by SC. SC also is required to make a profit-sharing payment to Bluestem each month if performance exceeds a specified return threshold. The agreement, among other provisions, gives Bluestem the right to repurchase up to 9.99% of the existing portfolio at any time during the term of the agreement and, provides that, if the repurchase right is exercised, Bluestem has the right to retain up to 20.00% of new accounts subsequently originated.


Impaired LHFIOn March 9, 2020, Bluestem and certain of its subsidiaries and affiliates filed Chapter 11 bankruptcy in the table above representsUnited States District Court for the recorded investmentDistrict of impaired commercialDelaware. On August 28, 2020, BLST Operating Company LLC. purchased the Bluestem assets from bankruptcy and assumed Bluestem's obligations under the parties' agreement.

Others

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

In connection with the sale of RICs through securitizations and other sales, SC has made standard representations and warranties customary to the consumer finance industry. Violations of these representations and warranties may require SC to repurchase loans previously sold to on- or off-balance sheet Trusts or other third parties. As of September 30, 2020, there were no loans that were the subject of a demand to repurchase or replace for breach of representations and warranties for SC's ABS or other sales. In the opinion of management, the potential exposure of other recourse obligations related to SC’s RICs sale agreements is not expected to have a material adverse effect on the Company's or SC’s business, consolidated financial position, results of operations, or cash flows.

Santander has provided guarantees on the covenants, agreements, and obligations of SC under the governing documents of its warehouse facilities and privately issued amortizing notes. These guarantees are limited to the obligations of SC as servicer.

In November 2015, SC executed a forward flow asset sale agreement with a third party under the terms of which SC is committed to sell $350.0 million in charged-off loan receivables in bankruptcy status on a quarterly basis. However, any sale of more than $275.0 millionis subject to a market price check. The remaining aggregate commitment as of September 30, 2020 and December 31, 2019 not subject to a market price check was $27.7 million and $39.8 million, respectively.

Other Off-Balance Sheet Risk

Other off-balance sheet risk stems from financial instruments that do not meet the definition of guarantees under applicable accounting guidance and from other relationships that include items such as indemnifications provided in the ordinary course of business and intercompany guarantees.
67



NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Legal and Regulatory Proceedings

The Company, including its subsidiaries, is and in the future periodically expects to be party to, or otherwise involved in, various claims, disputes, lawsuits, investigations, regulatory matters and other legal matters and proceedings that arise in the ordinary course of business. In view of the inherent difficulty of predicting the outcome of any such claim, dispute, lawsuit, investigation, regulatory matter and/or legal proceeding, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of the matters, or the eventual loss, fines or penalties related to the matters, if any. Accordingly, except as provided below, the Company is unable to reasonably estimate a range of its potential exposure, if any, to these claims, disputes, lawsuits, investigations, regulatory matters and other legal proceedings at this time. 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 materially and adversely affect the Company's business, financial position, liquidity, and results of operations.

In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal and regulatory 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 legal or regulatory proceeding develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether the matter presents a material loss contingency that is probable and estimable. If a determination is made during a given quarter that a material loss contingency is probable and estimable, an accrued liability is established during such quarter with respect to such loss contingency, and the Company continues to monitor the matter for further developments that could affect the amount of the accrued liability previously established.

As of September 30, 2020 and December 31, 2019, the Company accrued aggregate legal and regulatory liabilities of approximately $161 million and $295 million, respectively. Further, the Company estimates the aggregate range of reasonably possible losses for legal and regulatory proceedings, in excess of reserves established, of up to approximately $147 million as of September 30, 2020. Set forth below are descriptions of the material lawsuits, regulatory matters and other legal proceedings to which the Company measures impairment duringis subject.

SHUSA Matters

On March 21, 2017, SC and SHUSA entered into a written agreement with the period basedFRB of Boston. Under the terms of that agreement, SC is required to enhance its compliance risk management program, board oversight of risk management and senior management oversight of risk management, and SHUSA is required to enhance its oversight of SC's management and operations. 

Mortgage Escrow Interest Putative Class Action

The Bank is a defendant in a putative class action lawsuit (the “Tepper Lawsuit”) in the United States District Court, Southern District of New York, captioned Daniel and Rebecca Ruf-Tepper v. Santander Bank, N.A., No. 20-cv-00501. The Tepper Lawsuit, filed in January 2020, alleges that the Bank is obligated to pay interest on mortgage escrow accounts pursuant to state law. Plaintiffs filed an amended complaint and the Bank has filed a motion to dismiss.

Congressional Inquiry into PPP

After June 15, 2020, SBNA and seven other financial institutions received a request from the Congressional Select Subcommittee on the fair valueCoronavirus Crisis to provide information and documents related to PPP implementation.SBNA produced documents in response to this request and continues to cooperate with the subcommittee. On October 16, 2020, the Subcommittee issued its staff report on the investigation entitled “Undeserved and Unprotected: How the Trump Administration Neglected the Neediest Small Businesses in the PPP.”
68



NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

SC Matters

Securities Class Action and Shareholder Derivative Lawsuits

Deka Lawsuit: SC is a defendant in a purported securities class action lawsuit (the "Deka Lawsuit") in the United States District Court, Northern District of Texas, captioned Deka Investment GmbH et al. v. Santander Consumer USA Holdings Inc. et al., No. 3:15-cv-2129-K. The Deka Lawsuit, which was filed in August 2014, was brought against SC, certain of its current and former directors and executive officers and certain institutions that served as underwriters in SC's IPO, including SIS, on behalf of a class consisting of those who purchased or otherwise acquired SC securities between January 23, 2014 and June 12, 2014. The complaint alleges, among other things, that the IPO registration statement and prospectus and certain subsequent public disclosures violated federal securities laws by containing misleading statements concerning SC’s ability to pay dividends and the adequacy of SC’s compliance systems and oversight. In December 2015, SC and the individual defendants moved to dismiss the lawsuit, which was denied. In December 2016, the plaintiffs moved to certify the proposed classes. In July 2017, the court entered an order staying the Deka Lawsuit pending the resolution of the underlying collateral supportingappeal of a class certification order in In re Cobalt Int’l Energy, Inc. Sec. Litig., No. H-14-3428, 2017 U.S. Dist. LEXIS 91938 (S.D. Tex. June 15, 2017). In October 2018, the loan. Written offers to purchasecourt vacated the order staying the Deka Lawsuit and ordered that merits discovery in the Deka Lawsuit be stayed until the court ruled on the issue of class certification. On July 28, 2020, the Company entered into a specific impaired loan are considered observable market inputs, which are considered Level 1 inputs. Appraisals are obtained to supportStipulation of Settlement with the fair valueplaintiffs in the Deka Lawsuit that fully resolves all of the collateralplaintiffs' claims, for a cash payment of $47 million. On August 13, 2020, the Court entered an order preliminarily approving the settlement and incorporate measures suchproviding for notice, setting the final settlement hearing for January 12, 2021.

In Re Santander Consumer USA Holdings, Inc. Derivative Litigation: In October 2015, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Feldman v. Jason A. Kulas, et al., C.A. No. 11614-VCG (the "Feldman Lawsuit"). The Feldman Lawsuit names as recent sales pricesdefendants certain current and former members of SC’s Board of Directors, and names SC as a nominal defendant. The complaint alleges, among other things, that the current and former director defendants breached their fiduciary duties in connection with overseeing SC’s nonprime auto lending practices, resulting in harm to SC. The complaint seeks unspecified damages and equitable relief. In December 2015, the Feldman Lawsuit was stayed pending the resolution of the Deka Lawsuit. In September 2016, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware captioned Jackie888, Inc. v. Jason Kulas, et al., C.A. No. 12775-VCG (the "Jackie888 Lawsuit"). The Jackie888 Lawsuit names as defendants current and former members of SC’s Board of Directors, and names SC as a nominal defendant. The complaint alleges, among other things, that the director defendants breached their fiduciary duties in connection with SC’s accounting practices and controls. The complaint seeks unspecified damages and equitable relief. In April 2017, the Jackie888 Lawsuit was stayed pending the resolution of the Deka Lawsuit. In March 2018, the Feldman Lawsuit and Jackie888 Lawsuit were consolidated under the caption In Re Santander Consumer USA Holdings, Inc. Derivative Litigation, Consol. C.A. No. 11614-VCG. In January 2020, the Company executed a Stipulation and Agreement of Settlement, Compromise and Release with the plaintiffs in the consolidated action that, subject to court approval, fully resolves all of the plaintiffs’ claims in the Feldman Lawsuit and the Jackie888 Lawsuit. The Stipulation provides for comparable propertiesthe settlement of the consolidated action and, are considered Level 2 inputs. Loans forin return the Company has enacted or will enact and implement certain corporate governance reforms and enhancements. The settlement hearing at which the valueCourt would consider the settlement was scheduled for May 27, 2020, but a shareholder filed its notice of intent to object to the settlement and the parties agreed to postpone the settlement hearing to a later date.

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 Fair Debt Collection Practices Act, the Fair Credit Reporting Act, Section 5 of the underlying collateralFederal Trade Commission Act, the Telephone Consumer Protection Act, the Truth in Lending Act, wrongful repossession laws, usury laws and laws related to unfair and deceptive acts or practices. In general, these cases seek damages and equitable and/or other relief.

Regulatory Investigations and Proceedings

SC is determined using a combination of real estate appraisals, fieldparty to, or is periodically otherwise involved in, reviews, investigations, examinations and internal calculationsproceedings (both formal and informal), and information-gathering requests, by government and self-regulatory agencies, including the FRB of Boston, the CFPB, the DOJ, the SEC, the Federal Trade Commission and various state regulatory and enforcement agencies.


69



NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Currently, such matters include, but are classified as Level 3. The inputsnot limited to, the following:

•SC received a civil subpoena from the DOJ in 2014 under the Financial Institutions Reform, Recovery and Enforcement Act requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime vehicle loans. SC has responded to these requests within the deadlines specified in the internal calculations may includesubpoenas and has otherwise cooperated with the loan balance, estimationDOJ with respect to this matter.
•In October 2014, May 2015, July 2015 and February 2017, SC received subpoenas and/or CIDs from the Attorneys General of California, Illinois, Oregon, New Jersey, Maryland and Washington under the authority of each state's consumer protection statutes. On May 19, 2020, all of the collectabilityConsortium members and SC announced a settlement of the underlying receivables held byinvestigation requiring SC to: (1) pay a total of $65 million to the customer used as collateral, salestates for consumer remediation; (2) pay $5 million to the states for investigation costs; (3) pay up to $2 million in settlement administration costs; (4) provide $45 million in prospective debt forgiveness; (5) provide deficiency waivers for a defined class of SC customers; and liquidation value(6) implement certain enhancements to its loan underwriting process.
•In August 2017, SC received CIDs from the CFPB. The stated purpose of the inventory held byCIDs are to determine whether SC has complied with the customer used as collateralFair Credit Reporting Act and historical loss-given-default parameters.related regulations. SC has responded to these requests within the applicable deadlines and has otherwise cooperated with the CFPB with respect to this matter. In casesFebruary 2020, the Company received a communication from the CFPB inviting the Company to respond to the CFPB’s identified issues in the form of a Notice of Opportunity to Respond and Advise, in which the carrying value exceedsCFPB identified potential claims it might bring against SC. SC responded to the fair valueCFPB and continues to cooperate in connection with the investigation.

Mississippi Attorney General Lawsuit

In January 2017, Mississippi AG filed a lawsuit against SC in the Chancery Court of the collateral less cost to sell, an impairment charge is recognized. The net carrying valueFirst Judicial District of these loans was $460.8 million and $449.5 million at September 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 foreclosureHinds County, State of defaulted loans, and are primarily comprisedMississippi, captioned State of commercial and residential real properties and generally measured at fair value less costs to sell. The fair valueMississippi ex rel. Jim Hood, Attorney General of the real property is generally determined using appraisals or other indicationsState of market value based on recent comparable sales of similar properties or assumptions generally observableMississippi v. Santander Consumer USA Inc., C.A. # G-2017-28. The complaint alleges that SC engaged in the marketplace.

The Company estimates the fair value of its vehicles, which are obtained either through repossession or lease termination, using historical auction ratesunfair and current market values of used cars.


76


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 16. FAIR VALUE (continued)

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 valuedeceptive business practices to induce Mississippi consumers to apply 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 onthey could not afford. The complaint asserts claims under 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 ratesMississippi Consumer Protection Act 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 serviceseeks unspecified civil penalties, equitable relief and other economic factors. Duerelief. In March 2017, SC filed motions to dismiss the unobservable nature of certain valuation inputs, these MSRslawsuit and the parties are classified as Level 3.proceeding with discovery.


Fair Value Adjustments


The following table presents the increases and decreases in value of certain assets that are measured at fair value on a nonrecurring basis for which a fair value adjustment has been included in the Condensed Consolidated Statements of Operations relating to assets held at period-end:
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
(in thousands)(in thousands)Statement of Operations Location2020201920202019
Impaired LHFIImpaired LHFICredit loss expense$(12,036)$(3,877)$(5,883)$(9,990)
Foreclosed assetsForeclosed assets
Miscellaneous income, net (1)
(736)(4,014)(3,857)(7,798)
Statement of Operations
Location		 Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 30,
  2017 2016 2017 2016
 (in thousands)
Impaired loans held-for-investmentProvision for credit losses $617
 $(14,033) $(26,070) $(127,144)
Foreclosed assets
Miscellaneous income(1)
 (777) (1,604) (5,448) (6,346)
LHFSProvision for credit losses —
 —
 (13,200) —
LHFS
Miscellaneous income(1)
 (84,840) (107,526) (246,882) (266,506)LHFS
Miscellaneous income, net (1)
(56,598)(67,021)(387,900)(239,059)
Auto loans impaired due to bankruptcyProvision for credit losses (17,471) —
 (65,584) —
Auto loans impaired due to bankruptcyCredit loss expense0 1,943 0 (9,721)
Goodwill impairmentGoodwill impairment
Impairment of goodwill (1)(2)
0 0 (1,848,228)0 
MSRsMortgage banking income, net 123
 301
 320
 962
MSRs
Miscellaneous income, net (1)
0 (128)(138)(483)
  $(102,348) $(122,862) $(356,864) $(399,034)
(1)    These amounts reduce Miscellaneous income.Gains are disclosed as positive numbers while losses are shown as a negative number regardless of the line item being affected.

(2)    In the period ended September 30, 2020, Goodwill totaling $2.2 billion was written down to its implied fair value of $350.0 million, resulting in a goodwill impairment charge of $1.8 billion.

77


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 16. FAIR VALUE (continued)


Level 3 Rollforward for AssetsInputs - Significant Recurring and Liabilities Measured at Fair Value on a Recurring Basis

The tables below present the changes in Level 3 balances for the three-month and nine-month periods ended September 30, 2017 and 2016, respectively, for those assets and liabilities measured at fair value on a recurring basis.
Three-Month Period Ended September 30, 2017        
 Investments
AFS		 RICs Held for Investment MSRs Derivatives Total
 (in thousands)
Balance, June 30, 2017$587,571
 $207,216
 $146,091
 $(29,020) $911,858
Losses in other comprehensive income(1,506) —
 —
 —
 (1,506)
Gains/(losses) in earnings—
 27,759
 (1,578) (324) 25,857
Additions/Issuances—
 —
 4,099
 —
 4,099
Settlements(1)
(215,881) (30,281) (5,088) 31,222
 (220,028)
Balance, September 30, 2017$370,184
 $204,694
 $143,524
 $1,878
 $720,280
Changes in unrealized gains (losses) included in earnings related to balances still held at September 30, 2017$—
 $27,759
 $(1,578) $8
 $26,189
          
Nine-Month Period Ended September 30, 2017        
 Investments
AFS		 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(4,184) —
 —
 —
 (4,184)
Gains/(losses) in earnings—
 49,392
 (1,315) (539) 47,538
Additions/Issuances—
 19,727
 12,696
 —
 32,423
Settlements(1)
(440,199) (81,595) (14,446) 31,417
 (504,823)
Balance, September 30, 2017$370,184
 $204,694
 $143,524
 $1,878
 $720,280
Changes in unrealized gains (losses) included in earnings related to balances still held at September 30, 2017$—
 $49,392
 $(1,315) $(787) $47,290

(1)Settlements include charge-offs, prepayments, pay downs and maturities.


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NOTE 16. FAIR VALUE (continued)

Three-Month Period Ended September 30, 2016        
 Investments
AFS		 RICs Held for Investment MSRs Derivatives Total
 (in thousands)
Balance, June 30, 2016$1,526,691
 $250,703
 $117,792
 $(44,378) $1,850,808
Gains in other comprehensive income3,879
 —
 —
 —
 3,879
Gains/(losses) in earnings—
 31,814
 7,711
 (478) 39,047
Additions/Issuances9,479
 —
 6,058
 —
 15,537
Settlements(1)
(217,870) (64,974) (5,447) 23,434
 (264,857)
Balance, September 30, 2016$1,322,179
 $217,543
 $126,114
 $(21,422) $1,644,414
Changes in unrealized gains (losses) included in earnings related to balances still held at September 30, 2016$—
 $31,814
 $7,711
 $315
 $39,840
          
Nine-Month Period Ended September 30, 2016        
 Investments
AFS		 RICs Held for Investment MSRs Derivatives Total
 (in thousands)
Balance, December 31, 2015$1,360,240
 $328,655
 $147,233
 $(51,278) $1,784,850
Gains in other comprehensive income6,088
 —
 —
 —
 6,088
Gains/(losses) in earnings—
 85,169
 (18,113) 3,657
 70,713
Additions/Issuances509,006
 —
 14,450
 —
 523,456
Settlements(1)
(553,155) (196,281) (17,456) 26,199
 (740,693)
Balance, September 30, 2016$1,322,179
 $217,543
 $126,114
 $(21,422) $1,644,414
Changes in unrealized gains (losses) included in earnings related to balances still held at September 30, 2016$—
 $85,169
 $(18,113) $(2,988) $64,068

(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.


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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 16. FAIR VALUE (continued)

Valuation Processes and Techniques - RecurringNonrecurring Fair Value Assets and Liabilities


The following is a description oftable presents quantitative information about the valuation techniques used for instruments measured at fair value on a recurring basis:

Securities AFS and Trading Securities

Securities accounted for at fair value include both AFS and trading securities portfolios. The Company utilizes a third-party pricing service to value its investment securities portfolios. Its primary pricing service has consistently proved to be a high quality third-party pricing provider. For those investments not valued by pricing vendors, other trusted market sources are utilized. The vendors the Company uses provide pricing services on a global basis. The Company monitors and validates the reliability of vendor pricing on an ongoing basis, which can include pricing methodology reviews, performing detailed reviews of the assumptions and inputs used by the vendor to price individual securities, and price validation testing. Price validation testing is performed independently of the risk-taking function and can include corroborating the prices received from third-party vendors with prices from another third-party source, reviewing valuations of comparable instruments, comparison to internal valuations, or by reference to recent sales of similar securities.

The classification of securities within the fair value hierarchy is based upon the activity level in the market for the security type and the observability of the inputs used to determine their fair values. Trading securities and certain of the Company's U.S. Treasury securities are valued utilizing observable market quotes. The Company obtains vendor trading platform data (actual prices) from a number of live data sources, including active market makers and interdealer brokers. These certain investment securities are, therefore, classified as Level 1.

Actively traded quoted market prices for the majority of the investment securities 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 gains/(losses) on sale of investment securities.


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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 within significant Level 3 recurring and nonrecurring assets and liabilities at September 30, 2020 and December 31, 2019, respectively:
(dollars in thousands)Fair Value at September 30, 2020Valuation TechniqueUnobservable InputsRange
(Weighted Average)
Financial Assets:
ABS
Financing bonds$50,566 DCF
Discount rate (1)
 0.32% - 0.32% (0.32% )
RICs HFI61,448 DCF
CPR (2)
6.66 %
Discount rate (3)
 9.5% - 14.5% (11.66%)
Recovery rate (4)
 25% - 43% (42.22%)
Personal LHFS (8)
763,292 Lower of market or Income approachMarket participant view 60.00% - 70.00%
Discount rate 20.00% - 30.00%
Default rate 40.00% - 50.00%
Net principal & interest payment rate 65.00% - 75.00%
Loss severity rate 90.00% - 95.00%
MSRs (7)
81,776 DCF
CPR (5)
  [0.00% - 30.60%] (16.30%)
Discount rate (6)
9.38 %
(1)    Based on key assumptions, which includes historical default ratesthe applicable term and adjustments to reflect voluntary prepayments, prepayment rates baseddiscount index.
(2)    Based on the analysis of available data from a comparable market securitization of similar assets, discount rates reflective ofassets.
(3)    Based on the cost of funding of debt issuance and recent historical equity yields, recovery rates basedyields. Weighted average amount was developed by weighting the associated relative unpaid principal balances.
(4)    Based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. Accordingly, RICs heldWeighted average amount was developed by weighting the associated relative unpaid principal balances.
(5)    Average CPR projected from collateral stratified by loan type and note rate. Weighted average amount was developed by weighting the associated relative unpaid principal balances.
(6)    Average discount rate from collateral stratified by loan type and note rate. Weighted average amount was developed by weighting the associated relative unpaid principal balances.
(7)    Excludes MSR valued on a non-recurring basis for investmentwhich we do not consider there to be significant unobservable assumptions.
58



NOTE 12. FAIR VALUE (continued)

(8)    Excludes non-significant Level 3 LHFS portfolios. The estimated fair value for personal LHFS (Bluestem) is calculated based on the lower of market participant view, a DCF analysis in 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 $4.8 million and $9.3 million, respectively, at September 30, 2017.
A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $4.8 million and $9.4 million, respectively, at September 30, 2017.


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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 inon key assumptions, and also considers the fair value measurementpossible outcomes of the Company's loan commitments are "pull through" percentage andBluestem bankruptcy process.

(dollars in thousands)Fair Value at December 31, 2019Valuation TechniqueUnobservable InputsRange
(Weighted Average)
Financial Assets:
ABS
Financing bonds$51,001 DCF
Discount rate (1)
 1.64% - 1.64% (1.64% )
Sale-leaseback securities12,234 
Consensus pricing (9)
Offered quotes (10)
103.00 %
RICs HFI84,334 DCF
CPR (2)
6.66 %
Discount rate (3)
 9.50% - 14.50% (13.16%)
Recovery rate (4)
 25% - 43% (41.12%)
Personal LHFS (8)
1,007,105 Lower of market or Income approachMarket participant view 70.00% - 80.00%
Discount rate 15.00% - 25.00%
Default rate 30.00% - 40.00%
Net principal & interest payment rate 70.00% - 85.00%
Loss severity rate90.00% - 95.00%
MSRs (7)
130,855 DCF
CPR (5)
 7.83% - 100.00% (11.97%)
Discount rate (6)
9.63 %
(1), (2), (3), (4), (5), (6), (7), (8) - See corresponding footnotes to 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.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 16. FAIR VALUE (continued)

September 30, 2020 Level 3 Inputs - Significant Recurring Fair Value Assets and Liabilitiessignificant inputs table above.

The following table presents quantitative information about the significant unobservable inputs within significant Level 3 recurring assets and liabilities.
 Fair Value at September 30, 2017 Valuation Technique Unobservable Inputs Range
(Weighted Average)
 (in thousands)      
Financial Assets: 
ABS       
Financing bonds$323,583
 DCF 
Discount Rate (1)
  1.52% - 2.37% (2.01% )
Sale-leaseback securities$46,601
 
Consensus Pricing (2)
 
Offered quotes (3)
 123.03%
RICs held for investment$204,694
 DCF 
Prepayment rate (CPR) (4)
 6.66%
     
Discount Rate (5)
  9.5% - 14.5% (10.75% )
     
Recovery Rate (6)
  25% - 43% (36.65% )
MSRs$143,524
 DCF 
Prepayment rate (CPR) (7)
  [0.20% - 55.47%] (9.63% )
     
Discount Rate (8)
 9.90%
Mortgage banking interest rate lock commitments$2,564
 DCF 
Pull through percentage (9)
 77.00%
     
MSR value (10)
  [0.733% - 1.032]% (0.97%)

(1) Based on the applicable term and discount index.
(2)(9)    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)(10)    Based on the nature of the input, a range or weighted average does not exist. For sale-leaseback securities, theThe Company owns one sale-leaseback security.
(4) Based on the analysis of available data from a comparable market securitization of similar assets.
(5) Based on the cost of funding of debt issuance and recent historical equity yields.
(6) Based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool.
(7) Average CPR projected from collateral stratified by loan type, note rate and maturity.
(8) Based on the nature of the input, a range or weighted average does not exist.
(9) Historical weighted average based on principal balance calculated as the percentage of loans originated for sale divided by total commitments less outstanding commitments. 
(10) MSR value is the estimated value of the servicing right embedded in the underlying loan, expressed in basis points of outstanding unpaid principal balance.


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NOTES TO 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:
 September 30, 2017
 Carrying Value Fair Value Level 1 Level 2 Level 3
 (in thousands)
Financial assets:         
Cash and amounts due from depository institutions$7,909,625
 $7,909,625
 $7,909,625
 $—
 $—
AFS investment securities(1)
17,222,219
 17,222,219
 179,473
 16,672,562
 370,184
Held to maturity investment securities1,560,850
 1,542,093
 —
 1,542,093
 —
Trading securities9,098
 9,098
 1
 9,097
 —
LHFI, net77,592,554
 78,414,389
 —
 111,030
 78,303,359
LHFS1,988,097
 1,988,114
 —
 198,254
 1,789,860
Restricted cash3,033,587
 3,033,587
 3,033,587
 —
 —
MSRs(2)
146,958
 152,800
 —
 —
 152,800
Derivatives437,969
 437,969
 —
 435,396
 2,573
          
Financial liabilities: 
  
    
  
Deposits61,877,808
 61,856,395
 56,143,166
 5,713,229
 —
Borrowings and other debt obligations41,351,374
 41,630,193
 579
 26,969,565
 14,660,049
Derivatives383,201
 383,201
 —
 382,506
 695

September 30, 2020December 31, 2019
December 31, 2016
Carrying Value Fair Value Level 1 Level 2 Level 3
(in thousands)
(in thousands)(in thousands)Carrying ValueFair ValueLevel 1Level 2Level 3Carrying ValueFair ValueLevel 1Level 2Level 3
Financial assets:         Financial assets:    
Cash and amounts due from depository institutions$10,035,859
 $10,035,859
 $10,035,859
 $—
 $—
AFS investment securities(1)
17,013,618
 17,013,618
 225,050
 15,974,001
 814,567
Held to maturity investment securities1,658,644
 1,635,413
 —
 1,635,413
 —
Trading securities1,630
 1,630
 214
 1,416
 —
Cash and cash equivalentsCash and cash equivalents$8,871,504 $8,871,504 $8,871,504 $0 $0 $7,644,372 $7,644,372 $7,644,372 $0 $0 
Investments in debt securities AFSInvestments in debt securities AFS11,078,972 11,078,972 0 11,028,406 50,566 14,339,758 14,339,758 0 14,276,523 63,235 
Investments in debt securities HTMInvestments in debt securities HTM5,488,576 5,668,891 0 5,668,891 0 3,938,797 3,957,227 0 3,957,227 0 
Other investments (3)
Other investments (3)
792,464 792,465 2,359 790,106 0 1,097 1,097 379 718 0 
LHFI, net82,005,321
 81,955,122
 13,147
 244,986
 81,696,989
LHFI, net85,377,508 89,460,378 0 47,237 89,413,141 89,059,251 90,490,760 0 1,142,998 89,347,762 
LHFS2,586,308
 2,586,333
 —
 453,293
 2,133,040
LHFS1,147,578 1,147,579 0 240,190 907,389 1,420,223 1,420,295 0 289,009 1,131,286 
Restricted cash3,016,948
 3,016,948
 3,016,948
 —
 —
Restricted cash5,827,423 5,827,423 5,827,423 0 0 3,881,880 3,881,880 3,881,880 0 0 
MSRs(2)
150,343
 156,876
 —
 —
 156,876
MSRs(1)
MSRs(1)
81,776 81,776 0 0 81,776 132,683 139,052 0 0 139,052 
Derivatives421,330
 421,330
 —
 419,012
 2,318
Derivatives1,403,599 1,403,599 0 1,387,232 16,367 556,331 556,331 0 553,222 3,109 
         
Financial liabilities: 
  
    
  
Financial liabilities:    
Deposits67,240,690
 67,141,041
 58,067,792
 9,073,249
 —
Deposits (2)
Deposits (2)
4,385,602 4,421,527 0 4,421,527 0 9,375,281 9,384,994 0 9,384,994 0 
Borrowings and other debt obligations43,524,445
 43,770,267
 830
 26,132,197
 17,637,240
Borrowings and other debt obligations48,135,215 49,010,598 0 32,953,345 16,057,253 50,654,406 51,232,798 0 36,114,404 15,118,394 
Derivatives383,138
 383,138
 —
 351,820
 31,318
Derivatives1,220,385 1,220,385 0 1,214,548 5,837 546,414 546,414 0 543,560 2,854 
(1) Investment securities available-for-sale disclosed on the Condensed Consolidated Balance Sheet at September 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.

(2) This line item excludes deposit liabilities with no defined or contractual maturities in accordance with ASU 2016-01.
(3) This line item includes CDs with a maturity greater than 90 days and investments in trading securities.

84
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS






NOTE 16.12. 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 itdo they reflect potential taxes and the expenses that would be incurred in an actual sale or settlement. Accordingly, the aggregate fair value amounts presented above do not represent the underlying value of the Company.


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


Cash, cash equivalents and amounts due from depository institutionsrestricted cash


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


As of September 30, 2017 and December 31, 2016, the Company had $3.0 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 investmentInvestments in debt securities HTM


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


LHFI, net


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


LHFS


The Company'sCompany has LHFS portfolios that are accounted for at the lower of cost or marketmarket. This primarily consists of RICs held-for-sale. TheHFS for which 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.


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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 16. FAIR VALUE (continued)


Deposits


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


60



NOTE 12. FAIR VALUE (continued)

Borrowings and other debt obligations


Fair value is estimated by discounting cash flows using rates currently available to the Company for other borrowings with similar terms and remaining maturities. Certain other debt obligation instruments are valued using available market quotes for similar instruments, which contemplates issuer default risk. The related fair value measurements have generally been classified as Level 2. A certain portion of debt relating to revolving credit facilities is classified as Level 3. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements and, therefore, 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 onfor residential mortgage loans classified as held-for-saleHFS allows the Company to record the mortgage LHFS portfolio at fair market value compared to the lower of cost, net of deferred fees, deferred origination costs, or market. The Company economically hedges its residential LHFS portfolio, which is reported at fair value. A lower of cost or market accounting treatment would not allow the Company to record the excess of the fair market value over book value, but would require the Company to record the corresponding reduction in value on the hedges. Both the loans and related hedges are carried at fair value, which reduces earnings volatility, as the amounts more closely offset.

86


SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 16. FAIR VALUE (continued)


RICs held for investmentHFI


To reduce accounting and operational complexity, the Company elected the FVO for certain of its RICs held for investment in connection with the Change in Control.HFI. These loans consisted of allprimarily 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.and non-performing loans acquired by SC under optional clean up calls from its non-consolidated Trusts.


The following table summarizes the differences between the fair value and the principal balance of LHFS and RICs measured at fair value on a recurring basis as of September 30, 2017.2020 and December 31, 2019:
September 30, 2020December 31, 2019
(in thousands)(in thousands)Fair ValueAggregate UPBDifferenceFair ValueAggregate UPBDifference
LHFS(1)
LHFS(1)
$240,190 $227,691 $12,499 $289,009 $284,111 $4,898 
 Fair Value Aggregate Unpaid Principal Balance Difference
 (in thousands)
September 30, 2017      
LHFS(1)
 $198,254
 $194,099
 $4,155
RICs held-for-investment 204,694
 233,734
 (29,040)
RICs HFIRICs HFI61,448 64,646 (3,198)101,968 113,863 (11,895)
Nonaccrual loans 17,686
 23,476
 (5,790)Nonaccrual loans2,343 3,036 (693)10,616 12,917 (2,301)
(1)    LHFS disclosed on the Condensed Consolidated Balance SheetSheets 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 maintains an MSR asset for sold residential real estate loans serviced for others. The Company elected to account for the majority of its existing portfolio of MSRs at fair value. This election created greater flexibility with regard to risk management of the asset by aligning the accounting for the MSRs with the accounting for risk management instruments, which are also generally carried at fair value. At September 30, 2020 and December 31, 2019, the balance of these loans serviced for others accounted for at fair value was $13.4 billion and $15.0 billion, respectively. Changes in fair value are recorded through Miscellaneous income, net on the Condensed Consolidated Statements of Operations. As deemed appropriate, the Company economically hedges MSRs using interest rate swaps and forward contracts to purchase MBS. See further discussion on these derivative activities in Note 11 to these Condensed Consolidated Financial Statements. The remainder of the MSRs are accounted for using the lower of cost or fair value and are presented above in the section captioned "Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis."


61



NOTE 13. NON-INTEREST INCOME AND OTHER EXPENSES

The following table presents the details of the Company's residential MSRsNon-interest income for the following periods:
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
(in thousands)2020201920202019
Non-interest income:
Consumer and commercial fees$123,834 $133,049 $356,907 $412,566 
Lease income742,946 735,783 2,269,613 2,116,503 
Miscellaneous income, net
Mortgage banking income, net14,115 15,343 47,243 38,067 
BOLI14,855 15,338 43,764 45,769 
Capital market revenue56,949 48,326 179,417 146,290 
Net gain on sale of operating leases120,387 48,490 170,484 120,980 
Asset and wealth management fees52,984 45,020 156,575 132,224 
Loss on sale of non-mortgage loans(56,684)(87,399)(241,324)(238,771)
Other miscellaneous (loss) / income, net105,616 44,915 (25,994)83,290 
Net gain on sale of investment securities(148)2,267 31,646 2,646 
Total Non-interest income$1,174,854 $1,001,132 $2,988,331 $2,859,564 
Disaggregation of Revenue from Contracts with Customers

The following table presents the Company's Non-interest income disaggregated by revenue source:
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
(in thousands)2020201920202019
Non-interest income:
In-scope of revenue from contracts with customers:
Depository services(1)
$45,674 $63,016 $144,703 $179,298 
Commission and trailer fees(2)
47,466 39,971 144,730 119,607 
Interchange income, net(2)
15,648 16,891 47,567 49,854 
Underwriting service fees(2)
35,186 27,043 110,593 77,835 
Asset and wealth management fees(2)
32,283 35,169 101,574 109,166 
Other revenue from contracts with customers(2)
13,577 9,924 52,168 30,303 
Total in-scope of revenue from contracts with customers189,834 192,014 601,335 566,063 
Out-of-scope of revenue from contracts with customers:
Consumer and commercial fees(3)
64,860 59,432 178,248 200,972 
Lease income742,946 735,783 2,269,613 2,116,503 
Miscellaneous loss(3)
177,362 11,636 (92,511)(26,620)
Net gain/(loss) on sale of investment securities(148)2,267 31,646 2,646 
Total out-of-scope of revenue from contracts with customers985,020 809,118 2,386,996 2,293,501 
Total non-interest income$1,174,854 $1,001,132 $2,988,331 $2,859,564 
(1) Primarily recorded in the Company's Consolidated Statements of Operations within Consumer and commercial fees.
(2) Primarily recorded in the Company's Consolidated Statements of Operations within Miscellaneous income, net.
(3) The balance presented excludes certain revenue streams that are accountedconsidered in-scope and presented above.
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NOTE 13. NON-INTEREST INCOME AND OTHER EXPENSES (continued)

Other Expenses

The following table presents the Company's other expenses for at fair value had an aggregate fair value of $143.5 million at the following periods:
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,
(in thousands)202020192020
2019(1)
Other expenses:
Amortization of intangibles$14,724 $14,742 $44,211 $44,250 
Deposit insurance premiums and other expenses13,440 11,104 39,779 53,348 
Loss on debt extinguishment0 6 1,026 1,133 
Other administrative expenses115,909 145,870 313,344 404,399 
Other miscellaneous expenses6,176 18,407 29,618 33,236 
Total Other expenses$150,249 $190,129 $427,978 $536,366 
(1) The nine-month period ended September 30, 2017. Changes in fair value totaling a loss2019 includes $25.3 million of $1.6FDIC insurance premiums that relates to periods from the first quarter of 2015 through the fourth quarter of 2018. The Company has concluded that the out-of-period correction is immaterial to all impacted periods.


NOTE 14. INCOME TAXES

An income tax benefit of $53.3 million and a gainprovision of $1.3$112.9 million were recorded for the three-month periods ended September 30, 2020 and 2019, respectively. An income tax benefit of $272.9 million and a provision of $384.5 million were recorded for the nine-month periods ended September 30, 2020 and 2019, respectively. This resulted in an ETR of (6.5)% and 29.5% for the three-month periods ended September 30, 2020 and 2019, respectively, and 19.3% and 29.6% for the nine-month periods ended September 30, 2020 and 2019, respectively. The lower ETR for the three-month period ended September 30, 2020, compared to the three-month period ended September 30, 2019, was primarily the result of an expected pre-tax loss for 2020, compared to pre-tax income in 2019 and the reversal of the deferred tax liability associated with the book over tax basis difference for the investment in SC in the third quarter of 2020. The lower ETR for the nine-month period ended September 30, 2020, compared to the nine-month period ended September 30, 2019, was primarily the result of an expected pre-tax loss for 2020, compared to pre-tax income in 2019, and the impairment of goodwill that is non-deductible for tax purposes, offset with the reversal of the deferred tax liability associated with the book over tax basis difference for the Company's investment in SC, as described further below.

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

Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. The Company reviews its tax balances quarterly and, as new information becomes available, the balances are adjusted as appropriate. The Company is subject to ongoing tax examinations and assessments in various jurisdictions.
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NOTE 14. INCOME TAXES (continued)

On September 5, 2019, the Federal District Court in Massachusetts entered a stipulated judgment resolving the Company’s litigation relating to the proper tax consequences of 2 financing transactions with an international bank through which the Company borrowed $1.2 billion that was previously disclosed within its Form 10-K for 2018. That stipulated judgment resolved the Company’s tax liability for the 2003 through 2005 tax years with no material effect on net income. The Company has agreed with the IRS to resolve the treatment of the same financing transactions for the 2006 and 2007 tax years on terms consistent with the September 5, 2019, stipulated judgment. The Congressional Joint Committee on Taxation has completed its review of the proposed resolution of the 2006 and 2007 tax years with no objection. The Company and the IRS are now finalizing that resolution, which will have no impact on net income.

With few exceptions, the Company is no longer subject to federal, state and non-U.S. income tax examinations by tax authorities for years prior to 2006.

The Company applies an aggregate portfolio approach whereby income tax effects from AOCI are released only when an entire portfolio (i.e., all related units of account) of a particular type is liquidated, sold or extinguished. 

The Company had a net deferred tax liability balance of $69.2 million at September 30, 2020, compared to a net deferred tax liability balance of $1.0 billion at December 31, 2019 (consisting of a deferred tax asset balance of $503.7 million and a deferred tax liability balance of $1.5 billion). During the quarter, the Company’s ownership of SC reached the 80% threshold which requires SC to file a consolidated federal tax return with the Company. Due to the filing of the consolidated federal tax return, SC and SHUSA's deferred tax assets and liabilities are now offset and reported on a net basis. SHUSA also reversed its deferred tax liability of $306.6 million for the book over tax basis difference in its investment in SC as SHUSA now has the ability and expects to recover its investment in SC in a tax free manner. The $948.2 million decrease in net deferred liability for the nine-month period ended September 30, 2020 was primarily due to the adoption of the CECL standard during the first quarter of 2020 and the reversal of the deferred tax liability for the book over tax basis difference associated with the Company’s investment in SC during the third quarter of 2020.


NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES

Off-Balance Sheet Risk - Financial Instruments

In the normal course of business, the Company utilizes a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers and manage its exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, letters of credit, loans sold with recourse, forward contracts, and interest rate and cross currency swaps, caps and floors. These financial instruments may involve, to varying degrees, elements of credit, liquidity, and interest rate risk in excess of the amount recognized on the Condensed Consolidated Balance Sheets. The contractual or notional amounts of these financial instruments reflect the extent of involvement the Company has in particular classes of financial instruments.

The Company’s exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit, letters of credit and loans sold with recourse is represented by the contractual amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments. For forward contracts and interest rate swaps, caps and floors, the contract or notional amounts do not represent exposure to credit loss. The Company controls the credit risk of its forward contracts and interest rate swaps, caps and floors through credit approvals, limits and monitoring procedures. See Note 11 to these Condensed Consolidated Financial Statements for discussion of all derivative contract commitments.

64



NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

The following table details the amount of commitments at the dates indicated:
Other CommitmentsSeptember 30, 2020December 31, 2019
 (in thousands)
Commitments to extend credit$32,140,936 $30,685,478 
Letters of credit1,626,932 1,592,726 
Commitments to sell loans44,193 21,341 
Unsecured revolving lines of credit0 24,922 
Recourse exposure on sold loans26,957 53,667 
Total commitments$33,839,018 $32,378,134 

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 September 30, 2020 and December 31, 2019 are $6.0 billion and $5.7 billion, respectively, of commitments that can be canceled by the Company without notice.

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

Letters of Credit

The Company’s letters of credit meet the definition of a guarantee. Letters of credit commit the Company to make payments on behalf of its customers if specified future events occur. The guarantees are primarily issued to support public and private borrowing arrangements. The weighted average term of these commitments at September 30, 2020 was 14 months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the event of a requested draw by the beneficiary that complies with the terms of the letter of credit, the Company would be required to honor the commitment. The Company has various forms of collateral for these letters of credit, including real estate assets and other customer business assets. The maximum undiscounted exposure related to these commitments at September 30, 2020 was $1.6 billion. The fees related to letters of credit are deferred and amortized over the life of the respective commitments, and were immaterial to the Company’s financial statements at September 30, 2020. 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. The credit risk associated with letters of credit is monitored using the same risk rating system utilized within the loan and financing lease portfolio. As of September 30, 2020 and December 31, 2019, the liability related to unfunded lending commitments of $148.0 million and $89.6 million, respectively.

Unsecured Revolving Lines of Credit

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

Loans Sold with Recourse

The Company has loans sold with recourse that meet the definition of a guarantee. For loans sold with recourse under the terms of its multifamily sales program with the FNMA, the Company retained a portion of the associated credit risk.
65



NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Commitments to Sell Loans

The Company enters into forward contracts relating to its mortgage banking business to hedge the exposures from commitments to make new residential mortgage loans with existing customers and from mortgage loans classified as LHFS. These contracts mature in less than one year.

SC Commitments

The following table summarizes liabilities recorded for commitments and contingencies as of September 30, 2020 and December 31, 2019, all of which are included in Accounts payable and accrued expenses in the accompanying Condensed Consolidated Balance Sheets:
Agreement or Legal MatterCommitment or ContingencySeptember 30, 2020December 31, 2019
(in thousands)
Chrysler AgreementRevenue-sharing and gain/(loss), net-sharing payments$50,809 $12,132 
Agreement with Bank of AmericaServicer performance fee1,508 2,503 
Agreement with CBPLoss-sharing payments392 1,429 
Other contingenciesConsumer arrangements25,099 1,991 

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

Chrysler Agreement

Under the terms of the Chrysler Agreement, SC must make revenue sharing payments to FCA and also must share with FCA when residual gains/(losses) on leased vehicles exceed a specified threshold. The agreement also requires that SC maintain at least $5.0 billion in funding available for floor plan loans and $4.5 billion of financing dedicated to FCA retail financing. In turn, FCA must provide designated minimum threshold percentages of its subvention business to SC.

Agreement with Bank of America

Until January 2017, SC had a flow agreement with Bank of America whereby SC was committed to sell up to $300.0 million of eligible loans to the bank each month. SC retains servicing on all sold loans and may receive or pay a servicer performance payment based on an agreed-upon formula if performance on the sold loans is better or worse, respectively, than expected performance at the time of sale. Servicer performance payments are due six years from the cut-off date of each loan sale.

Agreement with CBP

Until May 2017, SC sold loans to CBP under terms of a flow agreement and predecessor sale agreements. SC retained servicing on the sold loans and owes CBP a loss-sharing payment capped at 0.5% of the original pool balance if losses exceed a specified threshold, established on a pool-by-pool basis. Loss-sharing payments are due the month in which net losses exceed the established threshold of each loan sale.

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NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Agreements

Bluestem

SC is party to agreements with Bluestem whereby SC is committed to purchase certain new advances on personal revolving financings receivables, along with existing balances on accounts with new advances, originated by Bluestem for an initial term ending in April 2020 and renewing through April 2022 at Bluestem's option. As of September 30, 2020 and December 31, 2019, the total unused credit available to customers was $2.8 billion and $3.0 billion, respectively. In 2020, SC purchased $0.8 billion of receivables out of the $3.0 billion unused credit available to customers as of December 31, 2019. In 2019, SC purchased $1.2 billion of receivables out of the $3.1 billion unused credit available to customers as of December 31, 2018. In addition, SC purchased $151.2 million and $137.8 million of receivables related to newly-opened customer accounts during the nine-month periods ended September 30, 2020 and 2019, respectively.

Each customer account generated under the agreements generally is approved with a credit limit higher than the amount of the initial purchase, with each subsequent purchase automatically approved as long as it does not cause the account to exceed its limit and the customer is in good standing. As of September 30, 2020 and December 31, 2019, SC was obligated to purchase $13.3 million and $10.6 million, respectively, in receivables that had been originated by Bluestem but not yet purchased by SC. SC also is required to make a profit-sharing payment to Bluestem each month if performance exceeds a specified return threshold. The agreement, among other provisions, gives Bluestem the right to repurchase up to 9.99% of the existing portfolio at any time during the term of the agreement and, provides that, if the repurchase right is exercised, Bluestem has the right to retain up to 20.00% of new accounts subsequently originated.

On March 9, 2020, Bluestem and certain of its subsidiaries and affiliates filed Chapter 11 bankruptcy in the United States District Court for the District of Delaware. On August 28, 2020, BLST Operating Company LLC. purchased the Bluestem assets from bankruptcy and assumed Bluestem's obligations under the parties' agreement.

Others

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

In connection with the sale of RICs through securitizations and other sales, SC has made standard representations and warranties customary to the consumer finance industry. Violations of these representations and warranties may require SC to repurchase loans previously sold to on- or off-balance sheet Trusts or other third parties. As of September 30, 2020, there were no loans that were the subject of a demand to repurchase or replace for breach of representations and warranties for SC's ABS or other sales. In the opinion of management, the potential exposure of other recourse obligations related to SC’s RICs sale agreements is not expected to have a material adverse effect on the Company's or SC’s business, consolidated financial position, results of operations, or cash flows.

Santander has provided guarantees on the covenants, agreements, and obligations of SC under the governing documents of its warehouse facilities and privately issued amortizing notes. These guarantees are limited to the obligations of SC as servicer.

In November 2015, SC executed a forward flow asset sale agreement with a third party under the terms of which SC is committed to sell $350.0 million in charged-off loan receivables in bankruptcy status on a quarterly basis. However, any sale of more than $275.0 millionis subject to a market price check. The remaining aggregate commitment as of September 30, 2020 and December 31, 2019 not subject to a market price check was $27.7 million and $39.8 million, respectively.

Other Off-Balance Sheet Risk

Other off-balance sheet risk stems from financial instruments that do not meet the definition of guarantees under applicable accounting guidance and from other relationships that include items such as indemnifications provided in the ordinary course of business and intercompany guarantees.
67



NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Legal and Regulatory Proceedings

The Company, including its subsidiaries, is and in the future periodically expects to be party to, or otherwise involved in, various claims, disputes, lawsuits, investigations, regulatory matters and other legal matters and proceedings that arise in the ordinary course of business. In view of the inherent difficulty of predicting the outcome of any such claim, dispute, lawsuit, investigation, regulatory matter and/or legal proceeding, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of the matters, or the eventual loss, fines or penalties related to the matters, if any. Accordingly, except as provided below, the Company is unable to reasonably estimate a range of its potential exposure, if any, to these claims, disputes, lawsuits, investigations, regulatory matters and other legal proceedings at this time. 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 materially and adversely affect the Company's business, financial position, liquidity, and results of operations.

In accordance with applicable accounting guidance, the Company establishes an accrued liability for legal and regulatory 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 legal or regulatory proceeding develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether the matter presents a material loss contingency that is probable and estimable. If a determination is made during a given quarter that a material loss contingency is probable and estimable, an accrued liability is established during such quarter with respect to such loss contingency, and the Company continues to monitor the matter for further developments that could affect the amount of the accrued liability previously established.

As of September 30, 2020 and December 31, 2019, the Company accrued aggregate legal and regulatory liabilities of approximately $161 million and $295 million, respectively. Further, the Company estimates the aggregate range of reasonably possible losses for legal and regulatory proceedings, in excess of reserves established, of up to approximately $147 million as of September 30, 2020. Set forth below are descriptions of the material lawsuits, regulatory matters and other legal proceedings to which the Company is subject.

SHUSA Matters

On March 21, 2017, SC and SHUSA entered into a written agreement with the FRB of Boston. Under the terms of that agreement, SC is required to enhance its compliance risk management program, board oversight of risk management and senior management oversight of risk management, and SHUSA is required to enhance its oversight of SC's management and operations. 

Mortgage bankingEscrow Interest Putative Class Action

The Bank is a defendant in a putative class action lawsuit (the “Tepper Lawsuit”) in the United States District Court, Southern District of New York, captioned Daniel and Rebecca Ruf-Tepper v. Santander Bank, N.A., No. 20-cv-00501. The Tepper Lawsuit, filed in January 2020, alleges that the Bank is obligated to pay interest on mortgage escrow accounts pursuant to state law. Plaintiffs filed an amended complaint and the Bank has filed a motion to dismiss.

Congressional Inquiry into PPP

After June 15, 2020, SBNA and seven other financial institutions received a request from the Congressional Select Subcommittee on the Coronavirus Crisis to provide information and documents related to PPP implementation.SBNA produced documents in response to this request and continues to cooperate with the subcommittee. On October 16, 2020, the Subcommittee issued its staff report on the investigation entitled “Undeserved and Unprotected: How the Trump Administration Neglected the Neediest Small Businesses in the PPP.”
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NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

SC Matters

Securities Class Action and Shareholder Derivative Lawsuits

Deka Lawsuit: SC is a defendant in a purported securities class action lawsuit (the "Deka Lawsuit") in the United States District Court, Northern District of Texas, captioned Deka Investment GmbH et al. v. Santander Consumer USA Holdings Inc. et al., No. 3:15-cv-2129-K. The Deka Lawsuit, which was filed in August 2014, was brought against SC, certain of its current and former directors and executive officers and certain institutions that served as underwriters in SC's IPO, including SIS, on behalf of a class consisting of those who purchased or otherwise acquired SC securities between January 23, 2014 and June 12, 2014. The complaint alleges, among other things, that the IPO registration statement and prospectus and certain subsequent public disclosures violated federal securities laws by containing misleading statements concerning SC’s ability to pay dividends and the adequacy of SC’s compliance systems and oversight. In December 2015, SC and the individual defendants moved to dismiss the lawsuit, which was denied. In December 2016, the plaintiffs moved to certify the proposed classes. In July 2017, the court entered an order staying the Deka Lawsuit pending the resolution of the appeal of a class certification order in In re Cobalt Int’l Energy, Inc. Sec. Litig., No. H-14-3428, 2017 U.S. Dist. LEXIS 91938 (S.D. Tex. June 15, 2017). In October 2018, the court vacated the order staying the Deka Lawsuit and ordered that merits discovery in the Deka Lawsuit be stayed until the court ruled on the issue of class certification. On July 28, 2020, the Company entered into a Stipulation of Settlement with the plaintiffs in the Deka Lawsuit that fully resolves all of the plaintiffs' claims, for a cash payment of $47 million. On August 13, 2020, the Court entered an order preliminarily approving the settlement and providing for notice, setting the final settlement hearing for January 12, 2021.

In Re Santander Consumer USA Holdings, Inc. Derivative Litigation: In October 2015, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Feldman v. Jason A. Kulas, et al., C.A. No. 11614-VCG (the "Feldman Lawsuit"). The Feldman Lawsuit names as defendants certain current and former members of SC’s Board of Directors, and names SC as a nominal defendant. The complaint alleges, among other things, that the current and former director defendants breached their fiduciary duties in connection with overseeing SC’s nonprime auto lending practices, resulting in harm to SC. The complaint seeks unspecified damages and equitable relief. In December 2015, the Feldman Lawsuit was stayed pending the resolution of the Deka Lawsuit. In September 2016, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware captioned Jackie888, Inc. v. Jason Kulas, et al., C.A. No. 12775-VCG (the "Jackie888 Lawsuit"). The Jackie888 Lawsuit names as defendants current and former members of SC’s Board of Directors, and names SC as a nominal defendant. The complaint alleges, among other things, that the director defendants breached their fiduciary duties in connection with SC’s accounting practices and controls. The complaint seeks unspecified damages and equitable relief. In April 2017, the Jackie888 Lawsuit was stayed pending the resolution of the Deka Lawsuit. In March 2018, the Feldman Lawsuit and Jackie888 Lawsuit were consolidated under the caption In Re Santander Consumer USA Holdings, Inc. Derivative Litigation, Consol. C.A. No. 11614-VCG. In January 2020, the Company executed a Stipulation and Agreement of Settlement, Compromise and Release with the plaintiffs in the consolidated action that, subject to court approval, fully resolves all of the plaintiffs’ claims in the Feldman Lawsuit and the Jackie888 Lawsuit. The Stipulation provides for the settlement of the consolidated action and, in return the Company has enacted or will enact and implement certain corporate governance reforms and enhancements. The settlement hearing at which the Court would consider the settlement was scheduled for May 27, 2020, but a shareholder filed its notice of intent to object to the settlement and the parties agreed to postpone the settlement hearing to a later date.

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 Fair Debt Collection Practices Act, the Fair Credit Reporting Act, Section 5 of the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Truth in Lending Act, wrongful repossession laws, usury laws and laws related to unfair and deceptive acts or practices. In general, these cases seek damages and equitable and/or other relief.

Regulatory Investigations and Proceedings

SC is party to, or is periodically otherwise involved in, reviews, investigations, examinations and proceedings (both formal and informal), and information-gathering requests, by government and self-regulatory agencies, including the FRB of Boston, the CFPB, the DOJ, the SEC, the Federal Trade Commission and various state regulatory and enforcement agencies.


69



NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Currently, such matters include, but are not limited to, the following:

•SC received a civil subpoena from the DOJ in 2014 under the Financial Institutions Reform, Recovery and Enforcement Act requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime vehicle loans. SC has responded to these requests within the deadlines specified in the subpoenas and has otherwise cooperated with the DOJ with respect to this matter.
•In October 2014, May 2015, July 2015 and February 2017, SC received subpoenas and/or CIDs from the Attorneys General of California, Illinois, Oregon, New Jersey, Maryland and Washington under the authority of each state's consumer protection statutes. On May 19, 2020, all of the Consortium members and SC announced a settlement of the investigation requiring SC to: (1) pay a total of $65 million to the states for consumer remediation; (2) pay $5 million to the states for investigation costs; (3) pay up to $2 million in settlement administration costs; (4) provide $45 million in prospective debt forgiveness; (5) provide deficiency waivers for a defined class of SC customers; and (6) implement certain enhancements to its loan underwriting process.
•In August 2017, SC received CIDs from the CFPB. The stated purpose of the CIDs are to determine whether SC has complied with the Fair Credit Reporting Act and related regulations. SC has responded to these requests within the applicable deadlines and has otherwise cooperated with the CFPB with respect to this matter. In February 2020, the Company received a communication from the CFPB inviting the Company to respond to the CFPB’s identified issues in the form of a Notice of Opportunity to Respond and Advise, in which the CFPB identified potential claims it might bring against SC. SC responded to the CFPB and continues to cooperate in connection with the investigation.

Mississippi Attorney General Lawsuit

In January 2017, Mississippi AG filed a lawsuit against SC in the Chancery Court of the First Judicial District of Hinds County, State of Mississippi, captioned State of Mississippi ex rel. Jim Hood, Attorney General of the State of Mississippi v. Santander Consumer USA Inc., C.A. # G-2017-28. The complaint alleges that SC engaged in unfair and deceptive business practices to induce Mississippi consumers to apply for loans that they could not afford. The complaint asserts claims under the Mississippi Consumer Protection Act and seeks unspecified civil penalties, equitable relief and other relief. In March 2017, SC filed motions to dismiss the lawsuit and the parties are proceeding with discovery.

IHC Matters

Periodically, SSLLC is party to pending and threatened legal actions and proceedings, including FINRA arbitration actions and class action claims.

Puerto Rico FINRA Arbitrations

As of September 30, 2020, SSLLC had received 766 FINRA arbitration cases related to Puerto Rico bonds and Puerto Rico CEFs, generally, that SSLLC previously recommended and/or sold to clients. Most of these cases are based upon concerns regarding the local Puerto Rico securities market. The statements of claims allege, among other things, fraud, negligence, breach of fiduciary duty, breach of contract, unsuitability, over-concentration and failure to supervise. There were 267 arbitration cases pending as of September 30, 2020. The Company has experienced a decrease in the volume of claims since September 30, 2019; however, it is reasonably possible that it could experience an increase in claims in future periods.

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NOTE 15. COMMITMENTS, CONTINGENCIES, AND GUARANTEES (continued)

Puerto Rico Putative Class Action: SSLLC, SBC, BSPR, the Company and Santander are defendants in a putative class action alleging federal securities and common law claims relating to the solicitation and purchase of more than $180.0 million of Puerto Rico bonds and $101.0 million of CEFs during the period from December 2012 to October 2013. The case is pending in the United States District Court for the District of Puerto Rico and is captioned Jorge Ponsa-Rabell, et. al. v. SSLLC, Civ. No. 3:17-cv-02243. The amended complaint alleges that defendants acted in concert to defraud purchasers in connection with the underwriting and sale of Puerto Rico municipal bonds, CEFs and open-end funds. In May 2019, the defendants filed a motion to dismiss the amended complaint. On July 22, 2020, the District Court dismissed the complaint. Plaintiffs have appealed to the United States Court of Appeals for the First Circuit.

Puerto Rico Municipal Bond Insurer Litigation: On August 8, 2019, bond insurers National Public Finance Guarantee Corporation and MBIA Insurance Corporation filed suit in Puerto Rico state court against eight Puerto Rico municipal bond underwriters, including SSLLC, alleging that the underwriters made misrepresentations in connection with the issuance of the debt and that the bond insurers relied on such misrepresentations in agreeing to insure certain of the bonds. The complaint alleges damages of not less than $720.0 million. The defendants removed the case to federal court, and plaintiffs have sought to return the case to state court. On September 16, 2020, the defendants moved to dismiss the complaint.

These matters are ongoing and could in the future result in the imposition of damages, fines or other penalties. No assurance can be given that the ultimate outcome of these matters or any resulting proceedings would not materially and adversely affect the Company's business, financial condition and results of operations.


NOTE 16. RELATED PARTY TRANSACTIONS

The Company has various debt agreements with Santander. For a listing of these debt agreements, see Note 11 to the Consolidated Financial Statements of the Company's Annual Report on Form 10-K for the year ended December 31, 2019. 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.

During the nine-month period ended September 30, 2019, the Company received $88.9 million of capital contributions from Santander. During the nine-month period ended September 30, 2020, the Company did 0t receive any capital contributions from Santander.

On March 29, 2017, SC entered into an MSPA with Santander, under which it has the option to sell a contractually determined amount of eligible prime loans to Santander through the SPAIN trust securitization platform, for a term that ended in December 2018. SC provided servicing on all loans originated under this arrangement. Servicing fee income netof $4.5 million and $15.7 million were recognized in the Condensed Consolidated Statements of Operations duringfor the three-month and nine-month periods ended September 30, 2017.2020, respectively, and $4.7 million and $20.9 million for the three-month and nine-month periods ended September 30, 2019, respectively. SC had $6.9 million and $8.2 million of collections due to Santander as of September 30, 2020 and December 31, 2019, respectively.


87Beginning in 2018, SC agreed to provide SBNA with origination support services in connection with the processing, underwriting, and purchase of RICs, primarily from Chrysler dealers. In addition, SC agreed to perform the servicing for any RICs originated on SBNA's behalf. For the three-month and nine-month periods ended September 30, 2020, SC facilitated the purchase of $1.1 billion and $3.9 billion, respectively, of RICs. For the three-month and nine-month periods ended September 30, 2019, SC facilitated the purchase of $2.1 billion and $5.0 billion, respectively, of RICs. SC recognizes referral fee income and servicing fee income related to this agreement that eliminates in the consolidation of SHUSA.



BSI enters into transactions with affiliates in the ordinary course of business. As of September 30, 2020, BSI held interest-bearing deposits with an unconsolidated affiliate of $1.0 billion.
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS






NOTE 17. BUSINESS SEGMENT INFORMATION


Business Segment Products and Services


The Company’s reportable segments are focused principally around the customers the Company serves. The Company has identified the following reportable segments: CBB, C&I, CRE & VF, CIB, and SC.

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NOTE 17. BUSINESS SEGMENT INFORMATION (continued)

•The Consumer and Business BankingCBB segment (formerly known as the Retail Banking segment) includes the products and services provided to Bank consumer and business banking customers, through the Bank's branch locations, including consumer deposit, business banking, residential mortgage, unsecured lending and investment services. The branch locations offerThis segment offers a wide range of products and services to consumers and business banking customers, including demand and interest-bearing demand deposit accounts, money market and savings accounts, CDs and retirement savings products. The branch locationsIt also offeroffers lending products such as credit cards, mortgages, home equity loans and lines of credit, and business loans such as commercialbusiness lines of credit and business creditcommercial cards. The Bank also finances indirect consumer automobile RICs through an intercompany agreement with SC. 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 BankingC&I segment currently provides commercial lines, loans, letters of credit, receivables financing and deposits to mediummedium- and large business bankinglarge-sized commercial customers, as well as financing and deposits for government entities,entities. This segment also provides niche product financing for specific industries.
•The CRE & VF segment offers CRE loans and multifamily loans to customers. This segment also offers commercial loans to dealers and financing for commercial equipment and commercial vehicles. This segmentcategory also provides financing and deposits for government entities and niche product financing for specific industries,includes the Bank’s community development finance activities, including oil and gas and mortgage warehousing, among others.
The Commercial Real Estate segment offers commercial real estateoriginating CRA-eligible loans and multifamily loans to customers.making CRA-eligible investments.

•The Global Corporate Banking ("GCB")CIB segment serves the needs of global commercial and institutional customers by leveraging the international footprint of Santander to provide financing and banking services to corporations with over $500 million in annual revenues. GCB'sCIB also includes SIS, a registered broker-dealer located in New York that provides services in investment banking, institutional sales, and trading and offering research reports of Latin American and European equity and fixed-income securities. CIB's offerings and strategy are based on Santander's local and global capabilities in wholesale banking.
•SC is a specialized consumer finance company focused on vehicle finance and third-party servicing. SC’s primary business is the indirect origination of RICs, principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers. In conjunction with a ten-year private label financingthe Chrysler 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.


SBNA also offers customer-related derivatives to hedge interest rate risk, and for C&I and CIB offers derivatives relating to foreign exchange and lending arrangements. See Note 11 to the Condensed Consolidated Financial Statements for additional details.

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


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

88


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.

72



NOTE 17. BUSINESS SEGMENT INFORMATION (continued)

The application and development of management reporting methodologies is a dynamic process and is subject to periodic enhancements. The implementation of these enhancements to the internal management reporting methodology may materially affect the results disclosed for each segment with no impact on consolidated results. Whenever significant changes to management reporting methodologies take place, prior period information is reclassified wherever practicable.


In July 2020, the Company announced organizational changes to Business Banking to meet the evolving needs of its business customers including the re-alignment of Upper Business Banking into the C&I segment from the CBB segment effective for internal reporting on October 31, 2020. The CODM internal reporting package will be updated for this change in the fourth quarter of 2020 after changes to the CODM internal reporting are finalized.

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 below 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 three-month and nine-month periods ended September 30, 2017. The results of segments for the three-month and nine-month periods ended September 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 EndedSHUSA Reportable Segments
September 30, 2020CBBC&ICRE & VFCIB
Other(2)
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
Total
(in thousands)
Net interest income$374,014 $61,115 $93,451 $44,035 $(17,518)$1,061,986 $(165)$4,474 $1,621,392 
Non-interest income73,721 13,605 4,671 71,956 186,836 830,126 3,035 (9,096)1,174,854 
Provision for/(release of) credit losses50,109 22,400 11,963 (15,384)(4,038)340,548 227 0 405,825 
Total expenses402,962 47,791 30,569 63,343 131,571 888,973 9,804 (5,785)1,569,228 
Income/(loss) before income taxes(5,336)4,529 55,590 68,032 41,785 662,591 (7,161)1,163 821,193 
Intersegment revenue/(expense)(1)
273 2,847 1,232 (4,352)0 0 0 0 0 
For the Three-Month Period EndedSHUSA Reportable Segments   
September 30, 2017Consumer & Business BankingCommercial BankingCommercial Real Estate GCB
Other(2)
 
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
 Total
For the Nine-Month Period EndedFor the Nine-Month Period EndedSHUSA Reportable Segments
September 30, 2020September 30, 2020CBBC&ICRE & VF
CIB(5)
Other(2)
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
Total
(in thousands)(in thousands)
Net interest income$324,539
$87,176
$72,870
$35,494
$27,665
 $989,140
$31,731
$5,445
 $1,574,060
Net interest income$1,082,275 $188,970 $281,332 $123,411 $1,591 $3,058,137 $(588)$11,032 $4,746,160 
Total non-interest income100,583
15,837
2,855
23,205
181,047
 496,728
(13,779)(11,754) 794,722
Provision for credit losses20,716
5,857
(2,824)11,599
48,812
 536,447
31,513
—
 652,120
Non-interest incomeNon-interest income228,646 39,556 8,561 212,506 253,541 2,271,200 8,056 (33,735)2,988,331 
Credit loss expenseCredit loss expense402,293 93,578 78,800 18,071 (134,923)2,110,330 659 0 2,568,808 
Total expenses379,299
51,677
17,530
24,615
234,270
 671,648
10,946
(3,798) 1,386,187
Total expenses2,743,783 434,828 86,857 188,266 425,152 2,692,396 29,397 (17,958)6,582,721 
Income/(loss) before income taxes25,107
45,479
61,019
22,485
(74,370) 277,773
(24,507)(2,511) 330,475
Income/(loss) before income taxes(1,835,155)(299,880)124,236 129,580 (35,097)526,611 (22,588)(4,745)(1,417,038)
Intersegment revenue/(expense)(1)
3,076
1,619
500
(1,823)(3,372) —
—
—
 —
Intersegment revenue/(expense)(1)
1,234 7,790 3,985 (13,009)0 0 0 0 0 
Total assets19,716,199
11,606,759
14,073,894
6,109,131
41,714,577
 38,765,557
—
—
 131,986,117
Total assets23,612,515 6,475,164 20,296,999 11,532,762 35,373,234 48,448,921 0 0 145,739,595 

(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.
(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.

(2)Other includes the results of the entities transferred to the IHC, with the exception of SIS, earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and the Company's borrowings and other debt obligations, amortization of intangible assets and certain unallocated corporate income and indirect expenses.
(3)Management of SHUSA manages SC by analyzing the pre-Change in Control results of SC, which are presented in this column.
(4)SC Purchase Price Adjustments represents the impact that SC purchase marks had on the results of SC included within the consolidated operations of SHUSA, while eliminations eliminate intercompany transactions.
(5)Includes results and assets of SIS.

89
73





SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 17. BUSINESS SEGMENT INFORMATION (continued)


For the Three-Month Period EndedSHUSA Reportable Segments
September 30, 2019CBBC&ICRE & VFCIB
Other(2)
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
Total
(in thousands)
Net interest income$381,759 $59,738 $104,076 $36,577 $8,586 $1,002,661 $10,189 $15,524 $1,619,110 
Non-interest income120,264 17,631 3,428 53,341 102,489 734,149 1,162 (31,332)1,001,132 
Provision for/(release of) credit losses37,915 4,985 6,425 (3,878)(7,874)566,849 (787)0 603,635 
Total expenses414,836 59,242 32,718 66,092 203,816 855,267 9,934 (8,661)1,633,244 
Income/(loss) before income taxes49,272 13,142 68,361 27,704 (84,867)314,694 2,204 (7,147)383,363 
Intersegment revenue/(expense)(1)
600 1,683 1,605 (3,888)0 0 0 0 0 
For the Nine-Month Period EndedSHUSA Reportable Segments   For the Nine-Month Period EndedSHUSA Reportable Segments
September 30, 2017Consumer & Business BankingCommercial BankingCommercial Real Estate GCB
Other(2)
 
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
 Total
September 30, 2019September 30, 2019CBBC&ICRE & VF
CIB(5)
Other(2)
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
Total
(in thousands)(in thousands)
Net interest income$945,102
$259,502
$220,580
$119,968
$62,738
 $3,085,739
$103,132
$21,612
 $4,818,373
Net interest income$1,120,907 $170,525 $311,790 $114,646 $80,489 $2,978,709 $27,315 $39,337 $4,843,718 
Total non-interest income282,360
45,729
8,121
48,808
548,945
 1,363,948
(12,044)(33,756) 2,252,111
Provision for credit losses64,577
16,115
(8,784)23,871
80,472
 1,692,015
124,068
—
 1,992,334
Non-interest incomeNon-interest income281,464 50,641 9,860 159,970 309,123 2,123,441 5,476 (80,411)2,859,564 
Credit loss expense / (Recovery of) credit loss expenseCredit loss expense / (Recovery of) credit loss expense115,130 20,570 9,824 (6,624)520 1,548,404 (3,346)0 1,684,478 
Total expenses1,169,247
154,587
57,162
75,945
739,912
 1,910,365
34,326
(16,261) 4,125,283
Total expenses1,208,908 173,426 95,385 198,653 610,116 2,421,754 30,324 (20,521)4,718,045 
Income/(loss) before income taxes(6,362)134,529
180,323
68,960
(208,701) 847,307
(67,306)4,117
 952,867
Income/(loss) before income taxes78,333 27,170 216,441 82,587 (221,024)1,131,992 5,813 (20,553)1,300,759 
Intersegment revenue/(expense)(1)
9,226
4,553
1,997
(5,867)(9,909) —
—
—
 —
Intersegment revenue/(expense)(1)
1,576 3,986 5,396 (10,958)0 0 0 0 0 
Total assets19,716,199
11,606,759
14,073,894
6,109,131
41,714,577
 38,765,557
—
—
 131,986,117
Total assets23,447,787 7,948,200 18,772,209 9,605,098 40,133,105 47,279,015 0 0 147,185,414 

(1)- (5) Refer to corresponding notes above.
(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.
For the Three-Month Period EndedSHUSA Reportable Segments    
September 30, 2016Consumer & Business BankingCommercial BankingCommercial Real Estate GCB
Other(2)
 
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
 Total
 (in thousands)
Net interest income$297,952
$91,259
$74,992
$60,436
$(45,680) $1,095,060
$42,566
$4,545
 $1,621,130
Total non-interest income104,736
16,947
5,124
26,319
189,825
 389,375
9,071
(13,824) 727,573
Provision for credit losses19,872
(20,162)2,945
(2,487)4,426
 610,398
72,920
—
 687,912
Total expenses395,759
51,156
20,556
26,830
260,723
 570,017
13,956
(12,172) 1,326,825
Income/(loss) before income taxes(12,943)77,212
56,615
62,412
(121,004) 304,020
(35,239)2,893
 333,966
Intersegment revenue/(expense)(1)
9,656
3,616
2,523
(702)(15,093) —
—
—
 —
Total assets19,735,459
12,174,784
15,005,335
10,551,939
43,782,904
 38,771,636
—
—
 140,022,057

(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.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





NOTE 17. BUSINESS SEGMENT INFORMATION (continued)

For the Nine-Month Period EndedSHUSA Reportable Segments    
September 30, 2016Consumer & Business BankingCommercial BankingCommercial Real Estate GCB
Other(2)
 
SC(3)
SC Purchase Price Adjustments(4)
Eliminations(4)
 Total
 (in thousands)
Net interest income$793,345
$257,421
$212,035
$182,024
$(8,180) $3,388,276
$146,419
$10,477
 $4,981,817
Total non-interest income297,311
51,094
16,445
65,818
608,810
 1,109,894
38,340
(38,897) 2,148,815
Provision for credit losses40,215
32,686
23,905
28,889
31,247
 1,782,489
260,723
—
 2,200,154
Total expenses1,162,090
157,672
66,819
89,952
852,990
 1,645,156
42,585
(37,497) 3,979,767
Income/(loss) before income taxes(111,649)118,157
137,756
129,001
(283,607) 1,070,525
(118,549)9,077
 950,711
Intersegment revenue/(expense)(1)
34,111
12,927
9,940
(780)(56,198) —
—
—
 —
Total assets19,735,459
12,174,784
15,005,335
10,551,939
43,782,904
 38,771,636
—
—
 140,022,057

(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.


NOTE 18. IHC

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.

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. Refer to Note 1 for additional details.


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



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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 ("MD&A")



EXECUTIVE SUMMARY


Santander Holdings USA, Inc. ("SHUSA" or the "Company")SHUSA is the parent holding company of Santander Bank, National Association, (the "Bank" or "SBNA"),SBNA, a national banking association, and owns approximately 59%80.2% (as of Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SC"),September 30, 2020) of SC, a specialized consumer finance company focused on vehicle finance and third-party servicing.company. SHUSA is headquartered in Boston, Massachusetts and the Bank's main office is in Wilmington, Delaware.Delaware. SC is headquartered in Dallas, Texas. SHUSA is a wholly-owned subsidiary of Banco Santander, S.A. ("Santander").Santander. SHUSA is also the parent company of Santander BanCorp (together with its subsidiaries, “Santander BanCorp”),SSLLC, 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; Santander Securities, LLC (“SSLLC”), a registered broker-dealer headquartered in Boston; Banco Santander International (“BSI”),BSI, a financial services company locatedheadquartered in Miami that offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; Santander Investment Securities Inc. (“SIS”),SIS, a registered broker-dealer locatedheadquartered in New York providing services in investment banking, institutional sales, trading and offering research reports of Latin American and European equity and fixed-income securities; and several other subsidiaries. SSLLC, SIS and another SHUSA subsidiary, SAM, are registered investment advisers with the SEC.


The Bank's principal markets are in the Mid-Atlantic and Northeastern United States. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios. The Bank earns interest income on its loan and investment portfolios. In addition, the Bank generates non-interest income from a number of sources, including deposit and loan services, sales of loans and investment securities, capital markets products and bank-owned life insurance ("BOLI").BOLI. The principal non-interest expenses include employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. The financial results of the Bank are affected by the economic environment, including interest rates and consumer and business confidence and spending, as well as the competitive conditions within the Bank's geographic footprint.


SC is a specialized consumer finance company focused on vehicle finance and third-party servicing. SC's primary business is the indirect origination and securitization of retail installment contracts ("RICs"),RICs, principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to subprime retail consumers. Further information about SC’s business is provided below in the “Chrysler Capital” section.


SC is managed through a single reporting segment which included vehicle financial products and services, including RICs, vehicle leases, and dealer loans, as well as financial products and services related to recreational and marine vehicles and other consumer finance products.

SC also originates vehicle loans through a web-based direct lending program, purchases vehicle RICs from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, SC has severalother relationships through which it provides personal unsecured loans, private-label credit cards andholds other consumer finance products. However, in 2015, SC announced its exit from personal lending and, accordingly, all of its personal lending assets are classified as LHFS at December 31, 2019.


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 theSince its IPO, SC has been consolidated with the Company owned approximately 65%and Santander for financial reporting and accounting purposes. Now that the Company directly owns more than 80% or more of SC Common Stock.Stock, SC is consolidated with the Company for tax filing and capital planning purposes. Among other things, tax consolidation (1) facilitates certain offsets of SC’s taxable income, (2) eliminates the double taxation of dividends from SC, and (3) triggered a release into SHUSA’s income of an approximately $306.6 million deferred tax liability recognized with respect to the GAAP basis vs. the income tax basis in the Company's ownership of SC. Tax consolidation also allows for SC's net deferred tax liability to offset the Company's net deferred tax asset, which provides a regulatory capital benefit. In addition, SHUSA and Santander recognizes a larger percentage of SC's net income. On August 10 2020, SC substantively exhausted the amount of shares the Company was permitted to repurchase under the exception SHUSA was granted to the Interim Policy, and as a result of these repurchases, SHUSA now owns approximately 80.2% of SC. SC Common Stock is now listed for trading on the New York Stock ExchangeNYSE under the trading symbol “SC”."SC"


Immediately following the IPO, the Company owned approximately 61% of the shares of SC Common Stock. The IPO resulted in a change in control and consolidation of SC (the "Change in Control").

Prior to the Change in Control, the Company accounted for its investment in SC under the equity method. Following the Change in Control, the Company consolidated the financial results of SC in the Company’s 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).

Chrysler Capital


Since May 2013, under the Chrysler Agreement, SC offers a full spectrum of auto financing productshas operated as FCA’s preferred provider for consumer loans, leases and dealer loans and provides services to ChryslerFCA 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").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.


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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



Under the terms of the Chrysler Agreement, certain standards were agreed to, including SC meeting specified escalating penetration rates for the first five years, and FCA treating SC in a manner consistent with comparable original equipment manufacturers ("OEMs") treatment of their captive providers, primarily in regard to sales support. The failure of either party to meet its obligations under the agreement could result in the agreement being terminated. The targeted and actual penetration rates under the terms of the Chrysler Agreement are as follows:

  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% 21%

(a) Each program year runs from May 1 to April 30. Retail and lease penetration is based on a percentage of FCA retail sales.
(b) Actual penetration rates shown for program year 1, 2, 3 and 4 are as of April 30, 2014, 2015, 2016 and 2017, respectively, the end date of each of those Program Years. Actual penetration rate shown for program year 5, which ends April 30, 2018, is as of September 30, 2017.

The target penetration rate as of as of April 30, 2018 is 65%. SC's actual penetration rate for the three-months ended September 30, 2017 was 21%. The penetration rate has been constrained due to the competitive landscape and low interest rates, causing SC's subvented loan offers not to be materially more attractive than other lenders' offers. While SC has not achieved the targeted penetration rates to date, Chrysler Capital continues to be a focal point of its strategy,SC's strategy. On June 28, 2019, SC continues to work with FCA to improve penetration rates, and SC remains committedentered into an amendment to the Chrysler Agreement.Agreement with FCA which modified the Chrysler Agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions under the agreement. The amendment also established an operating framework that is mutually beneficial for both parties for the remainder of the contract. The Company's average penetration rate under the Chrysler Agreement for the third quarter of 2020 was 33%, a decrease from 36% for the same period in 2019.


SC has dedicated financing facilities in place for its Chrysler Capital business and has worked strategically and collaboratively with FCA to continue to strengthen its relationship and create value within the Chrysler Capital program. SC has partnered with FCA to roll out two new pilot programs, including a dealer rewards program and a nonprime subvention program. During the nine monthsnine-month period ended September 30, 2017,2020, SC originated $5.2$11.1 billion in Chrysler Capital loans, which represented 46%61% of the UPB of its total RIC originations, with an approximately even share between prime and non-prime, as well as more than $4.7$4.9 billion in Chrysler Capital leases. Since its May 1, 2013 launch, Chrysler Capital hasAdditionally, substantially all of the leases originated $43.7 billion in retail loans and $22.3 billion in leases, and facilitated the origination of $3.0 billion in leases and dealer loans for the Bank. As ofby SC during nine-month period ended September 30, 2017, SC's auto RIC portfolio consisted of $6.9 billion of2020 were under the Chrysler Capital loans, which represents 31% of SC's auto RIC portfolio.Agreement.

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



ECONOMIC AND BUSINESS ENVIRONMENT


Overview


During the third quarter of 2017,2020, unemployment declined, whiledecreased and year-to-date market results improved andwere mixed, reflecting the preliminary gross domestic product ("GDP") growth rate rose from the prior quarter.effects of COVID-19.


The unemployment rate at September 30, 2017 decreased to 4.2%2020 was 7.9%, compared to 4.4%11.1% at June 30, 20172020, and 5.0%3.5% one year ago. According to the U.S. Bureau of Labor Statistics, employment rose sharply in the leisure and hospitality sector. In addition, notable increases were seen in retail trade, social assistance and health care, transportationservices, and warehousing jobs, but declined in foodprofessional and business services.

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


The Bureau of Economic Analysis ("BEA") advance estimate indicates that real GDP grew at an annualized rate of 3.0% for the third quarter of 2017, compared to 2.6% in the second quarter of 2017. According to the BEA, the change was positively affected by changes in personal consumption expenditures, non-residential fixed investment, exports, and federal government spending, and negatively affected by changes in residential fixed investment and state and local government spending.


Market year-to-date returns for the following indices based on closing prices at September 30, 20172020 were:
September 30, 2020
September 30, 2017
Dow Jones Industrial Average13.4%(2.4)%
S&P 50012.5%4.4%
NASDAQ Composite20.7%24.8%


AtIn light of the effects COVID-19 will have on economic activity, at its September 20172020 meeting, the Federal Open Market Committee decided to maintain the federal funds rate target at 1-1.25% , indicatingrange to 0.00% to 0.25%. The Committee expects to maintain this target rate until it is confident that the economy has weathered recent events and is on track to achieve its maximum employment and price stability. This action will help support economic activity, strong labor market has continuedconditions and inflation to strengthen and that economic activity has continued to expandremain at a moderate pace. Inflation remains below the targeted rate of 2.0%.


The 10-yearten-year Treasury bond rate at September 30, 20172020 was 2.33%0.68%, down from 2.45%1.90% at December 31, 2016. Over the past twelve months, however, the 10-year Treasury bond rate increased 72 basis points.2019. Within the industry, changes in 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, current quarter 2017 information was not available; however, for the second quarter of 2017, mortgage originations increased approximately 1.73% over the prior quarter, but decreased 25.99% year-over-year. Similarly, refinancing activity showed an increase of approximately 2.72% over the prior quarter, but a decrease of 54.49% year-over- year.

After reaching its peak in 2009, the ratio of nonperforming loans ("NPLs") to total gross loans for U.S. banks declined for six consecutive years, to just under 1.5% in 2015. NPL trends have remained relatively flat since that time. NPLs for U.S. commercial banks were approximately 1.20% of loans using data for the second quarter of 2017, compared to 1.31 for the prior quarter.

Changing market conditions are considered a significant risk factor to the Company. The interest rate environment can present challenges in the growth of net interest income for the banking industry, which continues to rely on non-interest activities to support revenue growth. Changing market conditions and political uncertainty could have an overall impact on the Company's results of operations and financial condition. Such conditions could also impact the Company's credit risk and the associated provision for credit lossesloss expense and legal expense.

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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'sMoody’s, S&P and Standard & Poor's ("S&P")Fitch credit ratings for the Bank, SHUSA, and Banco Santander Puerto Rico ("BSPR"), SHUSA, Santander, and the Kingdom of Spain, as of September 30, 2017:
senior debt / long-term issuer rating:
BANK
BSPRSANTANDER (1)
SHUSASANTANDERSBNASPAINOverall Outlook
FitchMoody'sS&PAMoody'sBBB+S&PBBB+Moody'sS&PMoody'sS&PMoody'sS&PNegative
Long-TermMoody'sBaa2BBB+A2Baa2Baa3N/ABaa1Baa3BBB+A3A-Baa2BBB+Stable
Short-TermS&PP-1A-2AP-1/P-2BBB+N/AA-n/aA-2P-2A-2P-2A-2
OutlookStableStableStableN/AStableStableStableStableStablePositiveNegative

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

February 9, 2017 Standard and Poor’s raised its outlook on Santander’s credit rating to “positive” from “stable” reflecting Santander’s issuance of debt to meet total loss absorbing capital ("TLAC") requirements.

On March 31, 2017, Standard & Poor's raised its outlook on Spain's sovereign credit rating to "positive" from "stable", saying it believed the country's strong economic performance would continue over the next two years.

On June 6, 2017 Standard and Poor's revised its outlook on Santander to stable from positive, saying its stable outlook reflects limited prospects for ratings upside until it sees evidence that the integration of Banco Popular is proceeding smoothly and not facing meaningful business or financial setbacks.

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


On August 1, 2017 Standard & Poor’s affirmed SHUSA’s and SBNA’s ratings at A-2/BBB+/Stable.

On September 27, 2017 Moody’s placed SBNA’s long term rating on review for possible upgrade. Moody's affirmed SBNA’s short term rating and outlook at P-1/Stable. Also on September 27, 2017 Moody’s affirmed SHUSA’s long-term rating and outlook at Baa3/Stable.

On October 10, 2017 Moody's affirmed the short-term deposit rating for BSPR following Hurricane Maria.


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


At this time, SC is not rated by the major credit rating agencies.


Puerto Rico EconomyImpacts of COVID- 19 on our current and future financial and operating status and planning


On May 3, 2017,The current outbreak of COVID-19 has materially impacted our business, and the Financial Oversightcontinuance of this pandemic or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and Management Board for Puerto Rico (“FOB”) submitted a requestadversely impact our business, financial condition, liquidity and results of operations.

Due to the Federal District Courtunpredictable and rapidly changing nature of Puerto Ricothis outbreak and the resulting economic distress, it is not possible to apply Title IIIdetermine with certainty the ultimate impact on our results of operations or whether other currently unanticipated consequences of the Puerto Rico Oversight, Management,pandemic are reasonably likely to materially affect our results of operations; however, certain adverse effects have already occurred or are probable. The following summarizes our current discussion of the impacts of COVID-19 on the Company's current financial and Economic Stability Act (“PROMESA”)operating status, as well as on its future operational and financial planning as of the date hereof:

•Impact on workforce: The health and well-being of our colleagues and customers are a top priority for the Company. The Company has implemented business continuity plans and has followed guidelines issued by government authorities regarding social distancing and work-from-home arrangements. Currently, approximately 90-95% of the workforce continues to work from home. In addition, the Company has established a Temporary Emergency Paid Leave Program that provides employees with up to 120 hours of additional paid time off to use – either continuously or intermittently, and before exhausting other paid time off – to assist with dependent care needs related to COVID-19. Further, the Company provided $250 a week in pay premiums for frontline customer support workers to help defray additional costs incurred while working during the pandemic.

While our business continuity plans are in place, if significant portions of our workforce, our subsidiaries' workforces, or our vendors' workforces are unable to work effectively as a result of the COVID-19 outbreak, including because of illness, stay-at-home orders, facility closures, reductions in services or hours of operation, or ineffective remote work arrangements, there may be disruptions to our origination and servicing operations, which could result in reduced originations and/or collection effectiveness or impair our or our subsidiaries' ability to operate our businesses and satisfy obligations under third-party servicing agreements. Each of these scenarios could have materially adverse effects on our business, financial condition, and results of operations.
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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations


•Impact on services: The COVID-19 outbreak as well as state stay-at-home orders resulted in the closure of certain branches in highly affected areas within the Bank's footprint. To comply with social distancing guidelines and help minimize the spread of the coronavirus, the Bank instituted temporary changes to how it operates, including closure of certain branches and limitations on services provided to others. Certain limited service locations were only performing teller transactions- such as depositing and cashing checks and handling requests for cash withdrawals, money orders and cashier's checks - in the lobby or at the drive-through. In addition, some branches were only providing account opening and servicing with a banker by appointment only. Full and limited-service branches are limiting the number of people allowed in our locations at one time. Branch hours have been changed temporarily, with certain branches providing special hours for high-risk customers. As the quarter wore on and states changed their guidance, the Bank has resumed normal branch operations for over 90% of its current branches while maintainingapplicable social distancing guidelines. Retail customers are encouraged to take advantage of mobile and online banking enabling customers to bank anytime, anywhere, for services including: checking account balances, remote check deposit, transfers, bill pay, and more. Retail customers can also utilize automated services via phone to make balance and transaction inquiries, payments on loans, transfers between accounts, stop payments, and more. Our call center remains staffed and open seven days a week to better serve our customers. Business customers can continue to utilize the business mobile banking application and business online banking to minimize the need to go to branches or exchange cash. We have developed the "Business First Coronavirus Resource Page" for our business customers during this time.

•Impact on customers and loan and lease performance: The COVID-19 outbreak and associated economic crisis have led to negative effects on our customers. Unlike the regional impact of natural disasters, such as hurricanes, the COVID-19 outbreak is impacting customers nationwide and is expected to have a materially more significant impact on the performance of our loan and lease portfolios than even the most severe historical natural disaster.

Closures and disruptions to businesses in the United States have led to negative effects on our customers. Similar to many other financial institutions, we have taken and will continue to take measures to mitigate our customers’ COVID-19-related economic challenges. The Company is actively working with its borrowers who have been impacted by COVID-19. This unique and evolving situation has created temporary personal and financial challenges for our retail and commercial borrowers. The Company is working prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19 and has developed loan modification and deferral programs to mitigate the adverse effects of COVID-19 to our loan customers. We have experienced a sharp increase in requests for extensions and modifications related to COVID-19 nationwide and a significant number of such extensions and modifications have been granted. The Bank also permitted fee reversals for those customers impacted by COVID-19, even if the amount exceed the allowable courtesy fee reversal. The Bank also joined other U.S. banks in providing overdrawn customers full access to their EIP by providing a temporary credit in the amount of their overdrawn balance as of the end of the day prior to receipt of the EIP, up to a limit of 5,000. To date, the Bank has provided over $3 million in temporary credits, helping nearly 10,000 customers. Beginning July 15, 2020, the Bank began removing these temporary credits from customers’ accounts.

These customer support programs, by their nature, are expected to negatively impact our financial performance and other results of operations in the near term. Our business, financial condition and results of operations may be materially and adversely affected in the longer term if the COVID-19 outbreak leads us to continue to provide such programs for a significant period of time, if the number of customers experiencing hardship related directly or indirectly to the Commonwealthoutbreak of Puerto Rico. Title IIICOVID-19 increases, or if our customer support programs are not effective in mitigating the effects of PROMESA allowsCOVID-19 on our customers' financial situations. Given the Commonwealthunpredictable nature of Puerto Ricothis situation, the nature and extent of such effects cannot be predicted at this time.

In addition to enter intothe measures discussed above, the Bank is providing assistance for its retail customers, including helping those experiencing difficulties with loan payments, waiving fees for early CD withdrawals, refunding late payment and overdraft fees, offering credit card limit increases, and increasing cash availability limits at ATMs. The policy of a debt restructuring process notwithstanding that Puerto Ricomore relaxed approach to providing fee refunds in the wake of hardship caused by the COVID-19 pandemic remains, but beginning in August the Bank began to see fewer refund requests. As a result, fee reversals are approaching pre-pandemic levels.For business banking customers, the Bank is barred from traditional bankruptcy protection under Chapter 9working with customers in offering interest-only loan accommodations, and deferrals and extensions up to 90 days for customers (and deferrals up to 180 days for SBA loan customers)experiencing hardships.


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


The PPP, a key part of the CARES Act, authorizes loans to small businesses to help meet payroll costs and pay other eligible expenses during the COVID-19 outbreak. The program is administered by the SBA, and the loans and accrued interest are forgivable as long as the borrower uses at least 60% of the proceeds of the loan for eligible purposes, such as payroll, benefits, rent and utilities, and maintains employee and payroll levels. The original funding for the PPP was fully allocated by mid-April 2020, with additional funding made available on April 24, 2020. Original loans were originated with a two-year maturity, unless extended by mutual agreement between the lender and borrower. Loans made on or after June 5, 2020 have a five-year maturity. In July 2020, the PPP was extended through August 8, 2020. The Bank originated loans in the first and second rounds of PPP. To date, SBNA has assisted more than 12,070 business customers in receiving PPP loans for more than $1.2 billion in funding. SBNA launched a pilot of the PPP loan forgiveness application on August 14, 2020. The PPP loan forgiveness application, process, and platform are in pilot, and are currently being enhanced to account for guidance released by the U.S. Bankruptcy Code.Treasury and the SBA on October 8, 2020 related to PPP loans under $50,000.


On July 2, 2017,•Impact on originations, including the Puerto Rican Electric Power Authority ("PREPA") submittedrelationship with FCA: Since the COVID-19 outbreak, SC has partnered with FCA to launch new incentive programs including implementing 90 day first payment deferrals and a request0% annual percentage rate for 84 months on select 2019/2020 FCA models. Today, all dealers are open and operating at full capacity; however, many are operating with a different business model (e.g. appointments only, home delivery, etc.). Third party sources are reporting a new car seasonally adjusted annual rate that is approximately 95% of pre-COVID expectations. While an economic downturn associated with the pandemic will impact sales, most dealers have developed business models that will allow them to continue operation in some capacity.

While banking is considered an essential business in all of the Bank’s footprint states, executive orders have limited the scope of work of vendors supporting mortgage and home equity lines of credit such as appraisers, notaries, law firms, title companies and settlement agents or stopped these vendors from working altogether.  As a result of these restrictions, the number of mortgages, home equity lines of credit and refinancings declined, for a period in certain states. While many of these restrictions have been lifted, it remains difficult to estimate the overall negative impact these limitations will have on mortgages, home equity lines of credits and refinancing as restrictions may be reinstated with rising COVID-19 numbers in the upcoming months.

•Impact on operations: Government and regulatory authorities could also implement laws, regulations, executive orders and other guidance that allow customers to forgo making scheduled payments for some period of time, require modifications to receivables (e.g., waiving accrued interest), preclude creditors from exercising certain rights or taking certain actions with respect to collateral, including repossession or liquidation of collateral, or mandate limited operations or temporary closures of the Company or our vendors as “non-essential businesses” or otherwise. While we have business continuity plans in place, if significant portions of our or our vendors’ workforces are unable to work effectively as a result of the COVID-19 pandemic, including because of illness, stay-at-home orders, facility closures reductions in services or hours of operation, or ineffective remote work arrangements, there may be servicing disruptions, which could result in reduced collection effectiveness or our ability to operate our business and satisfy our obligations under our third-party servicing agreements. Each of these scenarios could have negative effects on our business, financial condition and results of operations.


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


•Impact on debt and liquidity: As international trade and business activity has slowed and supply chains have been disrupted, global credit and financial markets have recently experienced, and may continue to experience significant disruption and volatility. During the first and second quarters of 2020 particularly, financial markets experienced significant declines and volatility, and such market conditions may continue and/or precede recessionary conditions in the U.S. economy. Under these circumstances, we may experience some or all of the risks related to market volatility and recessionary conditions described under the caption "We are vulnerable to disruptions and volatility in the global financial markets" in the Risk Factors section of our Form 10-K.

Governmental and regulatory authorities have recently implemented fiscal and monetary policies and initiatives to mitigate the effects of the pandemic on the economy and individual businesses and households, such as the reduction of the Federal District CourtReserve's benchmark interest rate to near zero in March 2020. Further, the Federal Reserve's TALF is available, if necessary, to support investment in SC's eligible ABS bonds. However, the Company does not expect to need to utilize TALF, given recent tightening in ABS credit spreads. These governmental and regulatory actions may not be successful in mitigating the adverse economic effects of Puerto RicoCOVID-19 and could affect our net interest income and reduce our profitability. Sustained adverse economic effects from the outbreak may also result in downgrades in our credit ratings or adversely affect the interest rate environment. If our access to apply Title IIIfunding is reduced or if our costs to obtain such funding significantly increases, our business, financial condition and results of PROMESA to PREPA.operations could be materially and adversely affected.


AsThe Company's liquidity comes from several primary sources outlined in the "Liquidity and Capital Resources" section of September 30, 2017, SHUSA did not have material direct credit exposure tothis MD&A, including deposits, as well as public and financing activities. During the Commonwealth of Puerto Rico, and its exposure to Puerto Rico municipalities in total was approximately $300 million. As of September 30, 2017, municipalities had not been designated “covered” territorial instrumentalities subject to the requirements of PROMESA, and the municipalitiesquarter, there were current on theirno unsecured debt obligations toissuances executed by SHUSA. Under PROMESA, the FOB has sole discretion to designate territorial instrumentalities such as municipalities as covered entities subject to PROMESA’s requirements. If the FOB determines to designate municipalities as covered entities under PROMESA, the FOB could initiate debt restructuring of municipalities that have debt obligations to SHUSA, if deemed necessary.

Impact from Hurricanes

Our footprint was impacted by three significant hurricanes duringDuring the third quarter, SBNA maintained ample liquidity driven by stable deposits whereby maturing FHLB advances and Brokered CDs were not renewed, resulting in lower outstanding balances for both products. As a result, there was minimal new wholesale funding activity at SBNA over the quarter, limited to a $56.5 million brokered CD issuance in August and $700 million of 2017, Hurricane Harvey, which struckadditional FHLB advances in September. In addition to significant amounts of liquidity from warehouse lines and affiliate lines of credit, SC successfully continued to access the State of Texas and 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 propertyABS market in the affected areas. Ourquarter. During the quarter SC subsidiary headquartered in Dallas, Texas, our BSI subsidiary headquartered in Miami, Florida,completed on-balance sheet funding transactions totaling approximately $6.5 billion, including: private amortizing lease facilities for approximately $1.2 billion; two securitizations on its SDART platform for approximately $3.3 billion; and our Santander BanCorp, BSPR and SSLLC subsidiaries in Puerto Rico were most directly affected by these hurricanes.  In Puerto Rico, there was significant damagea $2 billion unsecured debt issuance with Santander. However, due to the infrastructureevolving nature of the COVID-19 outbreak, it is not possible to predict whether unanticipated consequences of the pandemic will materially affect our liquidity and the power gridcapital resources in the entire island, which resulted in extended delays in BSPR returningfuture.

•Impact on dividends: Historically the Company made dividend payments to normal operations.Santander, and received dividends from the Bank and other IHC entities. The amount and size of any future dividends, however, will be subject to various factors, including the Company's capital and liquidity positions, regulatory considerations, impacts related to the COVID-19 outbreak, any accounting standards that affect capital or liquidity (including CECL), financial and operational performance, alternative uses of capital, and general market conditions, and may be changed or suspended at any time.


•Impact on impairment of goodwill, indefinite-lived and long-lived assets: The Company assessedhas analyzed the impact of COVID-19 on its financial statements, including the potential additional credit losses related to its consumer and commercial lending exposures in the greater Texas, Florida and Puerto Rico regions and has increased its allowance for loan losses by approximately $95 million in the third quarter 2017. However, for credit exposures in Puerto Rico, given the current state in the region,impairment. As a result of this analysis, the Company has had limited informationrecorded a goodwill impairment charge of $1.8 billion during the second quarter of 2020. The analysis did not indicate any impairment for the Company's loan and lease portfolios, leased vehicles, ROU assets, or other non-financial assets such as upfront fees or other intangibles.

•Impact on communities: The Company is committed to supporting our communities impacted by the COVID-19 pandemic and the Company's non-profit foundation has begun responding to the COVID-19 crisis with which$200 thousand in donations to estimate probable credit losses. Asa select group of September 30, 2017, the Company has approximately $3.6 billion of loan exposuresorganizations addressing community issues.

In addition, SHUSA's ongoing support for non-profit partners providing essential services in Puerto Rico consisting of $1.7 billionour communities includes $15.0 million in consumer loans, $1.6 billioncharitable giving this year. Further SHUSA will provide $25.0 million in commercialfinancing to community development financial institutions to fund small business loans and $300 million in loanswill expedite grant funding and payments where possible 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.help sustain nonprofit operations during this time.





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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.

Santander. 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 BankFRB of Boston, (the "FRB"), and the Consumer Financial Protection Bureau (the "CFPB").CFPB. The Company's banking subsidiaries are further supervised by the Federal Deposit Insurance Corporation (the "FDIC")OCC, the FRB of Atlanta, and the Office of the Comptroller of the Currency (the “OCC”).NYDFS. 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 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. AsAs a consolidated subsidiary of the Company, SC is included in various regulatory restrictions relating to the payment of dividends as described inunder the caption “Stress Tests and Capital Adequacy” discussionPlanning” in this section.

During Refer to the three-month"Liquidity and nine-month periods ended September 30, 2017Capital Resources" section of this MD&A for detail of the capital actions of the Company paid dividends of $5.0 millionand its subsidiaries during the period.

In June 2020, the Federal Reserve announced that, due to its sole shareholder, Santander.

the economic uncertainty resulting from COVID-19, it will require all large banks, including SHUSA, to update and resubmit their capital plans under new scenarios by November 2, 2020. In addition, the following regulatory mattersFederal Reserve issued the Interim Policy which includes:
•A cap on common stock dividends that cannot exceed the average of the trailing four quarters’ net income; and
•A prohibition on share repurchases.

The Interim Policy applied to the third quarter of 2020, and was extended into the fourth quarter by the Federal Reserve. Based on the Interim Policy and the Company’s expected average trailing four quarters of net income, the Company and SC are prohibited from paying dividends in the processthird quarter of being phased2020. SC is consolidated into SHUSA’s capital plan and therefore is subject to the Interim Policy that utilizes SHUSA’s average trailing income to determine the cap on common stock dividends. SHUSA requested an exception to the Interim Policy for SC to be able to pay dividends of up to $0.22 per share in the third quarter of 2020. The Federal Reserve granted this request, and on July 31, 2020 SC’s Board of Directors declared a quarterly cash dividend of $0.22 per share of SC Common Stock payable to shareholders of record as of August 13, 2020. This dividend was paid on August 24, 2020. SC does not currently expect to declare or evaluated bypay a dividend in the Company.fourth quarter of 2020.


Foreign Banking Organizations ("FBOs")FBOs


OnIn February 18, 2014, the Federal Reserve issued the final rule to strengthen regulatory oversight of FBOs (the “FBO Final Rule”).Rule implementing certain EPS mandated by the DFA. 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. In addition, the FBO Final Rule requiresrequired U.S. bank holding companies ("BHCs")BHCs and FBOs with at least $50 billion in total U.S. consolidated non-branch assets to be subject to enhanced prudential standards ("EPS")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.

Economic Growth Act

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


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


Regulatory Capital Requirements

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

These subsidiaries include Santander BanCorp,rules narrow the definition of regulatory capital and establish higher minimum risk-based capital ratios and prompt corrective action thresholds that require banking organizations, including the Company and the Bank, to maintain a Puerto Rico bank holding company, Banco Santander International, a private bank headquartered in Miami ("BSI"); Santander Investment Securities, Inc.minimum CET1 capital ratio of 4.5%, a broker-dealer located in New York ("SIS");Tier 1 capital ratio of 6.0%, a total capital ratio of 8.0% and Santander Securities LLC, a Puerto Rico broker-dealer ("SSLLC")minimum leverage ratio, calculated as the ratio of Tier 1 capital to average consolidated assets for the quarter, of 4.0%. A phased-in approach is being used for the standards and requirements at both the FBO and the IHC. As a result, as discussed in Note 18, on July 1, 2017, Santander also transferred ownershipfurther capital conservation buffer of an additional entity, Santander Financial Services, Inc. ("SFS"), to the Company. Other standards of the FBO Final Rule will be2.5% above these minimum ratios was phased in througheffective 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.



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


Third Basel Accord ("Basel III")

Basel III Regulatory Capital Rule Implementation

TheThese U.S. Basel III regulatory capital rules include deductions from and adjustments to common equity Tier 1 ("CET1").CET1. These include, for example, the requirement that MSRs and deferred tax assets dependent upon future taxable income are deducted from CET1 to the extent any one such category exceeds 25% of CET1. Implementation of the deductions and other adjustments to CET1 for the Company and the Bank began on January 1, 2015 and are being phased inwas initially planned over three years. Phased-in changes 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.

As of September 30, 2017, the Bank's and the Company's CET1 ratios under the transitional provisions provided under Basel III, were 18.08% and 15.66%, respectively. Under Basel III, onyears, with a fully phased-in basis underrequirement of January 1, 2018. However, during 2017, the standardizedregulatory agencies finalized changes to the capital rules that became effective on January 1, 2018.  These changes extended the current treatment and deferred the final transition provision phase-in at non-advanced approach (non-GAAP),institutions for certain capital elements, and suspended the Bank`srisk weight to 100 percent for certain deferred taxes and mortgage servicing assets not disallowed from capital, in lieu of advancing to 250 percent.  During 2019, the Company`s CET1 ratios were 17.71%regulatory agencies approved a final rule which includes simplifications for non-advanced approaches to the generally applicable capital rules, specifically with regard to the treatment of minority interest, as well as modifying the risk-weight to 250 percent for certain deferred taxes and 15.18%, respectively.mortgage servicing assets not disallowed from capital.  This final rule became effective on April 1, 2020. 

As described in our Annual Report on Form 10-K for 2019, on January 1, 2020, we adopted the CECL standard, which upon adoption resulted in a reduction to our opening retained earnings balance, net of income tax, and an increase to the allowance for loan losses of approximately $2.5 billion. As also described in our Form 10-K, the U.S. banking agencies in December 2018 approved a final rule to address the impact of CECL on regulatory capital by allowing banking organizations, including the Company, the option to phase in the day-one impact of CECL until the first quarter of 2023. In March 2020, the U.S. banking agencies issued an interim final rule that provides banking organizations with an alternative option to delay for two years an estimate of CECL’s effect on regulatory capital relative to the incurred loss methodology’s effect on regulatory capital, followed by a three-year transition period. The calculationCompany has elected this alternative option instead of the CET1 ratio on both a fully phased-in and transition basis is based on management's interpretation ofone described in the final rules adopted by 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. If 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 September 30, 2017, it would remain above regulatory minimums under the currently enacted capital adequacy requirements of Basel III, including when implemented on a fully phased-in basis.December 2018 rule.


See the Bank"Bank Regulatory CapitalCapital" 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 Improvements Act and OCC regulations, institutions which are not categorized as well-capitalized or adequately-capitalized are restricted from making capital distributions, which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital account of the institution. At September 30, 2020, the Bank met the criteria to be classified as “well-capitalized.”


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


On March 4, 2020, the Federal Reserve adopted a final rule to simplify capital rules for large banks. Under the final rule, firms' supervisory stress test results are now used to establish the size of the SCB requirement, replacing the 2.5% of risk-weighted assets component under the prior capital conservation buffer requirement. The SCB is calculated as the maximum decline in CET1 in the severely adverse scenario (subject to a 2.5% floor) plus four quarters of 2.5% above these minimum ratios is being phaseddividends. The rule results in over three years,new regulatory capital minimums which began in 2016 at 0.625%are equal to 4.5% of CET1 plus the SCB, any GSIB surcharge, and increases by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019. Thisany countercyclical capital conservationbuffer. The GSIB buffer is required for banking institutionsapplicable only to the largest and BHCs,most complex firms and failuredoes not apply to maintainSHUSA. In the capital conservation buffer can lead toevent a firm falls below its new minimums, the rule imposes restrictions on the ability to make capital distributions including paying dividends.and discretionary bonuses. Firms continue to submit a capital plan annually. Supervisory expectations for capital planning processes do not change under the proposal. The Company does not expect this rule to have a material impact on its current or future planned capital actions.


Stress Testing and Capital Planning

In October 2019, the Federal Reserve issued rules that tailor the stress testing a company is required to perform based on the company’s asset size, cross-jurisdictional activity, reliance on short-term wholesale funding, nonbank assets, and off-balance sheet exposure. In March 2020, the Federal Reserve amended and simplified its capital planning rules and introduced the SCB to more closely align individual firm capital requirements to the firm’s risk profile. The SCB uses the results from the Federal Reserve's supervisory stress tests, which are one component of the CCAR, to help determine each firm's capital requirements for the coming year. On August 10, 2020 the Federal Reserve announced the individual large bank capital requirements. SHUSA’s CET1 SCB is 2.5% resulting in a 7% CET1 capital requirement under the revised rules. The simplified SCB rule was effective on October 1, 2020 but has been superseded, temporarily in the third and fourth quarter of 2020, by the Interim Policy which limits distributions as described above under “Payment of Dividends”.

On October 7, 2020 the Federal Reserve proposed amendments to capital planning and stress testing requirements for large BHCs. Under the proposal, as a Category IV firm under the supervisory tailoring rule, SHUSA would be required to submit a capital plan on an annual basis but would generally no longer be required to utilize the scenarios provided by the Federal Reserve. The Company continues to evaluate planned capital actions in its annual capital plan and on an ongoing basis.

Liquidity Rules

The Federal Reserve, the FDIC, and the OCC have established a rule to implement the Basel III Liquidity Framework

The Basel III liquidity framework requiresLCR for certain internationally active banks and BHCs to measure their liquidity against specific liquidity tests. One test, referred to asnonbank financial companies, and a modified version of the liquidity coverage ratio ("LCR"),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. The other, referred toSmaller covered companies (more than $50 billion in assets) such as the net stableCompany were required to calculate the LCR monthly beginning January 2016.

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

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


In October 2020, the joint agencies published the final rule for the NSFR. The NSFR is designed to promoteencourage more mediummedium- and long-term funding of the assets and activities of banking entities over a one-year time horizon.

On November 13, 2015, The metric requires large banking organizations to maintain a stable funding profile in relation to their on- and off-balance sheet activities, thereby reducing the Federal Reserve publishedlikelihood that disruptions to a revisedbank's regular sources of funding will erode its liquidity in a way that could increase the risk of its failure and potentially lead to broader systemic stress. Similar to the aforementioned criteria used to determine US LCR reporting requirements, the final LCR rule. Under this revision,NSFR rule would not be applicable to 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 disclosebased upon 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 100% on January 1, 2017.size and risk profile.


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.Resolution Planning

Stress Tests and Capital Adequacy

Under the terms of a written agreement the Company entered into with Federal Reserve Bank ("FRB") of Boston on July 2, 2015, 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.


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The Company previously was subject to an additional written agreement with the FRB of Boston regarding stress testing and capital adequacy. That written agreement was entered into on September 15, 2014, and was terminated on August 17, 2017.

The Company also is subject to the capital plan rule, whichDFA requires the Company to prepare and regularly update resolution plans. The 165(d) resolution plan must assume that the Bank to perform stress testscovered company is resolved under the U.S. Bankruptcy Code and submitthat no “extraordinary support” is received from the resultsU.S. or any other government. The most recent 165(d) resolution plan was submitted to the Federal Reserve and FDIC in December 2018. In addition, under amended Federal Deposit Insurance Corporation Improvements Act rules, the OCC on an annual basis.IDI resolution plan rule requires that a bank with assets of $50 billion or more develop a plan for its resolution that supports depositors’ rapid access to their insured deposits, maximizes the net present value return from the sale or disposition of its assets, and minimizes the amount of any loss realized by creditors in resolution. The Company is also required to submit a mid-year stress testmost recent IDI resolution plan was submitted 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 includedFDIC in the Company's stress tests and capital plans.June 2018.

Under the capital plan rule, the Federal Reserve may object to the Company’s capital plan if the Federal Reserve determines that the Company has not demonstrated an ability to maintain capital above each minimum regulatory capital ratio on a pro forma basis under expected and stressful conditions throughout the planning horizon. The Company is considered a large and non-complex BHC under the capital rule plan, and as a result is no longer subject to the qualitative assessment of the capital plan rule by the Federal Reserve.

In June 2017, the Company announced that the Federal Reserve, as part of its Comprehensive Capital Analysis and Review ("CCAR") process, did not object to the capital plan submitted by the Company as part of the CCAR process and the capital distributions included in the plan. 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.


TLAC


The Federal Reserve adopted a rule in December 2016 that will requireTLAC Rule requires certain U.S. organizations to maintain a minimum amount of loss-absorbing instruments, including a minimum amount of unsecured long-term debt (the “TLAC Rule”).LTD. The TLAC Rule which amends Regulation YY, applies to U.S. global systemically important banksGSIBs 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 tomust hold the higher of 18% of its risk-weighted assets ("RWAs")RWAs or 9% of its total consolidated assets in the form of TLAC.TLAC, of which 6% of its RWAs or 3.5% of total consolidated assets must consist of LTD. In addition, SHUSA must maintain a TLAC buffer composed solely of CET1 capital and will be subject to restrictions on capital distributions and discretionary bonus payments based on the size of the TLAC buffer it maintains. The TLAC Rule became effective on January 1, 2019.

Volcker Rule

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

Because the term “banking entity” includes an IDI, a depository institution holding company and any of their affiliates, the Volcker Rule has sweeping worldwide application and covers entities such as Santander, the Company, and certain of the Company’s subsidiaries (including the Bank and SC), as well as other Santander subsidiaries in the United States and abroad.

The Company implemented certain policies and procedures, training programs, recordkeeping, internal controls and other compliance requirements that were necessary to comply with the Volcker Rule. As required by the Volcker Rule, the compliance infrastructure has been tailored to each banking entity based on its size and its level of trading and Covered Fund activities. SHUSA's compliance program includes, among other things, processes for prior approval of new activities and investments permitted under the Volcker Rule, testing and auditing for compliance and a process for attesting annually that the compliance program is reasonably designed to achieve compliance with the rule.

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


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


In July 2020, the joint agencies finalized a rule that revised the Volcker Rule further.The 2020 revisions provide an exemption for activities of qualifying foreign excluded funds, revise the exclusions from the definition of a “covered fund”, create new exclusions from the definition of a covered fund, and modify the definition of an ownership interest.The new rule became effective on October 1, 2020, and the Company is in the process of transitioning to the requirements of this revised rule.

Risk Retention Rule

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

Market Risk Rule

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

A bank is subject to the market risk capital rules if its consolidated trading activity, defined as the sum of trading assets and liabilities as reported in its FFIEC 031 and FR Y-9C for the previous quarter, equals the lesser of: (1) 10 percent or more of the bank's total assets as reported in its Call Report and FR Y-9C for the previous quarter, or (2) $1 billion or more. At September 30, 2019, SBNA reported aggregate trading exposure in excess of the market risk threshold and, as a result, both the Company and SBNA began holding the market risk component within RWAs of the risk-based capital ratios, and submitted the FFIEC 102 - Market Risk Regulatory Report beginning for the period ended December 31, 2019. The incorporation of market risk within regulatory capital has resulted in a decrease in the risk-based capital ratios.

Capital Simplification Rule

The federal banking agencies adopted a final rule that simplifies for non-advanced approaches banking organizations the generally applicable capital rules and makes a number of technical corrections. Specifically, it reverses the previous transition provision freeze on MSRs and deferred tax assets by modifying the risk-weight from 100% to 250%. The rule will also replace the existing methodology for calculating includible minority interest with a flat 10% limit at each capital level. The increased risk weighting presents an amount no less thanunfavorable decline to the greaterCompany's risk-based ratios, but Tier 1 and total capital ratios has improve overall due to the additional minority interest includible under the simplified rule. Adoption of 6%the capital simplification rule was required by the regulatory agencies on April 1, 2020.

Heightened Standards

OCC guidelines to strengthen the governance and risk management practices of its RWAslarge financial institutions are commonly referred to as “heightened standards.” The heightened standards apply to insured national banks with $50 billion or 3.5% of its totalmore in consolidated assets. The final rule is effective January 1, 2019.heightened standards require covered institutions to establish and adhere to a written risk governance framework to manage and control their risk-taking activities. The heightened standards also provide minimum standards for the institutions’ boards of directors to oversee the risk governance framework.


Transactions with Affiliates


Depository institutions must remain in compliance with Sections 23A and 23B of the Federal Reserve Act and FRBthe Federal Reserve's Regulation W, ("Reg. W"), which governs the activitiestransactions of the Company and itsCompany's 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, andas 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. 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.

arms'-length. As a U.S. domiciled subsidiary of a global parent with significant non-bank affiliates, the Company faces elevated compliance risk in this area.



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


Regulation AB II


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


Community Reinvestment Act ("CRA")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.

On December 12, 2019, the OCC and the FDIC jointly issued the CRA NPR to modernize the regulatory framework implementing the CRA.  On May 20, 2020, the OCC issued the CRA Final Rule implementing many of the provisions of the CRA NPR. The CRA NPR generally focuses on clarifying and expanding the activities that qualify for CRA consideration, allowing the OCC to evaluate a bank’s CRA performance through quantitative measures intended to assess the volume and value of activity, updating how assessment areas are determined to account for institutions such as internet-based banks that receive a substantial portion of their deposits outside physical branch locations, and increasing transparency and timeliness in reporting. In connection with promulgating the CRA Final Rule, the OCC issued a publicly available, non-exhaustive list of activities that would automatically receive CRA consideration. and a process for confirming that particular activities meet the qualifying activities criteria. In addition, there maythe CRA Final Rule allows banks to receive consideration for certain qualifying activities conducted outside their assessment areas. While the CRA Final Rule took effect on October 1, 2020, SBNA will have until January 1, 2023 to bring its operations into compliance with the rule. Although SBNA will be some negative impacts on aspectsrequired to comply with the CRA Final Rule in 2023, the OCC has deferred to a future rulemaking process how to calibrate the key thresholds and benchmarks used in the rule to determine the level of the Bank’s business asperformance necessary to achieve a result of the downgrade. For example, certain categories of depositors are restricted from making deposits in banks with a “Needs to Improve”performance rating.


Other Regulatory Matters


On March 23,21, 2017, SC and the Company and SC entered into a written agreement with the FRB of Boston. Under the terms of this writtenthat agreement, SC is required to enhance its compliance risk management program, SC’s Board and management are required to enhance theirboard oversight of SC’s risk management program,and senior management oversight of risk management, and the Company is required to enhance among other matters, its Board oversight of SC’sSC's management and operations.


On February 25, 2015, we entered into a consent order with the DOJ, approved by the United States District Court for the Northern District
86




Item 2.    Management’s Discussion and Analysis of Texas, which resolves the DOJ’s claims against the Company that certainFinancial Condition and Results of its repossession and collection activities during the period of time between January 2008 and February 2013 violated the SCRA. The consent order requires us 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 us and $5,000 per servicemember for each instance where we 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 us to monitoring by the DOJ for compliance with SCRA for a period of five years.Operations




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


Pursuant to Section 219 of the Iran Threat Reduction and Syria Human Rights Act of 2012, which added Section 13(r) to the Exchange Act of 1934, 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.


99

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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



The following activities are disclosed in response to Section 13(r) with respect to affiliates of SHUSA within the Santander Group.

Santander. During the period covered by this annual report:


•Santander UK plc ("Santander UK") holds two savingsthree blocked accounts and one current account for two customers, with the first customer holding one GBP savings account and one GBP current account, and the second customer holding one GBP savings account. Both of the customers, who are resident in the UK, who are currently designated by the U.S. under the Specially Designated Global Terrorist ("SDGT")SDGT sanctions program.program with accounts blocked since designation. The accounts are dormant. Revenues and profits generated by Santander UK on these accounts in the three-month and nine-month periods ended September 30, 2017first three quarters of 2020 were negligible relative to the overall profits of Santander.

•Santander UK holds two frozen current accounts for two UK nationals who are designated by the U.S. under the SDGT sanctions program. The accounts held by eachone customer were fully inaccessible at the time of the US designation and were blocked at the time of the account going into a debit balance. The accounts held by the second customer were blocked immediately following the US designation and have been frozen since their designationthroughout the first three quarters of 2020. These accounts are frozen in order to comply with Articles 2, 3 and remained frozen through7 of Council Regulation (EC) No 881/2002 imposing certain specific restrictive measures directed against certain persons and entities associated with the three-month and nine-month periods ended September 30, 2017.Al-Qaeda network, by virtue of Commission Implementing Regulation (EU) 2015/1815. 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 accountthese accounts in the three-month and nine-month periods ended September 30, 2017.first three quarters of 2020.


•Santander, 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 nine-month periods ended September 30, 2017first three quarters of 2020 which were negligible relative to the overall revenues and profits of Santander. SantanderSantander has undertaken significant steps to withdraw from the Iranian market, such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit-taking from Iranian entities 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.


100
87




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 OF OPERATIONS


On July 1, 2016, ownership of several Santander subsidiaries, including Santander BanCorp, BSI, SISThis MD&A is based on the Consolidated Financial Statements 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,accompanying notes that have been prepared in accordance with ASC 805, the transaction has been accounted for under the common control guidance, which requiresGAAP. The significant accounting policies of the Company are described in Note 1 of the Company's Annual Form 10-K as of December 31, 2019, and have been updated as appropriate in Note 1 of these Condensed Consolidated Financial Statements. The preparation of financial statements in accordance with GAAP requires management to recognizemake estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities transferred at their historical costliabilities. Actual results could differ from those estimates. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, accordingly, have a greater possibility of producing results that could be materially different than originally reported. Our estimates include consideration of the transferring entity atcurrent uncertainty in the dateeconomy and the results may be materially different. Management identified accounting for ACL, estimates of expected residual values of leased vehicles subject to operating leases, accretion of discounts and subvention on RICs, goodwill, fair value measurements and income taxes as the Company's most critical accounting estimates, in that they are important to the portrayal of the transfer. Additionally,Company's financial condition and results and require management’s most difficult, subjective and complex judgments as this transaction represents a change in reporting entity, the guidance requires retrospective combinationresult of the entities for all periods presentedneed to make estimates about the effects of matters that are inherently uncertain.

There have been material changes in these financial statements as if the combination had beenCompany’s critical accounting estimates from those disclosed in effect since inceptionItem 7 of common control. On Julythe Company's 2019 Annual Report on Form 10-K. These changes are a result of the Company's adoption of the CECL standard on January 1, 2017, an additional Santander subsidiary, SFS, a finance company located in Puerto Rico, was transferred to the Company and accounted for prospectively.2020. Refer to Note 1, Note 4 of the Condensed Consolidated Financial Statements and the section captioned "Credit Quality" of this MD&A for additional information.

RESULTS OF OPERATIONS FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2017 AND 2016detailed discussions around accounting policy, estimation process and assumptions used in determining the ACL.
88


 Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 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$1,574,060
 $1,621,130
 $4,818,373
 $4,981,817
 $(47,070) (2.9)% $(163,444) (3.3)%
Provision for credit losses(652,120) (687,912) (1,992,334) (2,200,154) (35,792) (5.2)% (207,820) (9.4)%
Total non-interest income794,722
 727,573
 2,252,111
 2,148,815
 67,149
 9.2 % 103,296
 4.8 %
General and administrative expenses(1,343,545) (1,281,275) (3,995,019) (3,775,490) 62,270
 4.9 % 219,529
 5.8 %
Other expenses(42,642) (45,550) (130,264) (204,277) (2,908) (6.4)% (74,013) (36.2)%
Income before income taxes330,475
 333,966
 952,867

950,711
 (3,491) (1.0)% 2,156
 0.2 %
Income tax provision(93,448) (108,320) (264,368) (339,968) (14,872) (13.7)% (75,600) (22.2)%
Net income(1)
$237,027
 $225,646
 $688,499
 $610,743
 $11,381
 5.0 % $77,756
 12.7 %


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





NET INTEREST INCOME AND NET INTEREST MARGIN
CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019
2020 (1)
2019 (1)
InterestChange due to
(dollars in thousands)Average
Balance		Interest
Yield/
 Rate(2)
Average
Balance		Interest
Yield/
Rate(2)
Increase/(Decrease)VolumeRate
EARNING ASSETS      
INVESTMENTS AND INTEREST EARNING DEPOSITS$26,828,719 $75,241 1.12 %$22,225,245 $134,440 2.42 %$(59,199)$37,147 $(96,346)
LOANS(3):
      
Commercial loans33,281,183 276,206 3.32 %33,673,664 355,272 4.22 %(79,066)(4,096)(74,970)
Multifamily8,512,238 73,134 3.44 %8,415,539 87,766 4.17 %(14,632)1,027 (15,659)
Total commercial loans41,793,421 349,340 3.34 %42,089,203 443,038 4.21 %(93,698)(3,069)(90,629)
Consumer loans:  
Residential mortgages8,155,884 71,210 3.49 %9,847,104 100,531 4.08 %(29,321)(15,918)(13,403)
Home equity loans and lines of credit4,375,284 34,251 3.13 %5,018,365 64,442 5.14 %(30,191)(7,451)(22,740)
Total consumer loans secured by real estate12,531,168 105,461 3.37 %14,865,469 164,973 4.44 %(59,512)(23,369)(36,143)
RICs and auto loans40,026,191 1,322,556 13.22 %33,516,284 1,271,550 15.18 %51,006 152,146 (101,140)
Personal unsecured1,841,369 134,260 29.17 %2,390,750 164,692 27.55 %(30,432)(40,898)10,466 
Other consumer(4)
255,944 4,474 6.99 %357,361 6,414 7.18 %(1,940)(1,775)(165)
Total consumer54,654,672 1,566,751 11.47 %51,129,864 1,607,629 12.58 %(40,878)86,104 (126,982)
Total loans96,448,093 1,916,091 7.95 %93,219,067 2,050,667 8.80 %(134,576)83,035 (217,611)
Intercompany investments— — — %— — — %— — — 
TOTAL EARNING ASSETS123,276,812 1,991,332 6.46 %115,444,312 2,185,107 7.57 %(193,775)120,182 (313,957)
Allowance for loan losses (5)
(7,192,161)(3,772,807)
Other assets(6)
34,156,248 32,392,411 
TOTAL ASSETS$150,240,899 $144,063,916 
INTEREST BEARING FUNDING LIABILITIES      
Deposits and other customer related accounts:      
Interest-bearing demand deposits$11,334,566 $1,936 0.07 %$11,223,790 $23,901 0.85 %$(21,965)$239 $(22,204)
Savings5,957,740 1,937 0.13 %5,767,649 3,477 0.24 %(1,540)119 (1,659)
Money market30,775,793 30,032 0.39 %24,778,267 83,340 1.35 %(53,308)27,507 (80,815)
Certificates of deposit (“CDs”)5,148,959 18,420 1.43 %8,291,661 42,235 2.04 %(23,815)(13,313)(10,502)
TOTAL INTEREST-BEARING DEPOSITS53,217,058 52,325 0.39 %50,061,367 152,953 1.22 %(100,628)14,552 (115,180)
BORROWED FUNDS:         
Federal Home Loan Bank (“FHLB”) advances, federal funds, and repurchase agreements4,015,217 6,680 0.67 %6,129,891 39,970 2.61 %(33,290)(10,553)(22,737)
Other borrowings45,076,390 310,935 2.76 %42,279,698 373,074 3.53 %(62,139)27,043 (89,182)
TOTAL BORROWED FUNDS (7)
49,091,607 317,615 2.59 %48,409,589 413,044 3.41 %(95,429)16,490 (111,919)
TOTAL INTEREST-BEARING FUNDING LIABILITIES102,308,665 369,940 1.45 %98,470,956 565,997 2.30 %(196,057)31,042 (227,099)
Noninterest bearing demand deposits19,141,277 14,482,711 
Other liabilities(8)
7,920,941 6,192,978 
TOTAL LIABILITIES129,370,883 119,146,645 
STOCKHOLDER’S EQUITY20,870,016 24,917,271 
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY$150,240,899 $144,063,916 
NET INTEREST SPREAD (9)
  5.01 %5.27 %
NET INTEREST MARGIN (10)
  5.26 %5.61 %
NET INTEREST INCOME (11)
$1,621,392 $1,619,110 
89




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


CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2020 AND 2019
2020 (1)
2019 (1)
Change due to
(dollars in thousands)Average
Balance		Interest
Yield/
Rate(2)
Average
Balance		Interest
Yield/
Rate(2)
Increase/(Decrease)VolumeRate
EARNING ASSETS      
INVESTMENTS AND INTEREST EARNING DEPOSITS$26,940,052 $295,996 1.46 %$21,485,208 $417,085 2.59 %$(121,089)$168,544 $(289,633)
LOANS(3):
      
Commercial loans33,430,857 885,374 3.53 %33,356,133 1,089,897 4.36 %(204,523)2,434 (206,957)
Multifamily8,501,040 229,027 3.59 %8,380,211 259,649 4.13 %(30,622)3,794 (34,416)
Total commercial loans41,931,897 1,114,401 3.54 %41,736,344 1,349,546 4.31 %(235,145)6,228 (241,373)
Consumer loans:  
Residential mortgages8,532,737 237,596 3.71 %10,121,409 309,529 4.08 %(71,933)(45,591)(26,342)
Home equity loans and lines of credit4,522,847 121,949 3.60 %5,179,086 200,682 5.17 %(78,733)(23,179)(55,554)
Total consumer loans secured by real estate13,055,584 359,545 3.67 %15,300,495 510,211 4.45 %(150,666)(68,770)(81,896)
RICs and auto loans38,269,859 3,847,016 13.40 %31,755,513 3,701,535 15.54 %145,481 442,582 (297,101)
Personal unsecured2,180,322 437,300 26.74 %2,483,911 502,887 26.99 %(65,587)(60,970)(4,617)
Other consumer(4)
281,204 14,840 7.04 %390,032 20,974 7.17 %(6,134)(5,760)(374)
Total consumer53,786,969 4,658,701 11.55 %49,929,951 4,735,607 12.65 %(76,906)307,082 (383,988)
Total loans95,718,866 5,773,102 8.04 %91,666,295 6,085,153 8.85 %(312,051)313,310 (625,361)
Intercompany investments— — %— — — %— — — 
TOTAL EARNING ASSETS122,658,918 6,069,098 6.60 %113,151,503 6,502,238 7.66 %(433,140)481,854 (914,994)
Allowance for loan losses(5)
(6,711,184)(3,832,455)
Other assets(6)
34,537,325 31,153,498 
TOTAL ASSETS$150,485,059 $140,472,546 
INTEREST-BEARING FUNDING LIABILITIES      
Deposits and other customer related accounts:      
Interest-bearing demand deposits$11,345,723 $21,851 0.26 %$10,607,947 $63,570 0.80 %$(41,719)$4,794 $(46,513)
Savings5,898,275 7,296 0.16 %5,839,750 10,145 0.23 %(2,849)97 (2,946)
Money market29,070,436 140,333 0.64 %24,397,708 235,925 1.29 %(95,592)58,617 (154,209)
CDs6,756,472 80,580 1.59 %8,129,517 118,746 1.95 %(38,166)(18,236)(19,930)
TOTAL INTEREST-BEARING DEPOSITS53,070,906 250,060 0.63 %48,974,922 428,386 1.17 %(178,326)45,272 (223,598)
BORROWED FUNDS:         
FHLB advances, federal funds, and repurchase agreements5,973,325 64,866 1.45 %5,166,044 106,160 2.74 %(41,294)20,515 (61,809)
Other borrowings44,698,919 1,008,012 3.01 %41,377,822 1,123,974 3.62 %(115,962)105,467 (221,429)
TOTAL BORROWED FUNDS (7)
50,672,244 1,072,878 2.82 %46,543,866 1,230,134 3.52 %(157,256)125,982 (283,238)
TOTAL INTEREST-BEARING FUNDING LIABILITIES103,743,150 1,322,938 1.70 %95,518,788 1,658,520 2.32 %(335,582)171,254 (506,836)
Noninterest bearing demand deposits17,529,234 14,460,711 
Other liabilities(8)
7,357,434 5,945,936 
TOTAL LIABILITIES128,629,818 115,925,435 
STOCKHOLDER’S EQUITY21,855,241 24,547,111 
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY$150,485,059 $140,472,546 
NET INTEREST SPREAD (9)
  4.90 %5.34 %
NET INTEREST MARGIN (10)
  5.16 %5.71 %
NET INTEREST INCOME (11)
$4,746,160 $4,843,718 
(1)Includes non-controllingAverage 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 ("NCI").income.

(3)Interest on loans includes amortization of premiums and discounts on purchased loan portfolios and amortization of deferred loan fees, net of origination costs. Average loan balances includes non-accrual loans and LHFS.
The Company reported pre-tax(4)Other consumer primarily includes RV and marine loans.
(5)Refer to Note 3 to the Condensed Consolidated Financial Statements for further discussion.
(6)Other assets primarily includes leases, goodwill and intangibles, premise and equipment, net deferred tax assets, equity method investments, BOLI, accrued interest receivable, derivative assets, miscellaneous receivables, prepaid expenses and MSRs. Refer to Note 6 to the Condensed Consolidated Financial Statements for further discussion.
(7)Refer to Note 9 to the Condensed Consolidated Financial Statements for further discussion.
(8)Other liabilities primarily includes accounts payable and accrued expenses, derivative liabilities, net deferred tax liabilities and the unfunded lending commitments liability.
(9)Represents the difference between the yield on total earning assets and the cost of total funding liabilities.
(10)Represents annualized, taxable equivalent net interest income divided by average interest-earning assets.
(11)Intercompany investment income is eliminated from this line item.


90




Item 2.    Management’s Discussion and Analysis of $330.5Financial Condition and Results of Operations



Net interest income increased $2.3 million and $952.9decreased $97.6 millionfor the three-month and nine-month periods ended September 30, 2017,2020, respectively, compared to pre-tax income of $334.0 million and $950.7 million for the three-month and nine-monthcomparative periods ended September 30, 2016. Factorsin 2019. The most significant factors contributing to these changes wereare as follows:
Net interest income decreased $47.1 million and $163.4 million for the three-month and nine-month periods ended September 30, 2017 compared to the corresponding periods in 2016. These decreases were primarily due to a decrease in interest income earned on loans due to declining yields on consumer loans.

The provision for credit losses decreased $35.8 million and $207.8 million for the three-month and nine-month periods ended September 30, 2017 compared to the corresponding periods in 2016. These decreases were primarily due to activity in the RIC and auto loan portfolio and the related provisions for these portfolios, the 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.

Total non-interest income increased $67.1 million and $103.3 million for the three-month and nine-month periods ended September 30, 2017 compared to the corresponding periods of 2016. These increases were primarily in lease income associated with the continued growth of the lease portfolio, and increases in miscellaneous income. These were offset by a decrease in consumer loan fees due to a reduction of loans serviced by the Company for the three-month and nine-month periods ended September 30, 2017.

Total general and administrative expenses increased $62.3 million and $219.5 million for the three-month and nine-month periods ended September 30, 2017 compared to the corresponding periods in 2016. These increases were primarily due to an increase in lease expense due to the growth of the Company's leased vehicle portfolio and an increase in compensation expense due to employee headcount, offset by a decrease in consulting fees.


101

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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


Other expenses decreased $2.9 million and $74.0 million for the three-month and nine-month periods ended September 30, 2017 compared to the corresponding period in 2016. These were primarily due to a decrease in expenses associated with loss on debt repurchases.
The income tax provision decreased $14.9 million and $75.6 million for the three-month and nine-month periods ended September 30, 2017, compared to the corresponding periods in 2016. These decreases were predominantly due to the undistributed net earnings of a Puerto Rico subsidiary that will be indefinitely reinvested outside the U.S.

102

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
 THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2017 AND 2016
 
2017 (1)
 
2016 (1)
 InterestChange due to
 
Average
Balance
 Interest 
Yield/
 Rate(2)
 
Average
Balance
 Interest 
Yield/
Rate(2)
 Increase/(Decrease)VolumeRate
 (dollars in thousands)
EARNING ASSETS               
INVESTMENTS AND INTEREST EARNING DEPOSITS$26,528,717
 $131,516
 1.98% $23,417,007
 $81,885
 1.39% $49,631
$11,832
$37,799
LOANS(3):
               
Commercial loans32,319,061
 307,933
 3.81% 37,164,361
 332,340
 3.56% (24,407)(52,902)28,495
Multifamily8,220,959
 76,413
 3.72% 9,110,535
 82,610
 3.61% (6,197)(9,008)2,811
Total commercial loans40,540,020
 384,346
 3.79% 46,274,896
 414,950
 3.57% (30,604)(61,910)31,306
Consumer loans:               
Residential mortgages8,540,609
 85,956
 4.03% 7,888,262
 62,882
 3.17% 23,074
5,390
17,684
Home equity loans and lines of credit5,881,885
 60,736
 4.13% 6,055,344
 54,888
 3.61% 5,848
(1,451)7,299
Total consumer loans secured by real estate14,422,494
 146,692
 4.07% 13,943,606
 117,770
 3.36% 28,922
3,939
24,983
RICs and auto loans27,381,594
 1,126,517
 16.46% 26,922,199
 1,198,698
 17.71% (72,181)23,011
(95,192)
Personal unsecured2,355,848
 150,951
 25.63% 2,179,968
 137,764
 25.14% 13,187
10,621
2,566
Other consumer(4)
670,318
 13,878
 8.28% 879,136
 19,895
 9.00% (6,017)(4,501)(1,516)
Total consumer44,830,254
 1,438,038
 12.83% 43,924,909
 1,474,127
 13.35% (36,089)33,070
(69,159)
Total loans85,370,274
 1,822,384
 8.54% 90,199,805
 1,889,077
 8.33% (66,693)(28,840)(37,853)
Allowance for loan and lease losses (5)
(3,971,133) —
 —% (3,784,242) —
 —%    
NET LOANS81,399,141
 1,822,384
 8.96% 86,415,563
 1,889,077
 8.70% (66,693)(28,840)(37,853)
Intercompany investments9,531
 133
 5.58% 14,640
 226
 6.14% (93)(74)(19)
TOTAL EARNING ASSETS107,937,389
 1,954,033
 7.24% 109,847,210
 1,971,188
 7.14% (17,155)(17,082)(73)
Other assets(6)
26,566,056
     29,935,299
        
TOTAL ASSETS$134,503,445
     $139,782,509
        
INTEREST BEARING FUNDING LIABILITIES               
Deposits and other customer related accounts:               
Interest-bearing demand deposits$9,851,544
 $6,227
 0.25% $10,977,842
 $6,384
 0.23% $(157)$(1,030)$873
Savings5,967,134
 2,531
 0.17% 6,001,890
 3,299
 0.22% (768)(19)(749)
Money market24,718,439
 31,977
 0.52% 25,199,241
 31,383
 0.50% 594
(542)1,136
Certificates of deposit ("CDs")5,744,488
 15,972
 1.11% 9,515,447
 23,222
 0.97% (7,250)(11,403)4,153
TOTAL INTEREST-BEARING DEPOSITS46,281,605
 56,707
 0.49% 51,694,420
 64,288
 0.49% (7,581)(12,994)5,413
BORROWED FUNDS:               
Federal Home Loan Bank ("FHLB") advances, federal funds, and repurchase agreements4,868,414
 18,973
 1.56% 7,633,696
 24,783
 1.29% (5,810)(13,761)7,951
Other borrowings38,570,714
 304,160
 3.15% 38,314,163
 260,761
 2.71% 43,399
1,719
41,680
TOTAL BORROWED FUNDS (7)
43,439,128
 323,133
 2.98% 45,947,859
 285,544
 2.47% 37,589
(12,042)49,631
TOTAL INTEREST-BEARING FUNDING LIABILITIES89,720,733
 379,840
 1.69% 97,642,279
 349,832
 1.43% 30,008
(25,036)55,044
Noninterest bearing demand deposits15,862,813
     15,107,001
        
Other liabilities(8)
5,339,995
     4,614,098
        
TOTAL LIABILITIES110,923,541
     117,363,378
        
STOCKHOLDER’S EQUITY23,579,904
     22,419,131
        
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY$134,503,445
     $139,782,509
        
                
NET INTEREST SPREAD (9)
    5.55%     5.71%    
NET INTEREST MARGIN (10)
    5.83%     5.87%    
NET INTEREST INCOME  $1,574,060
     $1,621,130
      
(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.

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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. 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.


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


                
CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
 NINE-MONTH PERIODS ENDED SEPTEMBER 30, 2017 AND 2016
 
2017 (1)
 
2016 (1)
 InterestChange due to
 
Average
Balance
 Interest 
Yield/
Rate(2)
 
Average
Balance
 Interest 
Yield/
Rate(2)
 Increase/(Decrease)VolumeRate
 (dollars in thousands)
EARNING ASSETS               
INVESTMENTS AND INTEREST EARNING DEPOSITS$27,141,702
 $378,698
 1.86% $25,581,579
 $302,965
 1.58% $75,733
$19,388
$56,345
LOANS(3):
            


Commercial loans33,400,685
 913,332
 3.65% 37,472,514
 993,965
 3.54% (80,633)(112,927)32,294
Multifamily8,367,176
 234,418
 3.74% 9,223,167
 250,375
 3.63% (15,957)(23,693)7,736
Total commercial loans41,767,861
 1,147,750
 3.66% 46,695,681
 1,244,340
 3.56% (96,590)(136,620)40,030
Consumer loans:               
Residential mortgages8,341,638
 248,210
 3.97% 7,816,089
 187,430
 3.20% 60,780
13,274
47,506
Home equity loans and lines of credit5,926,996
 172,634
 3.88% 6,095,190
 165,639
 3.63% 6,995
(4,676)11,671
Total consumer loans secured by real estate14,268,634
 420,844
 3.93% 13,911,279
 353,069
 3.39% 67,775
8,598
59,177
RICs and auto loans27,100,719
 3,444,811
 16.95% 26,597,271
 3,657,493
 18.37% (212,682)68,973
(281,655)
Personal unsecured2,570,206
 469,517
 24.36% 2,341,387
 436,724
 24.92% 32,793
42,585
(9,792)
Other consumer(4)
718,719
 47,317
 8.78% 940,577
 63,547
 9.02% (16,230)(14,584)(1,646)
Total consumer44,658,278
 4,382,489
 13.08% 43,790,514
 4,510,833
 13.76% (128,344)105,572
(233,916)
Total loans86,426,139
 5,530,239
 8.53% 90,486,195
 5,755,173
 8.50% (224,934)(31,048)(193,886)
Allowance for loan and lease losses (5)
(3,919,362) —
 —% (3,609,242) —
 —% 





NET LOANS82,506,777
 5,530,239
 8.94% 86,876,953
 5,755,173
 8.85% (224,934)(31,048)(193,886)
Intercompany investments12,918
 596
 6.15% 14,640
 677
 6.18% (81)(78)(3)
TOTAL EARNING ASSETS109,661,397
 5,909,533
 7.19% 112,473,172
 6,058,815
 7.20% (149,282)(11,738)(137,544)
Other assets(6)
26,432,133
     30,212,877
        
TOTAL ASSETS$136,093,530
     $142,686,049
   ��    
INTEREST BEARING FUNDING LIABILITIES               
Deposits and other customer related accounts:               
Interest-bearing demand deposits$10,269,643
 $16,299
 0.21% $11,788,832
 $35,809
 0.41% $(19,510)$(4,078)$(15,432)
Savings5,998,369
 8,250
 0.18% 6,012,640
 9,425
 0.21% (1,175)(19)(1,156)
Money market25,488,561
 96,061
 0.50% 24,836,343
 95,377
 0.51% 684
2,700
(2,016)
Certificates of deposit ("CDs")7,040,527
 56,914
 1.08% 9,875,505
 72,524
 0.98% (15,610)(24,219)8,609
TOTAL INTEREST-BEARING DEPOSITS48,797,100
 177,524
 0.49% 52,513,320
 213,135
 0.54% (35,611)(25,616)(9,995)
BORROWED FUNDS:               
Federal Home Loan Bank ("FHLB") advances, federal funds, and repurchase agreements4,761,700
 53,028
 1.48% 10,517,500
 108,061
 1.37% (55,033)(64,493)9,460
Other borrowings38,389,955
 860,012
 2.99% 38,193,757
 755,125
 2.64% 104,887
3,912
100,975
TOTAL BORROWED FUNDS (7)
43,151,655
 913,040
 2.82% 48,711,257
 863,186
 2.37% 49,854
(60,581)110,435
TOTAL INTEREST-BEARING FUNDING LIABILITIES91,948,755
 1,090,564
 1.58% 101,224,577
 1,076,321
 1.42% 14,243
(86,197)100,440
Noninterest bearing demand deposits15,625,300
     13,899,407
        
Other liabilities(8)
5,207,748
     5,408,527
        
TOTAL LIABILITIES112,781,803
     120,532,511
        
STOCKHOLDER’S EQUITY23,311,727
     22,153,538
        
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY$136,093,530
     $142,686,049
        
                
NET INTEREST SPREAD (9)
    5.61%     5.78%    
NET INTEREST MARGIN (10)
    5.86%     5.92%    
NET INTEREST INCOME  $4,818,373
     $4,981,817
      
(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.

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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. 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.


NET INTEREST INCOME

 Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 30,		 QTD Change YTD Change
 2017 2016 2017 2016 Dollar increase/(decrease) Percentage Dollar increase/(decrease) Percentage
 (in thousands) (dollars in thousands)
INTEREST INCOME:               
Interest-earning deposits$24,370
 $13,400
 $63,279
 $41,890
 $10,970
 81.9 % $21,389
 51.1 %
Investments available-for-sale93,599
 60,844
 270,041
 235,851
 32,755
 53.8 % 34,190
 14.5 %
Investments held-to-maturity8,859
 —
 29,502
 —
 8,859
 100%
 29,502
 100%
Other investments4,688
 7,641
 15,876
 25,224
 (2,953) (38.6)% (9,348) (37.1)%
Total interest income on investment securities and interest-earning deposits131,516
 81,885
 378,698
 302,965
 49,631
 60.6 % 75,733
 25.0 %
Interest on loans1,822,384
 1,889,077
 5,530,239
 5,755,173
 (66,693) (3.5)% (224,934) (3.9)%
Total Interest Income1,953,900
 1,970,962
 5,908,937
 6,058,138
 (17,062) (0.9)% (149,201) (2.5)%
INTEREST EXPENSE:        
   
 
Deposits and customer accounts56,707
 64,288
 177,524
 213,135
 (7,581) (11.8)% (35,611) (16.7)%
Borrowings and other debt obligations323,133
 285,544
 913,040
 863,186
 37,589
 13.2 % 49,854
 5.8 %
Total Interest Expense379,840
 349,832
 1,090,564
 1,076,321
 30,008
 8.6 % 14,243
 1.3 %
 NET INTEREST INCOME$1,574,060
 $1,621,130
 $4,818,373
 $4,981,817
 $(47,070) (2.9)% $(163,444) (3.3)%
         
      

Net interest income decreased $47.1 million and $163.4 million for the three-month and nine-month periods ended September 30, 2017 compared to the corresponding periods in 2016. These overall decreases were primarily due to a decrease in interest income earned on loans as well as increased interest expense on borrowings.


Interest Income on Investment Securities and Interest-Earning Deposits


Interest income on investment securities and interest-earning deposits increased $49.6decreased $59.2 million and $75.7 million for the three-month and nine-month periodsquarter ended September 30, 20172020 compared to 2019. The average balances of investment securities and interest-earning deposits for the quarter ended September 30, 2020 was $26.8 billion with an average yield of 1.12%, compared to an average balance of $22.2 billion with an average yield of 2.42% for the corresponding periodsperiod in 2016.2019. The decrease in interest income on investment securities and interest-earning deposits for the quarter ended September 30, 2020 was primarily due to a decrease in the average yield on interest-earning deposits resulting from the Federal Reserve response to the outbreak of COVID-19.

Interest income on investment securities and interest-earning deposits decreased $121.1 million for the nine-month period ended September 30, 2020 compared to 2019. The average balancebalances of investment securities and interest-earning deposits for the nine-month period ended September 30, 20172020 was $27.1$26.9 billion with an average yield of 1.86%1.46%, compared to an average balance of $25.6$21.5 billion with an average yield of 1.58%2.59% for the corresponding period in 2016.2019. The increasedecrease in interest income on investment securities and interest-earning deposits for the three-month and nine-month periodsperiod ended September 30, 20172020 was primarily attributable to an increase of $8.9 million and $29.5 million in interest income on investments held-to-maturity due to increased volume and an increasea decrease in the average yield on interest-earning deposits resulting from the Federal Reserve response to the outbreak of $32.8 million and $34.2 million in interest income on investments available-for-sale.COVID-19.


106

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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



Interest Income on Loans


Interest income on loans decreased $66.7 million and $224.9 million for the three-month and nine-month periods ended September 30, 2017, respectively,2020, compared to the corresponding periods in 2016, primarily due to a decline in the balance of total loans. The average balance of total loans was $86.4 billion with an average yield of 8.53% for the nine-month period ended September 30, 2017, compared to $90.5 billion with an average yield of 8.50% for the corresponding period in 2016. The decrease2019 reflected increases in the average balance for both periods, offset by decreasing rates, particularly during the first half of total loans of $4.1 billion was primarily due to a decline in the balance of the commercial loan portfolio. The average balance of commercial loans was $41.8 billion with an average yield of 3.66% for the nine-month period ended September 30, 2017, compared to $46.7 billion with an average yield of 3.56% for the corresponding period in 2016.2020.


Interest Expense on Deposits and Related Customer Accounts


Interest expense on deposits and related customer accounts decreased $7.6 million and $35.6 million for the three-month and nine-month periods ended September 30, 2017, respectively,2020 compared to 2019. These decreases were a result of the corresponding periodsnear zero interest rate environment offset by builds in 2016, primarilyoverall deposits.
91




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


Interest Expense on Borrowed Funds

Interest expense on borrowed funds decreased $95.4 million for the quarter ended September 30, 2020 compared to 2019. This decrease was due to a decrease in interest-bearing deposits.lower interest rates being paid, offset by increased balances during the quarter ended September 30, 2020. The average balance of total interest-bearing depositsborrowings was $48.8$49.1 billion with an average cost of 0.49%2.59% for the quarter ended September 30, 2020, compared to an average balance of $48.4 billion with an average cost of 3.41% for 2019. The average balance of borrowed funds increased for the quarter ended September 30, 2020 compared to the quarter ended September 30, 2019, primarily due to increases in FHLB advances, credit facilities and secured structured financings.

Interest expense on borrowed funds decreased $157.3 million for the nine-month period ended September 30, 2017,2020 compared to 2019. This decrease was due to lower interest rates being paid offset by increased balances during the nine-month period ended September 30, 2020. The average balance of total borrowings was $50.7 billion with an average cost of 2.82% for the nine-month period ended September 30, 2020, compared to an average balance of $52.5$46.5 billion with an average cost of 0.54%3.52% for the corresponding period in 2016.

Interest Expense on Borrowed Funds

Interest expense on2019. The average balance of borrowed funds increased $37.6for the nine-month period ended September 30, 2020 compared to the nine-month period ended September 30, 2019, primarily due to increases in FHLB advances, credit facilities and secured structured financings.

CREDIT LOSS EXPENSE

Credit loss expense was $405.8 million and $49.9 million$2.6 billion for the three-month and nine-month periods ended September 30, 2017,2020, respectively, compared to $603.6 million and $1.7 billion, respectively, for the correspondingcomparative periods in 2016.2019. The increase in interest expense on borrowed fundsyear over year was primarily due to reserve build during the first and second quarters of 2020 associated with a weaker economic outlook related to COVID-19. The decrease quarter over quarter was due to an increasea decrease in the interest rate paidnet charge offs.

Total charge-offs of $606.1 million and $2.8 billion for the three-month and nine-month periods ended September 30, 2017. The average balance of total borrowings was $43.42020, respectively, were lower by $818.5 million and $1.3 billion and $43.2 billion with an average cost of 2.98% and 2.82% forfrom the three-month and nine-month periods ended September 30, 2017, respectively, compared to an average balance of $45.9 billion and $48.7 billion with an average cost of 2.47% and 2.37% for the correspondingcomparative periods in 2016. The average balance of borrowed funds decreased from September 30, 2016 to September 30, 2017, primarily due to the decrease in FHLB advances2019 as a result of maturities and terminations. The increasethe Company's programs in interest expense on borrowed funds is dueresponse to the Company issuing $3.5 billion of long-term debt at higher fixed rates in 2017 to increase liquidity and meet the FRB's TLAC requirement.COVID-19. Total recoveries during these periods also decreased.

107

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 nine-month periods ended September 30, 2017 was $652.1 million and $2.0 billion, respectively, compared to $687.9 million and $2.2 billion for the corresponding periods in 2016. The decrease for the nine-month period ended September 30, 2017 was primarily related to the buildup of the ALLL coverage ratio throughout 2016, mainly on the RIC and auto loan portfolio. The provision continues to reflect the growth of the RIC and auto loan portfolio.
 Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 30,
 2017 2016 2017 2016
 (in thousands)
ALLL, beginning of period$3,953,607
 $3,765,887
 $3,814,464
 $3,246,145
Charge-offs:       
Commercial(30,576) (41,660) (117,263) (118,273)
Consumer(1,224,296) (1,249,370) (3,590,495) (3,424,199)
Total charge-offs(1,254,872) (1,291,030) (3,707,758) (3,542,472)
Recoveries:       
Commercial9,635
 21,359
 29,266
 68,640
Consumer594,959
 608,915
 1,818,335
 1,828,621
Total recoveries604,594
 630,274
 1,847,601
 1,897,261
Charge-offs, net of recoveries(650,278) (660,756) (1,860,157) (1,645,211)
Provision for loan and lease losses (1)
647,177
 709,151
 1,996,199
 2,213,348
Other(2):
       
Commercial356
 —
 356
 —
Consumer5,283
 —
 5,283
 —
ALLL, end of period$3,956,145
 $3,814,282
 $3,956,145
 $3,814,282
Reserve for unfunded lending commitments, beginning of period$111,811
 $156,898
 $122,419
 $149,021
Provision for unfunded lending commitments (1)
4,943
 (21,239) (3,865) (13,194)
Loss on unfunded lending commitments(668) (1,094) (2,468) (1,262)
Reserve for unfunded lending commitments, end of period116,086
 134,565
 116,086
 134,565
Total allowance for credit losses ("ACL"), end of period$4,072,231
 $3,948,847
 $4,072,231
 $3,948,847

(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.
(2) Includes transfers in for the period ending September 30, 2017.

The Company's net charge-offs decreased $10.5 million for the three-month period ended September 30, 2017, and increased $214.9 million for the nine-month period ended September 30, 2017 compared to the corresponding periods in 2016.

Consumer charge-offs decreased $25.1 million and increased $166.3 million for the three-month and nine-month periods ended September 30, 2017, respectively compared to the corresponding periods in 2016. The three-month decrease was primarily due to a $21.5 million decrease in consumer auto loan charge-offs, and the nine-month increase was due to a $173.5 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.

Consumer recoveries decreased $14.0 million and decreased $10.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The three-month decrease was primarily due to a $13.7 million decrease in consumer auto recoveries and the nine-month decrease was primarily due to a $6.0 million decrease in consumer auto loan recoveries, a $1.6 million decrease in home equity recoveries, and a $3.2 million decrease in other consumer recoveries.

Consumer net charge-offs as a percentage of average consumer loans were 1.4% and 4.0% for the three-month and nine-month periods ended September 30, 2017, respectively, compared to 1.5% and 3.6% for the corresponding periods in 2016.


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


Commercial charge-offs decreased $11.1 million and $1.0 million for the three-month and nine-month periods ended September 30, 2017, respectively compared to the corresponding periods in 2016. The three-month decrease was primarily due to a $10.4 million decrease in Commercial real estate charge-offs, and the nine-month decrease was primarily due to a $22.6 million decrease in Commercial Fleet charge-offs, offset by a $10.6 million increase in Commercial Banking charge-offs and a $10.8 million increase in Commercial charge-offs to commercial loans held in Puerto Rico.

Commercial recoveries decreased $11.7 million and $39.4 million for the three-month and nine-month periods ended September 30, 2017, respectively compared to the corresponding periods in 2016. The three-month decrease was primarily due to a $9.2 million decrease in commercial real estate recoveries, and a $2.5 million decrease in commercial fleet recoveries.

Commercial loan net charge-offs as a percentage of average commercial loans, including multifamily loans, were 0.05% and 0.21% for the three-month and nine-month periods ended September 30, 2017, respectively.


NON-INTEREST INCOME
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,QTD ChangeYTD Change
(dollars in thousands)2020201920202019Dollar increase/(decrease)PercentageDollar increase/(decrease)Percentage
Consumer fees$88,239 $92,734 $254,953 $295,857 $(4,495)(4.8)%$(40,904)(13.8)%
Commercial fees35,595 40,315 101,954 116,709 (4,720)(11.7)%(14,755)(12.6)%
Lease income742,946 735,783 2,269,613 2,116,503 7,163 1.0 %153,110 7.2 %
Miscellaneous (loss) / income, net308,222 130,033 330,165 327,849 178,189 137.0 %2,316 0.7 %
Net gains recognized in earnings(148)2,267 31,646 2,646 (2,415)(106.5)%29,000 1,096.0 %
Total non-interest income$1,174,854 $1,001,132 $2,988,331 $2,859,564 $173,722 17.4 %$128,767 4.5 %
 Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 30,		 QTD Change YTD Change
 2017 2016 2017 2016 Dollar increase/(decrease) Percentage Dollar increase/(decrease) Percentage
 (in thousands) (dollars in thousands)
Consumer fees$105,624
 $120,956
 $337,738
 $381,943
 $(15,332) (12.7)% $(44,205) (11.6)%
Commercial fees46,282
 50,728
 130,871
 153,640
 (4,446) (8.8)% (22,769) (14.8)%
Mortgage banking income, net14,783
 22,537
 43,049
 50,005
 (7,754) (34.4)% (6,956) (13.9)%
Bank-owned life insurance17,807
 14,150
 49,159
 44,315
 3,657
 25.8 % 4,844
 10.9 %
Lease income509,714
 483,929
 1,494,801
 1,365,519
 25,785
 5.3 % 129,282
 9.5 %
Miscellaneous income93,805
 35,637
 180,217
 94,842
 58,168
 163.2 % 85,375
 90.0 %
Net gains recognized in earnings6,707
 (364) 16,276
 58,551
 7,071
 (1,942.6)% (42,275) (72.2)%
Total non-interest income$794,722
 $727,573
 $2,252,111
 $2,148,815
 $67,149
 9.2 % $103,296
 4.8 %


Total non-interest income increased $67.1$173.7 million and $103.3$128.8 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The increases for the three-month and nine-month periods ended September 30, 2017 were primarily due to increase in lease income associated with the continued growth of the lease portfolio and increases in miscellaneous income. These increases were offset by decreases in consumer loan fees due to the reduction of loans serviced by the Company three-month and nine-month periods ended September 30, 2017.

Consumer Fees

Consumer fees decreased $15.3 million and $44.2 million for the three-month and nine-month periods ended September 30, 2017, respectively,2020 compared to the corresponding periods in 2016.2019. The decrease in consumer feesincrease for the three-month and nine-month periodsperiod ended September 30, 20172020 was primarily related to an increase in miscellaneous income. The increase for the nine-month period ended September 30, 2020 was primarily due to $24.7 million and $73.3 million decreasean increase in loan feelease income, which was attributable to the reduction of loans serviced by the Company due to loan sales and payoffs and lower reserve recourse releases in 2017. This was partially offset by an increase of $3.9a decrease in consumer fees.

Consumer fees

Consumer fees decreased $40.9 million and $12.3 millionfor the nine-month period ended September 30, 2020 compared to 2019. This decrease was primarily related to a decrease in consumer deposit fees, for the three-monthrelated to more few waivers given in 2020 compared to 2019.


92




Item 2.    Management’s Discussion and nine-month periods ended September 30, 2017.Analysis of Financial Condition and Results of Operations



Commercial Feesfees


Commercial fees consists of deposit overdraft fees, deposit automated teller machine ("ATM") fees, cash management fees, letter of credit fees, and loan syndication fees for commercial accounts. Commercial fees remained relatively stable for the nine-month period ended September 30, 2020 compared to 2019.

Lease income

Lease income increased $153.1 million for the nine-month period ended September 30, 2020 compared to 2019. This increase was the result of the growth in the Company's lease portfolio, with an average balance of $16.4 billion for the nine-month period ended September 30, 2020, compared to $15.1 billion at September 30, 2019.

Miscellaneous income/(loss)
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,QTD ChangeYTD Change
(dollars in thousands)2020201920202019Dollar increase/(decrease)PercentageDollar increase/(decrease)Percentage
Mortgage banking income, net$14,115 $15,343 $47,243 $38,067 $(1,228)(8.0)%$9,176 24.1 %
BOLI14,855 15,338 43,764 45,769 (483)(3.1)%(2,005)(4.4)%
Capital market revenue56,949 48,326 179,417 146,290 8,623 17.8 %33,127 22.6 %
Net gain on sale of operating leases120,387 48,490 170,484 120,980 71,897 148.3 %49,504 40.9 %
Asset and wealth management fees52,984 45,020 156,575 132,224 7,964 17.7 %24,351 18.4 %
Loss on sale of non-mortgage loans(56,684)(87,399)(241,324)(238,771)30,715 35.1 %(2,553)(1.1)%
Other miscellaneous (loss) / income, net105,616 44,915 (25,994)83,290 60,701 135.1 %(109,284)(131.2)%
Total miscellaneous (loss) / income$308,222 $130,033 $330,165 $327,849 $178,189 137.0 %$2,316 0.7 %

Miscellaneous income increased $178.2 million for the three-month period ended September 30, 2020 as compared to the corresponding period in 2019. The increase is primarily related to an increase in gain on sale of operating leases, a decrease in loss on sale of non-mortgage loans, and a gain recognized on the sale of SBC.

Miscellaneous income increased $2.3 million for the nine-month period ended September 30, 2020 as compared to the corresponding period in 2019. The increase is primarily related to the three-month period ended September 30, 2020 activity above, partially offset by a decrease in other miscellaneous income due to fair value adjustments related to the transfer of loan to HFS in the second quarter of 2020.

GENERAL, ADMINISTRATIVE AND OTHER EXPENSES
Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,QTD ChangeYTD Change
(dollars in thousands)2020201920202019Dollar increase/(decrease)PercentageDollar increase/(decrease)Percentage
Compensation and benefits$461,992 $485,920 $1,391,786 $1,432,730 $(23,928)(4.9)%$(40,944)(2.9)%
Occupancy and equipment expenses152,998 156,603 464,784 441,643 (3,605)(2.3)%23,141 5.2 %
Technology, outside services, and marketing expense124,211 178,053 386,192 482,183 (53,842)(30.2)%(95,991)(19.9)%
Loan expense67,139 98,639 219,483 308,139 (31,500)(31.9)%(88,656)(28.8)%
Lease expense612,639 523,900 1,844,270 1,516,984 88,739 16.9 %327,286 21.6 %
Impairment of goodwill— — 1,848,228 — — 0%1,848,228 100%
Other expenses150,249 190,129 427,978 536,366 (39,880)(21.0)%(108,388)(20.2)%
Total general, administrative and other expenses$1,569,228 $1,633,244 $6,582,721 $4,718,045 $(64,016)(3.9)%$1,864,676 39.5 %

93




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


Total general, administrative and other expenses decreased $4.4$64.0 million and $22.8 millionincreased $1.9 billion for the three-month and nine-month periods ended September 30, 2017, respectively,2020, compared to the corresponding periods in 2016, primarily dueof 2019. The most significant factors contributing to lower capital markets income.the quarter-to-date changes were as follows:



109

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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


Mortgage Banking Revenue
 Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 30,		 QTD Change YTD Change
 2017 2016 2017 2016 Dollar increase/(decrease) Percentage Dollar increase/(decrease) Percentage
 (dollars in thousands)        
Mortgage and multifamily servicing fees$10,244
 $10,772
 $31,320
 $32,387
 $(528) (4.9)% $(1,067) (3.3)%
Net gains on sales of residential mortgage loans and related securities13,582
 8,049
 19,258
 18,127
 5,533
 68.7 % 1,131
 6.2 %
Net gains on sales of multifamily mortgage loans1,000
 1,097
 2,200
 2,397
 (97) (8.8)% (197) (8.2)%
Net gains (losses) on hedging activities(3,134) 655
 6,812
 33,624
 (3,789) (578.5)% (26,812) (79.7)%
Net gains/(losses) from changes in MSR fair value(1,578) 7,711
 (1,315) (18,113) (9,289) (120.5)% 16,798
 (92.7)%
MSR principal reductions(5,331) (5,747) (15,226) (18,417) 416
 (7.2)% 3,191
 (17.3)%
     Total mortgage banking income, net$14,783
 $22,537

$43,049

$50,005
 $(7,754) (34.4)% $(6,956) (13.9)%

Mortgage banking income consisted of fees associated with servicing loans not held by the Company, as well as originations, amortization,•Technology, outside services, 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 revenuemarketing expense decreased $7.8 million and $7.0$53.8 million for the three-month and nine-month periodsquarter ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The decrease for the three-month period ended September 30, 2017 was primarily attributable to $9.3 million of net losses from changes in MSR fair value, and $3.8 million of change due to net losses on hedging activities, offset by $5.5 million of higher net gains on sales of residential mortgage loans and related securities. The decrease for the nine-month period ended September 30, 2017 was attributable to $26.8 million of lower net gains on hedging activities, offset by $16.8 million of higher net gain from changes in MSR fair value.

Since 2015, mortgage interest rates have remained stable, resulting in relative stability in mortgage banking fees from rate changes.

The following table details interest rates on certain residential mortgage loans for the Bank as of the dates indicated:
 30-Year Fixed 15-Year Fixed
December 31, 20154.13% 3.38%
March 31, 20163.63% 2.88%
June 30, 20163.50% 2.75%
September 30, 20163.50% 2.88%
December 31, 20164.38% 3.63%
March 31, 20174.25% 3.50%
June 30, 20174.13% 3.38%
September 30, 20174.13% 3.75%

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

Mortgage and multifamily loan servicing fees decreased $0.5 million and $1.1 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. At September 30, 2017 and 2016, the Company serviced mortgage and multifamily real estate loans for the benefit of others with a principal balance totaling $294.9 million and $688.8 million, respectively. The decrease in loans serviced for others is primarily due to pay-downs received during 2017.


110

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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


Net gains on sales of residential mortgage loans and related securities increased $5.5 million and $1.1 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. For the three-month and nine-month periods ended September 30, 2017, the Company sold $454.2 million and $1.4 billion of mortgage loans for gains of $13.6 million and $19.3 million, compared to $639.8 million and $1.5 billion of loans sold for gains of $8.0 million and $18.1 million for the corresponding periods in 2016.

The Company periodically sells qualifying mortgage loans to the Federal Home Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage Association 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 nine-month periods ended September 30, 2017 changed by an immaterial amount when compared to the corresponding periods in 2016. These changes were primarily due to a $1.0 million and $2.2 million release in the FNMA recourse reserve for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $1.1 million and $2.4 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 September 30, 2017, the Company serviced loans with a principal balance of $152.6 million for FNMA compared to $341.7 million at December 31, 2016. These loans had a credit loss exposure of $34.4 million as of both September 30, 2017 and December 31, 2016. Losses, if any, resulting from representation and warranty defaults would be in addition to the Company's credit loss exposure. The servicing asset for these loans has completely amortized.

The Company has established a liability related to the fair value of the retained credit exposure for multifamily loans sold to FNMA. This liability represents the amount the Company estimates it would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of the estimated losses the portfolio is projected to incur based upon internal specific information and an industry-based default curve with a range of estimated losses. As of September 30, 2017 and December 31, 2016, the Company had a liability of $1.6 million and $3.8 million, respectively, related to the fair value of the retained credit exposure for multifamily loans sold to the FNMA under this program.

Net gains on hedging activities decreased $3.8 million and $26.8 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The variances for the three-month and nine-month periods ended September 30, 2017 were primarily due to the decrease in the value of mortgage loan pipeline and the Company's hedging strategy in the current mortgage rate environment.

Net gains/losses from changes in MSR fair value were a loss of $1.6 million and a loss of $1.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, as compared to a net gain of $7.7 million and a net loss of $18.1 million for the corresponding period in 2016. The value of the related MSRs carried at fair value at September 30, 2017 and December 31, 2016 was $143.5 million and $146.6 million, respectively. The MSR asset fair value changes for the three-month and nine-month periods ended September 30, 2017 were the result of fluctuations in interest rates.

The Company recognized $5.3 million and $15.2 million of principal reductions for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $5.7 million and $18.4 million for the corresponding periods in 2016. Principal reduction activity is impacted by changes in the level of prepayments and mortgage refinancing.


111

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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


Bank Owned Life Insurance ("BOLI")

BOLI income represents fluctuations in the cash surrender value of life insurance policies on certain employees. The Bank is the beneficiary and the recipient of the insurance proceeds. Income from BOLI increased $3.7 million and $4.8 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016 as a result of an increase in death benefits received.

Lease income

Lease income increased $25.8 million and $129.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. These increases were the result of the growth of the Company's lease portfolio with an average balance of $10.1 billion for the nine-month period ended September 30, 2017, and $9.2 billion for the same periods in 2016.

Miscellaneous Income

Miscellaneous income increased $58.2 million and $85.4 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The miscellaneous income increased for the three-month period ended September 30, 2017 was primarily due a decrease in the lower of cost or market adjustments required to a loan portfolio that is held for sale of $60.8 million and an increase of $20.1 million on gain on sale of fixed assets, offset by a decrease of $37.4 million due to change in fair value of loan portfolio and $10.3 million in capital markets revenue, respectively,2020, compared to the corresponding period in 2016. The increased for the nine-month period ended September 30, 20172019. This decrease was primarily due to a gain on sale of operating lease of $49.9reduced marketing and technology spending in response to the COVID-19 pandemic.
•Loan expense decreased $31.5 million an increase in gain on sale of fixed assets of $30.6 million, offset by a decrease in other income of $20.0 million, respectively,for the quarter ended September 30, 2020, compared to the corresponding periodsperiod in 2016. For further discussion, see Note 162019. This decrease was primarily the result of lower repossession volumes due to the Condensed Consolidated Financial Statements.COVID-19 pandemic.

Net gains recognized in earnings

The Company recognized $6.7 million and $16.3•Lease expense increased $88.7 million for the three-month and nine-month periodsquarter ended September 30, 2017,2020, compared to the corresponding period in net gains2019. This increase was primarily due to more depreciation on the sale of AFS investment securities as a result of overall balance sheet managementlarger lease portfolio and in order to reposition the investment portfolio with securities thatfewer liquidations.
•Other expenses decreased the Company's risk weighted assets. The net gain realized$39.9 million for the three-month periodquarter ended September 30, 20172020, compared to the corresponding period in 2019. This decrease was primarily comprisedthe result of lower legal and operational risk expenses.

In addition to the sale of MBS's, including FHLMC residential debt securities and collateralized mortgage obligations ("CMOs"), with a book value of $558.6 million for a gain of $7.0 million. The net gain realizedgoodwill impairment charge discussed above, other significant factors for the nine-month period ended September 30, 2017 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,year-to-date included:
•Technology, outside services, and the sale of MBS's, including FHLMC residential debt securities and collateralized mortgage obligations ("CMOs"), with a book value of $1.1 billion for a gain of $16.3 million.

The Company recognized $58.6marketing expense decreased $96.0 million for the nine-month period ended September 30, 2016,2020 compared to 2019. This decrease was driven by reductions in net gains onmarketing and technology spending that have resulted in response to the sale of AFS investment securities as a result of overall balance sheet and interest rate risk management. The net gain realizedCOVID-19 pandemic.
•Loan expense decreased $88.7 million for the nine-month period ended September 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 CMOs, with a book value of $1.3 billion for a gain of $24.7 million.

112

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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


GENERAL AND ADMINISTRATIVE EXPENSES
 Three-Month Period
Ended September 30,		 Nine-Month Period Ended September 30, QTD Change YTD Change
 2017 2016 2017 2016 Dollar increase/(decrease)Percentage Dollar increase/(decrease)Percentage
 (dollars in thousands)
Compensation and benefits$452,587
 $426,162
 $1,360,444
 $1,282,094
 $26,425
6.2 % $78,350
6.1 %
Occupancy and equipment expenses165,201
 156,611
 491,465
 453,687
 8,590
5.5 % 37,778
8.3 %
Technology expense59,056
 56,449
 181,331
 183,039
 2,607
4.6 % (1,708)(0.9)%
Outside services46,994
 57,742
 154,272
 207,472
 (10,748)(18.6)% (53,200)(25.6)%
Marketing expense23,424
 35,944
 91,641
 77,986
 (12,520)(34.8)% 13,655
17.5 %
Loan expense91,147
 101,101
 285,364
 307,992
 (9,954)(9.8)% (22,628)(7.3)%
Lease expense409,424
 338,077
 1,137,456
 953,142
 71,347
21.1 % 184,314
19.3 %
Other administrative expenses95,712
 109,189
 293,046
 310,078
 (13,477)(12.3)% (17,032)(5.5)%
Total general and administrative expenses$1,343,545
 $1,281,275
 $3,995,019
 $3,775,490
 $62,270
4.9 % $219,529
5.8 %

Total general and administrative expenses increased $62.3 million and $219.5 million for the three-month and nine-month periods ended September 30, 2017, respectively,2020 compared to the corresponding periods in 2016. Factors contributing to this increase were as follows:

Compensation and benefits expense increased $26.4 million and $78.4 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The primary driver of these increases was the Company's salary expense which resulted in a $15.2 million and $37.6 million increase for the three-month and nine-month periods ended September 30, 2017, respectively. Commission expense increased $6.1 million and $11.7 million for the three-month and nine-month periods ended September 30, 2017, respectively. Additionally, other compensation and benefit expense increased $5.3 million and $24.0 million for the three-month and nine-month periods ended September 30, 2017, respectively. These increases were offset by decreases in bonus expense of $4.6 million and $9.7 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.
Occupancy and equipment expenses increased $8.6 million and $37.8 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.2019. This was primarily due to an increase in depreciation expense of $6.2 million and $18.0 million for the three-month and nine-month periods ended September 30, 2017, respectively. These increases were primarily due to more assets being placed in service and an increase in depreciation for assets that were moved to held for sale and sold during the periods. There were also $1.2 million and $10.2 million increases in maintenance and repair expense and other occupancy and equipment expenses for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.
Outside services decreased $10.7 million and $53.2 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. This was primarily due to a decrease in consulting service fees of $8.9 million and $42.4 million, respectively, which related to regulatory initiatives, including preparation for meeting the requirements of the IHC during 2016.
Marketing expense decreased $12.5 million and increased $13.7 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding period in 2016. These variances were primarily due to expenses such as direct mail, advertising and outside marketing associated with corporate marketing campaigns.
Loan expense decreased $10.0 million and $22.6 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. These decreases were primarily due to decreases of $12.0 million and $14.2 million in loan collection expenses.

113

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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


Lease expense increased $71.3 million and $184.3 million for the three-month and nine-month periods ended September 30, 2017 compared to the corresponding periods in 2016. These increases wereis primarily due to the continued growthlower repossession volumes as a result of the Company's leased vehicle portfolio and accumulation of depreciation associated with that portfolio.COVID-19 pandemic.
Other administrative expenses decreased $13.5•Lease expense increased $327.3 million and $17.0 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. These decreases were primarily attributable to lower operational risk expenses and other non income tax expenses, offset by increased in miscellaneous expenses for three-month and nine-month periods ended September 30, 2017.


OTHER EXPENSES
 Three-Month Period
Ended September 30,		 Nine-Month Period Ended September 30, QTD Change YTD Change
 2017 2016 2017 2016 Dollar (decrease)/increase Percentage Dollar (decrease)/increase Percentage
 (dollars in thousands)
Amortization of intangibles$15,288
 $17,174
 $46,204
 $52,860
 $(1,886) (11.0)% $(6,656) (12.6)%
Deposit insurance premiums and other expenses19,792
 17,950
 55,218
 56,966
 1,842
 10.3 % (1,748) (3.1)%
Loss on debt extinguishment5,582
 10,228
 16,321
 88,672
 (4,646) (45.4)% (72,351) (81.6)%
Other miscellaneous expenses1,980
 198
 12,521
 5,779
 1,782
 900.0 % 6,742
 116.7 %
Total other expenses$42,642
 $45,550
 $130,264
 $204,277
 $(2,908) (6.4)% $(74,013) (36.2)%

Total other expenses decreased $2.9 million and $74.0 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The primary factors contributing to these decreases were:

Amortization of intangibles decreased $1.9 million and $6.7 million for the three-month and nine-month periods ended September 30, 2017, respectively, 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 second quarter of 2016, thereby reducing intangibles in 2017.

Deposit insurance premiums and other expenses increased $1.8 million and decreased $1.7 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The expense for the three-month and nine-month periods ended September 30, 2016 included a higher contingent loss on the transfer of unfunded credit facilities to Santander, which did not recur in 2017. This decrease in cost was offset by increases in other expenses and FDIC insurance premium.

Losses on debt extinguishment decreased $4.6 million and $72.4 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. These expenses were primarily related to early termination fees incurred by the Company in association with the termination of FHLB advances in 2016. During the three-month and nine-month periods ended September 30, 2016, the Bank terminated $1.3 billion and $2.8 billion of FHLB advances, respectively, incurring costs of $32.9 million and $78.4 million. The Bank also terminated $750.0 million and $3.5 billion of FHLB advances during the three-month and nine-month periods ended September 30, 2016. During the three-month period ended September 30, 2017, a $5.1 million expense on tender offer was incurred. Additionally, for the nine-month period ended September 30, 2017,2020 compared to 2019. This increase was primarily due to more depreciation on a $4.0 million charge on the buyback of REIT preferred stock,larger lease portfolio and a tender offer on Bank debt resulted in a charge of $6.7 million.less liquidations.

•Other miscellaneous expenses increased $1.8 million and $6.7decreased $108.4 million for the nine-month period ended September 30, 2020, compared to the corresponding period in 2019. This decrease was primarily attributable to a decrease in legal and operational risk expenses. Travel and entertainment expenses also saw a significant decrease as COVID-19 has limited corporate travel.

INCOME TAX PROVISION

An income tax benefit of $53.3 million and a provision of $112.9 million were recorded for the three-month periods ended September 30, 2020 and 2019, respectively. An income tax benefit of $272.9 million and a provision of $384.5 million were recorded for the nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods2020 and 2019, respectively. This resulted in 2016. These increases were primarily due to the impairmentan ETR of capitalized software of $1.5 million(6.5)% and $8.0 million in29.5% for the three-month periods ended September 30, 2020 and 2019, respectively, and 19.3% and 29.6% for the nine-month periods ended September 30, 2017.2020 and 2019, respectively.

114

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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


INCOME TAX PROVISION

An income tax provision of $93.4 million and $264.4 million was recorded for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $108.3 million and $340.0 million for the corresponding periods in 2016. This resulted in effective tax rates ("ETR") of 28.3% and 27.7% for the three-month and nine-month periods ended September 30, 2017, respectively, compared to 32.4% and 35.8% for the corresponding periods in 2016.

The decrease in the ETR for the three-month and nine-month periods ended September 30, 2017 was predominantly due to the undistributed net earnings of a Puerto Rico subsidiary that will be indefinitely reinvested outside the U.S.


The Company's ETR in future periods will be affected by the results of operations allocated to the various tax jurisdictions in which the Company operates, any change in income tax laws or regulations within those jurisdictions, and interpretations of income tax regulations that differ from the Company's interpretations by tax authorities that examine tax returns filed by the Company or any of its subsidiaries.


Refer to Note 14 to the Condensed Consolidated Financial Statements for the year-to-year comparison of the ETR.


LINE OF BUSINESS RESULTS


General


The Company's segments at September 30, 20172020 and 2019 consisted of ConsumerCBB, C&I, CRE & VF, CIB 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, see Note 17 to the Condensed Consolidated Financial Statements.

Results Summary


Consumer and Business Banking

CBB
94




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


Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,QTD ChangeYTD Change
Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 30,		 QTD Change YTD Change
2017 2016 2017 2016 Dollar increase/(decrease) Percentage Dollar increase/(decrease) Percentage
(in thousands) (dollars in thousands)
(dollars in thousands)(dollars in thousands)2020201920202019Dollar increase/(decrease)PercentageDollar increase/(decrease)Percentage
Net interest income$324,539
 $297,952
 $945,102
 $793,345
 $26,587
 8.9 % $151,757
 19.1 %Net interest income$374,014 $381,759 $1,082,275 $1,120,907 $(7,745)(2.0)%$(38,632)(3.4)%
Total non-interest income100,583
 104,736
 282,360
 297,311
 (4,153) (4.0)% (14,951) (5.0)%Total non-interest income73,721 120,264 228,646 281,464 (46,543)(38.7)%(52,818)(18.8)%
Provision for credit losses20,716
 19,872
 64,577
 40,215
 844
 4.2 % 24,362
 60.6 %
Credit loss expenseCredit loss expense50,109 37,915 402,293 115,130 12,194 32.2 %287,163 249.4 %
Total expenses379,299
 395,759
 1,169,247
 1,162,090
 (16,460) (4.2)% 7,157
 0.6 %Total expenses402,962 414,836 2,743,783 1,208,908 (11,874)(2.9)%1,534,875 127.0 %
Income/(loss) before income taxes25,107
 (12,943) (6,362) (111,649) 38,050
 294.0 % 105,287
 94.3 %
Intersegment revenue/(expense)(1)
3,076
 9,656
 9,226
 34,111
 (6,580) (68.1)% (24,885) (73.0)%
(Loss)/income/ before income taxes(Loss)/income/ before income taxes(5,336)49,272 (1,835,155)78,333 (54,608)(110.8)%(1,913,488)(2,442.8)%
Intersegment revenueIntersegment revenue273 600 1,234 1,576 (327)(54.5)%(342)(21.7)%
Total assets19,716,199
 19,735,459
 19,716,199
 19,735,459
 (19,260) (0.1)% (19,260) (0.1)%Total assets23,612,515 23,447,787 23,612,515 23,447,787 164,728 0.7 %164,728 0.7 %


Consumer and Business BankingCBB reported income before income taxes of $25.1 million and a loss before income taxes of $6.4$5.3 million and $1.8 billion for the three-month and nine-month periods ended September 30, 2020, compared to income before income taxes of $49.3 million and $78.3 million for the three-month and nine-month periods ended September 30, 2017, respectively,2019. Factors contributing to this change were:

•Non-interest income decreased $46.5 million for the quarter ended September 30, 2020 compared to lossesthe third quarter of 2019. This decrease was due to a one-time gain recorded on the sale of branches in 2019, and decreased fee income in 2020 resulting from lower transaction volumes during the COVID-19 pandemic.
•Credit loss expense increased $287.2 million for the nine-month period ended September 30, 2020 compared to the corresponding period of 2019. This increase was due to large reserve builds in response to the economic uncertainty related to the COVID-19 outbreak and the growing auto loan portfolio.
•Total expenses increased $1.5 billion for the nine-month period ended September 30, 2020 compared to the corresponding period of 2019. This increase was due to the goodwill impairment that was recorded in the second quarter of 2020.

C&I Banking
 Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,QTD ChangeYTD Change
(dollars in thousands)2020201920202019Dollar increase/(decrease)PercentageDollar increase/(decrease)Percentage
Net interest income$61,115 $59,738 $188,970 $170,525 $1,377 2.3 %$18,445 10.8 %
Total non-interest income13,605 17,631 39,556 50,641 (4,026)(22.8)%(11,085)(21.9)%
Credit loss expense22,400 4,985 93,578 20,570 17,415 349.3 %73,008 354.9 %
Total expenses47,791 59,242 434,828 173,426 (11,451)(19.3)%261,402 150.7 %
(Loss) / income before income taxes4,529 13,142 (299,880)27,170 (8,613)(65.5)%(327,050)(1,203.7)%
Intersegment revenue2,847 1,683 7,790 3,986 1,164 69.2 %3,804 95.4 %
Total assets6,475,164 7,948,200 6,475,164 7,948,200 (1,473,036)(18.5)%(1,473,036)(18.5)%

C&I reported income before income taxes of $12.9$4.5 million and $111.6a loss before income taxes of $299.9 million for the three-month and nine-month periods ended September 30, 2016.2020, respectively, compared to income before income taxes of $13.1 million and $27.2 million for the corresponding periods in 2019. Factors contributing to these changes were as follows:were:


Net interest•Credit loss expense increased $73.0 million for the nine-month period ended September 30, 2020 compared to the corresponding period of 2019. This increase was due to large reserve builds in response to the economic uncertainty related to the COVID-19 outbreak.
•Total expenses increased $261.4 million for the nine-month period ended September 30, 2020 compared to the corresponding period of 2019. This increase was the result of the goodwill impairment recorded during the second quarter of 2020, offset by small reductions in travel and entertainment expenses, and marketing expenses related to the COVID-19 outbreak.
•Total assets decreased $1.5 billion due to the commercial loan sale that was completed in the fourth quarter of 2019.
95




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


CRE & VF
 Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,QTD ChangeYTD Change
(dollars in thousands)2020201920202019Dollar increase/(decrease)PercentageDollar increase/(decrease)Percentage
Net interest income$93,451 $104,076 $281,332 $311,790 $(10,625)(10.2)%$(30,458)(9.8)%
Total non-interest income4,671 3,428 8,561 9,860 1,243 36.3 %(1,299)(13.2)%
Credit loss expense / (Release of) credit loss expense11,963 6,425 78,800 9,824 5,538 86.2 %68,976 702.1 %
Total expenses30,569 32,718 86,857 95,385 (2,149)(6.6)%(8,528)(8.9)%
Income before income taxes55,590 68,361 124,236 216,441 (12,771)(18.7)%(92,205)(42.6)%
Intersegment revenue1,232 1,605 3,985 5,396 (373)(23.2)%(1,411)(26.1)%
Total assets20,296,999 18,772,209 20,296,999 18,772,209 1,524,790 8.1 %1,524,790 8.1 %

CRE & VF reported income increased $26.6before income taxes of $55.6 million and $151.8$124.2 million for the three-month and nine-month periods ended September 30, 2017,2020, respectively, compared to income before income taxes of $68.4 million and $216.4 million for 2019. Factors contributing to these changes were:

•Credit loss expense increased $69.0 million for the nine-month period ended September 30, 2020 compared to the corresponding periodsperiod of 2019. This increase was due to large reserve builds in 2016. These increases were primarily driven by deposit product margin where despite rising interest rates, costs have been managed down.response to the economic uncertainty related to COVID-19 outbreak.


115CIB

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
 Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,QTD ChangeYTD Change
(dollars in thousands)2020201920202019Dollar increase/(decrease)PercentageDollar increase/(decrease)Percentage
Net interest income$44,035 $36,577 $123,411 $114,646 $7,458 20.4 %$8,765 7.6 %
Total non-interest income71,956 53,341 212,506 159,970 18,615 34.9 %52,536 32.8 %
Credit loss expense / (release of) credit loss expenses(15,384)(3,878)18,071 (6,624)(11,506)(296.7)%24,695 372.8 %
Total expenses63,343 66,092 188,266 198,653 (2,749)(4.2)%(10,387)(5.2)%
Income before income taxes68,032 27,704 129,580 82,587 40,328 145.6 %46,993 56.9 %
Intersegment expense(4,352)(3,888)(13,009)(10,958)(464)(11.9)%(2,051)(18.7)%
Total assets11,532,762 9,605,098 11,532,762 9,605,098 1,927,664 20.1 %1,927,664 20.1 %

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



Total non-interestCIB reported income decreased $4.2before income taxes of $68.0 million and $15.0$129.6 million for the three-month and nine-month periods ended September 30, 2017, respectively,2020, compared to the corresponding periods in 2016.income before income taxes of $27.7 million and $82.6 million for 2019. Factors contributing to these changes were:
The provision for credit losses
•Total non-interest income increased by $24.4$52.5 million for the nine-month period ended September 30, 20172020 compared to the corresponding period in 2016of 2019. This increase was due to the increase in fee income resulting from the large amounts of debt underwritten during the second quarter of 2020 in response to the COVID-19 related economic uncertainty, and higher fixed income revenues.
•Credit loss expense increased consumer loan delinquencies in 2017$24.7 million for the nine-month period ended September 30, 2020 compared to the corresponding periodsperiod of 2019. This increase was due to large reserve builds in 2016.response to the economic uncertainty related to the COVID-19 outbreak.
•Total expenses decreased $16.5assets increased $1.9 billion, as a result of growth in the business and client growth at September 30, 2020 compared to 2019.


96




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


Other
 Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,QTD ChangeYTD Change
(dollars in thousands)2020201920202019Dollar increase/(decrease)PercentageDollar increase/(decrease)Percentage
Net interest income$(17,518)$8,586 $1,591 $80,489 $(26,104)(304.0)%$(78,898)(98.0)%
Total non-interest income186,836 102,489 253,541 309,123 84,347 82.3 %(55,582)(18.0)%
(Release of Credit loss expense)/Credit loss expense(4,038)(7,874)(134,923)520 3,836 (48.7)%(135,443)(26,046.7)%
Total expenses131,571 203,816 425,152 610,116 (72,245)(35.4)%(184,964)(30.3)%
Income/Loss before income taxes41,785 (84,867)(35,097)(221,024)126,652 149.2 %185,927 84.1 %
Intersegment (expense)/revenue— — — — — 0%— 0%
Total assets35,373,234 40,133,105 35,373,234 40,133,105 (4,759,871)(11.9)%(4,759,871)(11.9)%

The Other category reported income before income taxes of $41.8 million and increased $7.2a loss before income taxes of $35.1 million for the three-month and nine-month periods ended September 30, 2017,2020, respectively, compared to losses before income taxes of $84.9 million and $221.0 million for the comparative periods of 2019. Factors contributing to these changes were:


•Net interest income decreased $26.1 million for the quarter ended September 30, 2020 compared to the third quarter of 2019, due to the sale of SBC and lower rates during the quarter.
•Total non-interest income increased $84.3 million for the quarter ended September 30, 2020 compared to the third quarter of 2019, due to the gain on sale of SBC.
•Total expenses decreased $72.2 million for the quarter ended September 30, 2020 compared to the third quarter of 2019, due tolower operational risk expenses.

•Net interest income decreased $78.9 million for the nine-month period ended September 30, 2020 compared to the corresponding periodsperiod of 2019, due to lower rates.
•Total non-interest income decreased $55.6 million for the nine-month period ended September 30, 2020 compared to the corresponding period of 2019, due to fair value adjustments related to the transfer of loans to HFS in 2016, driven mainly by increased marketing expenses in 2017 that were partiallythe second quarter of 2020, offset by the gain on sale of SBC.
•Credit loss expense decreased $135.4 million for the nine-month period ended September 30, 2020 compared to the corresponding period of 2019, due to the release of provision related to SBC during the second quarter of 2020.
•Total expenses decreased $185.0 million for the nine-month period ended September 30, 2020 compared to the corresponding period of 2019, due tolower overhead costs.operational risk expenses and lower FDIC premiums.

•Total assets decreased $4.8 billion, as a result of the third quarter sale of SBC.
Commercial Banking
97




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


 Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 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$87,176
 $91,259
 $259,502
 $257,421
 $(4,083) (4.5)% $2,081
 0.8 %
Total non-interest income15,837
 16,947
 45,729
 51,094
 (1,110) (6.5)% (5,365) (10.5)%
Provision for credit losses5,857
 (20,162) 16,115
 32,686
 26,019
 129.0 % (16,571) (50.7)%
Total expenses51,677
 51,156
 154,587
 157,672
 521
 1.0 % (3,085) (2.0)%
Income/(loss) before income taxes45,479
 77,212
 134,529
 118,157
 (31,733) (41.1)% 16,372
 13.9 %
Intersegment revenue/(expense)(1)
1,619
 3,616
 4,553
 12,927
 (1,997) (55.2)% (8,374) (64.8)%
Total assets11,606,759
 12,174,784
 11,606,759
 12,174,784
 (568,025) (4.7)% (568,025) (4.7)%
SC

 Three-Month Period
Ended September 30,		Nine-Month Period Ended September 30,QTD ChangeYTD Change
(dollars in thousands)2020201920202019Dollar increase/(decrease)PercentageDollar increase/(decrease)Percentage
Net interest income$1,061,986 $1,002,661 $3,058,137 $2,978,709 $59,325 5.9 %$79,428 2.7 %
Total non-interest income830,126 734,149 2,271,200 2,123,441 95,977 13.1 %147,759 7.0 %
Credit loss expense340,548 566,849 2,110,330 1,548,404 (226,301)(39.9)%561,926 36.3 %
Total expenses888,973 855,267 2,692,396 2,421,754 33,706 3.9 %270,642 11.2 %
Income before income taxes662,591 314,694 526,611 1,131,992 347,897 110.6 %(605,381)(53.5)%
Total assets48,448,921 47,279,015 48,448,921 47,279,015 1,169,906 2.5 %1,169,906 2.5 %
Commercial Banking
SC reported income before income taxes of $45.5$662.6 million and $134.5$526.6 million for the three-month and nine-month periods ended September 30, 2017,2020, respectively, compared to income before income taxes of $77.2 million and $118.2 million for the three-month and nine-month periods ended September 30, 2016. Factors contributing to these changes were as follows:

Net interest income decreased $4.1 million and increased $2.1 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. Total average gross loans were $11.6 billion and $11.6 billion for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $12.2 billion and $11.9 billion for the corresponding periods in 2016. The decline in average gross loans is primarily related to a decrease in the Middle Market portfolio.
Total non-interest income decreased $1.1 million and $5.4 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.
The provision for credit losses increased $26.0 million and decreased $16.6 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The increase in provision during the three-month period ended September 30, 2017 compared to the corresponding period in 2016 is driven by increased reserves within the Middle Market portfolio. The decrease in provision for the nine-month period ended September 30, 2017 is due to increased provisions required for the Energy Finance portfolio in the prior year that did not recur in 2017.
Total expenses increased $0.5 million and decreased $3.1 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.


116

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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


Commercial Real Estate
 Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 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$72,870
 $74,992
 $220,580
 $212,035
 $(2,122) (2.8)% $8,545
 4.0 %
Total non-interest income2,855
 5,124
 8,121
 16,445
 (2,269) (44.3)% (8,324) (50.6)%
Provision for credit losses(2,824) 2,945
 (8,784) 23,905
 (5,769) (195.9)% (32,689) (136.7)%
Total expenses17,530
 20,556
 57,162
 66,819
 (3,026) (14.7)% (9,657) (14.5)%
Income/(loss) before income taxes61,019
 56,615
 180,323
 137,756
 4,404
 7.8 % 42,567
 30.9 %
Intersegment revenue/(expense)(1)
500
 2,523
 1,997
 9,940
 (2,023) (80.2)% (7,943) (79.9)%
Total assets$14,073,894
 $15,005,335
 $14,073,894
 $15,005,335
 $(931,441) (6.2)% $(931,441) (6.2)%

Commercial Real Estate reported income before income taxes of $61.0 million and $180.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to income before income taxes of $56.6 million and $137.8 million for the three-month and nine-month periods ended September 30, 2016. Factors contributing to these changes were as follows:

Net interest income decreased $2.1 million and increased $8.5 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The average balance of this segment's gross loans decreased to $14.1 billion and $14.3 billion for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $15.2 billion and $15.3 billion for the corresponding periods in 2016. The balance decline is driven by higher runoff in the Multi-Family portfolio outpacing originations. The average balance of deposits was $778.4 million and $867.2 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $817.2 million and $788.1 million for the corresponding periods in 2016.
Total non-interest income decreased $2.3 million and $8.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.
The provision for credit losses decreased $5.8 million and $32.7 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared the corresponding periods in 2016. The decrease in provisions is primarily related to a provision release in the real estate construction portfolio.
Total expenses decreased $3.0 million and $9.7 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. Total assets were $14.1 billion as of September 30, 2017, compared to $15.0 billion as of September 30, 2016.

GCB
 Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 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$35,494
 $60,436
 $119,968
 $182,024
 $(24,942) (41.3)% $(62,056) (34.1)%
Total non-interest income23,205
 26,319
 48,808
 65,818
 (3,114) (11.8)% (17,010) (25.8)%
Provision for credit losses11,599
 (2,487) 23,871
 28,889
 14,086
 566.4 % (5,018) (17.4)%
Total expenses24,615
 26,830
 75,945
 89,952
 (2,215) (8.3)% (14,007) (15.6)%
Income/(loss) before income taxes22,485
 62,412
 68,960
 129,001
 (39,927) (64.0)% (60,041) (46.5)%
Intersegment revenue/(expense)(1)
(1,823) (702) (5,867) (780) (1,121) (159.7)% (5,087) (652.2)%
Total assets$6,109,131
 $10,551,939
 $6,109,131
 $10,551,939
 $(4,442,808) (42.1)% $(4,442,808) (42.1)%


117

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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


GCB reported income before income taxes of $22.5 million and $69.0 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to income before income taxes of $62.4 million and $129.0 million for the three-month and nine-month periods ended September 30, 2016. Factors contributing to these changes were as follows:

Net interest income decreased $24.9 million and $62.1 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The average balance of this segment's gross loans were $5.5 billion and $6.3 billion for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $8.8 billion and $9.5 billion for the corresponding periods in 2016. The average balance of deposits was $2.1 billion and $2.2 billion for the three-month and nine-month periods ended September 30, 2017, respectively, compared to $2.4 billion and $2.1 billion for the corresponding periods in 2016. The decrease in loan balances is attributed to the strategic goal of building a less capital intensive US franchise, which was attained by transferring assets to Santander by pro-actively reducing exposures for weaker credit clients related to the Commodities and Oil & Gas sectors.
Total non-interest income decreased $3.1 million and $17.0 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.
The provision for credit losses increased $14.1 million and decreased $5.0 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016. The provision for the three-month period ended September 30, 2017 is higher reserves required to Oil & Gas clients, while the provisions for the nine-month period ended September 30, 2017 is lower due to an overall lower need for an allowance related related to the Oil & Gas portfolio compared to the same period in 2016.
Total expenses decreased $2.2 million and $14.0 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.

Other
 Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 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$27,665
 $(45,680) $62,738
 $(8,180) $73,345
 160.6 % $70,918
 867.0 %
Total non-interest income181,047
 189,825
 548,945
 608,810
 (8,778) (4.6)% (59,865) (9.8)%
Provision for credit losses48,812
 4,426
 80,472
 31,247
 44,386
 1,002.8 % 49,225
 157.5 %
Total expenses234,270
 260,723
 739,912
 852,990
 (26,453) (10.1)% (113,078) (13.3)%
Income/(loss) before income taxes(74,370) (121,004) (208,701) (283,607) 46,634
 38.5 % 74,906
 26.4 %
Intersegment revenue/(expense)(1)
(3,372) (15,093) (9,909) (56,198) 11,721
 77.7 % 46,289
 82.4 %
Total assets$41,714,577
 $43,782,904
 $41,714,577
 $43,782,904
 $(2,068,327) (4.7)% $(2,068,327) (4.7)%

The Other category reported losses before income taxes of $74.4 million and $208.7 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to losses before income taxes of $121.0 million and $283.6 million for the three-month and nine-month periods ended September 30, 2016. Factors contributing to these changes were as follows:

Net interest income increased $73.3 million and $70.9 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.
Total non-interest income decreased $8.8 million and $59.9 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.
The provision for credit losses increased $44.4 million and $49.2 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.
Total expenses decreased $26.5 million and $113.1 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016.


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


SC
 Three-Month Period
Ended September 30,		 Nine-Month Period
Ended September 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$989,140
 $1,095,060
 $3,085,739
 $3,388,276
 $(105,920) (9.7)% $(302,537) (8.9)%
Total non-interest income496,728
 389,375
 1,363,948
 1,109,894
 107,353
 27.6 % 254,054
 22.9 %
Provision for credit losses536,447
 610,398
 1,692,015
 1,782,489
 (73,951) (12.1)% (90,474) (5.1)%
Total expenses671,648
 570,017
 1,910,365
 1,645,156
 101,631
 17.8 % 265,209
 16.1 %
Income/(loss) before income taxes277,773
 304,020
 847,307
 1,070,525
 (26,247) (8.6)% (223,218) (20.9)%
Intersegment revenue/(expense)(1)
—
 —
 —
 —
 —
 0%
 —
 0%
Total assets$38,765,557
 $38,771,636
 $38,765,557
 $38,771,636
 $(6,079) — % $(6,079) — %

SC reported income before income taxes of $277.8 million and $847.3 million for the three-month and nine-month periods ended September 30, 2017, respectively, compared to income before income taxes of $304.0$314.7 million and $1.1 billion for the three-month and nine-month periods ended September 30, 2016. Factors contributingof 2019. Contributing to these changes were as follows:were:


Net interest income•Credit loss expense decreased $105.9 million and $302.5$226.3 million for the three-month and nine-month periodsquarter ended September 30, 2017, respectively,2020 compared to the corresponding periods in 2016. Thethird quarter of 2019. This decrease was primarily related to an increase in interest expense during the period. SC's cost of funds increased during 2017 due to decreased net charge offs, offset by higher market rates andallowance reserves.
•Credit loss expense increased spreads.
Total non-interest income increased $107.4 million and $254.1$561.9 million for the three-month and nine-month periodsperiod ended September 30, 2017, respectively,2020 compared to the corresponding periods in 2016first nine months of 2019 due to large reserve builds in response to the continual growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.economic uncertainty related to COVID-19 outbreak.
The provision for credit losses decreased $74.0 million and $90.5•Total expenses increased $270.6 million for the three-month and nine-month periodsperiod ended September 30, 2017, respectively,2020 compared to the corresponding periods in 2016 primarily due to a lower build of the ACL as a result of the decline in originations during the nine-monthsnine-month period ended September 30, 2017, compared2019 due to increasing lease expense from depreciation on a larger lease portfolio.

Refer to the corresponding period in 2016.
Total expenses increased $101.6 million"Economic and $265.2 millionBusiness Environment" section of this MD&A for additional details on the three-monthimpact of the COVID-19 pandemic on the Company's current financial and nine-month periods ended September 30, 2017, respectively, compared to the corresponding periods in 2016, primarily due to the continual growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.



status, as well as its future financial and operational planning.
119
98




SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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




FINANCIAL CONDITION


LOAN PORTFOLIO


The Company's LHFI portfolioconsisted of the following at the dates indicated:
 September 30, 2017 December 31, 2016 September 30, 2016
 Amount Percent Amount Percent Amount Percent
 (dollars in thousands)
Commercial LHFI:           
Commercial real estate loans$9,690,850
 11.9% $10,112,043
 11.8% $10,165,990
 11.7%
Commercial and industrial loans and other commercial22,073,060
 27.1% 25,644,405
 29.9% 26,400,792
 30.4%
Multifamily8,293,232
 10.1% 8,683,680
 10.1% 9,021,275
 10.4%
Total Commercial Loans (1)
40,057,142
 49.1% 44,440,128
 51.8% 45,588,057
 52.5%
Consumer loans secured by real estate:           
Residential mortgages8,476,935
 10.4% 7,775,272
 9.1% 7,588,663
 8.7%
Home equity loans and lines of credit5,855,086
 7.2% 6,001,192
 7.0% 6,041,629
 7.0%
Total consumer loans secured by real estate14,332,021
 17.6% 13,776,464
 16.1% 13,630,292
 15.7%
Consumer loans not secured by real estate:           
RICs and auto loans - originated23,074,936
 28.3% 22,104,918
 25.8% 21,602,717
 24.9%
RICs and auto loans - purchased2,162,540
 2.7% 3,468,803
 4.0% 4,005,079
 4.6%
Personal unsecured loans1,262,591
 1.5% 1,234,094
 1.4% 1,219,942
 1.4%
Other consumer659,469
 0.8% 795,378
 0.9% 848,252
 0.9%
Total consumer loans41,491,557
 50.9% 41,379,657
 48.2% 41,306,282
 47.5%
Total LHFI$81,548,699
 100.0% $85,819,785
 100.0% $86,894,339
 100.0%
Total LHFI with:           
Fixed$49,274,614
 60.4% $51,752,761
 60.3% $53,357,078
 61.4%
Variable32,274,085
 39.6% 34,067,024
 39.7% 33,537,261
 38.6%
Total LHFI$81,548,699
 100.0% $85,819,785
 100.0% $86,894,339
 100.0%
    
September 30, 2020December 31, 2019Dollar Increase / (Decrease)Percent Increase (Decrease)
(dollars in thousands)AmountPercentAmountPercent
Commercial LHFI:
CRE$7,466,898 8.0 %$8,468,023 9.1 %$(1,001,125)(11.8)%
C&I16,289,708 17.6 %16,534,694 17.8 %(244,986)(1.5)%
Multifamily8,677,483 9.4 %8,641,204 9.3 %36,279 0.4 %
Other commercial7,217,276 7.8 %7,390,795 8.2 %(173,519)(2.3)%
Total commercial loans (1)
39,651,365 42.8 %41,034,716 44.4 %(1,383,351)(3.4)%
Consumer loans secured by real estate:
Residential mortgages7,132,279 7.7 %8,835,702 9.5 %(1,703,423)(19.3)%
Home equity loans and lines of credit4,288,526 4.6 %4,770,344 5.1 %(481,818)(10.1)%
Total consumer loans secured by real estate11,420,805 12.3 %13,606,046 14.6 %(2,185,241)(16.1)%
Consumer loans not secured by real estate:
RICs and auto loans40,615,831 43.7 %36,456,747 39.3 %4,159,084 11.4 %
Personal unsecured loans845,860 0.9 %1,291,547 1.4 %(445,687)(34.5)%
Other consumer243,245 0.3 %316,384 0.3 %(73,139)(23.1)%
Total consumer loans53,125,741 57.2 %51,670,724 55.6 %1,455,017 2.8 %
Total LHFI$92,777,106 100.0 %$92,705,440 100.0 %71,666 0.1 %
Total LHFI with:
Fixed$64,631,198 69.7 %$61,775,942 66.6 %2,855,256 4.6 %
Variable28,145,908 30.3 %30,929,498 33.4 %(2,783,590)(9.0)%
Total LHFI$92,777,106 100.0 %$92,705,440 100.0 %71,666 0.1 %
(1)As of September 30, 2017,2020, the Company had $240.3$377.9 million of commercial loans that were denominated in a currency other than the U.S. dollar.


Commercial


Commercial loans decreased approximately $4.4$1.4 billion, or 9.9%3.4%, from December 31, 20162019 to September 30, 2017, and decreased $5.5 billion, or 12.1%, from September 30, 2016 to September 30, 2017. The2020. This decrease from December 31, 2016 to September 30, 2017 was primarily due to a decreasecomprised of decreases in commercial and industrialCRE loans of $3.6$1.0 billion which included payoffs to approximately 1,050 loans totaling $1.2 billion. Additionally, there was a decrease in multifamilyC&I loans of $390.4 million as$245.0 million. This decrease is reflective of the Company switches its focus to commercial real estate banking. Commercial real estatesale of SBC, largely in the CRE and C&I portfolios, offset by originations of C&I loans, decreased $421.2 million.including PPP loans.
At September 30, 2017, MaturingAt September 30, 2020, Maturing
In One Year
Or Less
 
One to Five
Years
 
After Five
Years
 
Total(1)
(in thousands)
Commercial real estate loans$2,374,562
 $5,734,318

$1,581,970
 $9,690,850
Commercial and industrial loans and other8,971,086
 11,299,673

1,885,580
 22,156,339
Multi-family loans869,308
 6,358,473

1,065,451
 8,293,232
(in thousands)(in thousands)In One Year
Or Less		One to Five
Years		After Five
Years
Total (1)
CRE loansCRE loans$1,732,855 $4,749,945 $984,098 $7,466,898 
C&I and other commercialC&I and other commercial10,083,493 11,904,885 1,662,703 23,651,081 
Multifamily loansMultifamily loans1,015,231 5,139,760 2,522,492 8,677,483 
Total$12,214,956

$23,392,464

$4,533,001
 $40,140,421
Total$12,831,579 $21,794,590 $5,169,293 $39,795,462 
Loans with:       Loans with:
Fixed rates$3,750,183
 $10,359,663

$1,638,295
 $15,748,141
Fixed rates$4,430,884 $9,957,281 $3,024,440 $17,412,605 
Variable rates8,464,773
 13,032,801

2,894,706
 24,392,280
Variable rates8,400,695 11,837,309 2,144,853 22,382,857 
Total$12,214,956

$23,392,464

$4,533,001
 $40,140,421
Total$12,831,579 $21,794,590 $5,169,293 $39,795,462 
(1) Includes LHFS.

99
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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


Consumer Loans Secured By Real Estate


Consumer loans secured by real estate increased $555.6 million,decreased $2.2 billion, or 4.0%16.1%, from December 31, 20162019 to September 30, 2017, and increased $701.7 million, or 5.1%, from September 30, 2016 to September 30, 2017. The increase from December 31, 2016 to September 30, 20172020. This decrease was comprised of an increasedecreases in the residential mortgage portfolio of $701.7 million due$1.7 billion, which is partially attributable to an increase in new loan originations, offset by a decreasethe sale of SBC, and decreases in the home equity loans and lines of credit portfolio of $146.1$481.8 million.


The increase from September 30, 2016 to September 30, 2017 was due to an increase in the residential mortgage portfolio of $888.3 million, offset by a decrease in the home equity and lines of credit portfolio of $186.5 million.

Consumer Loans Not Secured By Real Estate


The consumer loan portfolio not secured by real estate decreased $443.7 million,RICs and auto loans

RICs and auto loans increased $4.2 billion, or 1.6%11.4%, from December 31, 20162019 to September 30, 2017, and decreased $516.5 million, or 1.9%, from September 30, 2016 to September 30, 2017. These decreases2020. The increase in the RIC and auto loan portfolio were primarily due to a decrease in the RIC and auto loan portfolio - purchased portfolio of $1.3 billion which was offset by a $1.0 billion increase in new originations. This decrease is due to run-off of the portfolio from normal paydown and chargeoff activity.

The decrease from September 30, 2016 to September 30, 2017 was primarily due to a decrease in the RICs and auto loans - purchased portfolio of $1.8 billion, offset by an increase in new originations, net of $1.5 billion.securitizations. RICs are collateralized by vehicle titles, and the lender has the right to repossess the vehicle in the event the consumer defaults on the payment terms of the contract. Most of the Company's RICs HFI are pledged against warehouse lines or securitization bonds. Refer to further discussion of these in Note 9 to the Condensed Consolidated Financial Statements.


As of September 30, 2017, 70.2%2020, 62.9% of the Company's RIC and auto loan portfolio balance was comprised of nonprime loans (defined(defined by the Company as customers with a Fair Isaac Corporation ("FICO®") score of below 640) with customers who did not qualify for conventional consumer finance products as a result of, among other things, a lack of or adverse credit history, low income levels and/or the inability to provide adequate down payments. payments. This also includes 10.7% of loans for which no FICO score is available or legacy portfolios for which FICO is not considered in the ALLL model. While underwriting guidelines wereare designed to establish that the customer would be a reasonable credit risk, nonprime loans will nonetheless experience higher default rates than a portfolio of obligations of prime customers. Additionally, higher unemployment rates, higher gasoline prices, unstable real estate values, re-sets of adjustable rate mortgages to higher interest rates, the general availability of consumer credit, and other factors that impact consumer confidence or disposable income could lead to an increase in delinquencies, defaults, and repossessions, as well as decreasedecreased consumer demand for used automobiles and other consumer products, weaken collateral values and increase losses in the event of default. Because SC's historical focus for such credit has been predominantly on nonprime consumers, the actual rates of delinquencies, defaults, repossessions, and losses on these loans could be more dramatically affected by a general economic downturn.

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

  September 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)
 5.0% 59.6% 5.5% 61.7%
<600 61.4% 20.5% 60.1% 20.6%
600-639 19.0% 9.5% 19.4% 7.9%
>=640 14.6% 10.4% 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 $762.6 million and $924.7 million of LHFS at September 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.

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



At September 30, 2017,2020, a typical RIC was originated with an average annual percentage rate of 16.1%13.8% and was purchased from the dealer at a discountpremium of 1.2%1.0%. All of the Company's RICs and auto loans are fixed-rate loans.


Nonprime RICs and personal unsecured loans have a higher inherent risk of loss than prime loans. The Company records an ALLL to cover its estimate of inherent losses on its RICs incurred as of the balance sheet date. As of

Personal unsecured and other consumer loans

Personal unsecured and other consumer loans decreased from December 31, 2019 to September 30, 2017, SC's personal unsecured portfolio was held for sale and thus does not have a related allowance.2020 by $518.8 million.


As a result of the strategic evaluation of SC's personal lending portfolio, in the third quarter of 2015, SC began reviewing strategic alternatives for exiting its personal loan portfolios. In connection with this review, on October 9, 2015, SC delivered a 90-day notice of termination of its loan purchase agreement with LendingClub. On February 1, 2016, SC completed the sale of substantially all of its LendingClub loans to a third-party buyer at an immaterial premium to par value. On April 14, 2017, SC sold the remaining portfolio, comprised of personal installment loans, to a third-party buyer.

SC's other significant personal lending relationship is with Bluestem. SC continues to perform in accordance with the terms and operative provisions of the agreements under which it is obligated to purchase personal revolving loans originated by Bluestem for a term ending in 2020, or 2022 if extended at Bluestem's option. The Bluestem loan portfolio is carried as held for saleheld-for-sale in our Condensed Consolidated Financial Statements. Accordingly, the Company has recorded lower-of-cost-or-market adjustments on this portfolio, and there may be further such adjustmentsadjustments required in future periods'period 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 As of September 30, 2020, SC's personal unsecured portfolio was held-for-sale and interest due on loans willthus does 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 credit quality, authority to approve loans are executed in accordance with the Company’s credit and governance standards consistent with its Enterprise Risk Management Framework. Loans over certain dollar thresholds require approval by the Company's credit committees, with higher balance loans requiring approval by more senior level committees.

The Credit Risk Review group conducts ongoing independent reviews of the credit quality of the Company’s loan portfolios and credit management processes to ensure the accuracy of the risk ratings and adherence to established policies and procedures, verify compliance with applicable laws and regulations, provide objective measurement of the risk inherent in the loan portfolio, and ensure that proper documentation exists. The results of these periodic reviews are reported to business line management, Risk Management and the Audit Committee of both the Company and the Bank. The Company maintains a classification system for loans that identifies those requiring a higher level of monitoring by management because of one or more factors, including borrower performance, business conditions, industry trends, the nature of the collateral, collateral margin, economic conditions, or other factors. Loan credit quality is subject to scrutiny by 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.

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.

allowance.
122
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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
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.

123

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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:
Period EndedChange
September 30, 2017 December 31, 2016
(dollars in thousands)
(dollars in thousands)(dollars in thousands)September 30, 2020December 31, 2019DollarPercentage
Non-accrual loans:   Non-accrual loans:  
Commercial:   Commercial:  
Commercial real estate$146,916
 $179,220
Commercial and industrial loans and other commercial204,856
 193,465
CRECRE$95,621 $83,117 $12,504 15.0 %
C&IC&I102,274 153,428 (51,154)(33.3)%
Multifamily10,715
 8,196
Multifamily51,349 5,112 46,237 904.5 %
Other commercialOther commercial16,984 31,987 (15,003)(46.9)%
Total commercial loans362,487
 380,881
Total commercial loans266,228 273,644 (7,416)(2.7)%
Consumer: 
  
Consumer loans secured by real estate:Consumer loans secured by real estate:  
Residential mortgages284,415
 287,140
Residential mortgages164,001 134,957 29,044 21.5 %
Consumer loans secured by real estate116,482
 120,065
RICs and auto loans - originated1,553,954
 1,045,587
RICs - purchased274,374
 284,486
Personal unsecured and other consumer15,805
 17,895
Home equity loans and lines of creditHome equity loans and lines of credit94,872 107,289 (12,417)(11.6)%
Consumer loans not secured by real estate:Consumer loans not secured by real estate:
RICs and auto loansRICs and auto loans967,101 1,643,459 (676,358)(41.2)%
Personal unsecured loansPersonal unsecured loans— 2,212 (2,212)(100.0)%
Other consumerOther consumer7,135 11,491 (4,356)(37.9)%
Total consumer loans2,245,030
 1,755,173
Total consumer loans1,233,109 1,899,408 (666,299)(35.1)%
Total non-accrual loans2,607,517
 2,136,054
Total non-accrual loans1,499,337 2,173,052 (673,715)(31.0)%
   
Other real estate owned146,362
 116,705
Other real estate owned43,015 66,828 (23,813)(35.6)%
Repossessed vehicles157,757
 173,754
Repossessed vehicles249,572 212,966 36,606 17.2 %
Other repossessed assets1,711
 3,838
Other repossessed assets3,206 4,218 (1,012)(24.0)%
Total other real estate owned and other repossessed assets305,830
 294,297
Total OREO and other repossessed assetsTotal OREO and other repossessed assets295,793 284,012 11,781 4.1 %
Total non-performing assets$2,913,347
 $2,430,351
Total non-performing assets$1,795,130 $2,457,064 $(661,934)(26.9)%
   
Past due 90 days or more as to interest or principal and accruing interest$96,256
 $93,846
Past due 90 days or more as to interest or principal and accruing interest$45,117 $93,102 $(47,985)(51.5)%
Annualized net loan charge-offs to average loans (1)
2.9% 2.7%
Annualized net loan charge-offs to average loans (1)
1.9 %2.8 %   n/a   n/a
Non-performing assets as a percentage of total assets2.2% 1.8%Non-performing assets as a percentage of total assets1.2 %1.6 %   n/a   n/a
Non-performing loans ("NPLs") as a percentage of total loans3.1% 2.4%
NPLs as a percentage of total loansNPLs as a percentage of total loans1.6 %2.3 %   n/a   n/a
ALLL as a percentage of total NPLs151.7% 178.6%ALLL as a percentage of total NPLs493.5 %167.8 %   n/a   n/a
(1) Annualized net loan charge-offs to average loansare based on year-to-date charge-offs.

The increase in the ALLL as a percentage of total NPLs is calculated as annualized net loan charge-offs divided bya result of the average loan balance foradoption of the year-to-date period ended September 30, 2017.CECL standard effective January 1, 2020.


Potential problem loans are loans not currently classified as NPLs for which management has doubts about the borrowers’ ability to comply with the present repayment terms. These assets are principally loans delinquent for more than 30 days but less than 90 days. Potential problem commercial loans totaled approximately $242.1$262.7 million and $120.7$179.9 million at September 30, 20172020 and December 31, 2016,2019, respectively. This increase was primarily due to one large borrower within the Other Commercial portfolio.

Potential problem consumer loans amounted to $4.4$2.7 billion and $4.3$4.7 billion at September 30, 20172020 and December 31, 2016,2019, respectively. Management has included these loans in its evaluation of the Company's ACL and reserved for them during the respective periods.


Non-performing assets increased during the perioddecreased to $2.9$1.8 billion, or 2.2%1.2% of total assets, at September 30, 2017,2020, compared to $2.4$2.5 billion, or 1.8%1.6% of total assets, at December 31, 2016, primarily attributable2019, due to an increase inlower NPLs in the commercial and industrial and RIC portfolios, offset by a decrease in the mortgage and home equity loan portfolios.resulting from COVID-19 deferral program.

General

Non-performing assets consist of NPLs, which represent loans and leases no longer accruing interest, other real estate owned ("OREO") properties, and other repossessed assets. When interest accruals are suspended, accrued but uncollected interest income is reversed, with accruals charged against earnings. The Company generally places all commercial loans and consumer loans secured by real estate on non-performing status at 90 days past due for interest, principal or maturity, or earlier if it is determined that the collection of principal or interest on the loan is in doubt. For certain individual portfolios, including the RIC portfolio, non-performing status will begin at 60 days past due. Personal unsecured loans, including credit cards, generally continue to accrue interest until they are 180 days delinquent, at which point they are charged-off and all accrued but uncollected interest is removed from interest income. 


124
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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
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 decreased $18.4$7.4 million from December 31, 20162019 to September 30, 2017. At both2020. Commercial NPLs accounted for 0.7% of commercial LHFI at September 30, 20172020 and December 31, 2016, commercial NPLs accounted for 0.9% of commercial LHFI.2019, respectively. The decrease in commercial NPLs was primarily comprised of a $32.3decreases of $51.2 million in C&I offset by increases of $46.2 million in the commercial real estate portfolio, offset by a $11.4 million increase in commercial and industrial NPLs.Multifamily 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 September 30, 2017 and December 31, 2016, respectively:
 September 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$284,415
 $116,482
 $287,140
 $120,065
Total LHFI8,476,935
 5,855,086
 7,775,272
 6,001,192
NPLs as a percentage of total LHFI3.4% 2.0% 3.7% 2.0%
NPLs in foreclosure status50.8% 32.9% 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 greatermore than 60 days past dueDPD (i.e., 61 or more DPD) with respect to principal or interest. Except for loans accounted for using the FVO, at the time a loan is placed on non-performing status, previously accrued and uncollected interest is reversed against interest income. When an account is 60 days or less past due, it is returned to 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.


Interest is accruedRIC TDRs are placed on non-accrual status 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 foraccount becomes past due classification purposes.more than 60 days. For RICs originated after January 1, 2017,loans in non-accrual status, interest income is recognized on a cash basis. For loans on non-accrual status, the required minimum paymentaccrual of interest is 90% of the scheduled payment, regardless of through which origination channel the receivable was originated. The Company aggregates partial payments in determining whetherresumed if a full payment has been missed in computingdelinquent account subsequently becomes 60 days or less past due status.

due. NPLs in the RIC and auto loan portfolio increased $498.3decreased by $676.4 million from December 31, 20162019 to September 30, 2017. The increase was comprised of a $508.4 million increase in RICs and auto loans-originated offset by a $10.1 million decrease in RICs - purchased. At September 30, 2017, non-performing2020. Non-performing RICs and auto loans accounted for 7.2% of total RIC2.4% and auto LHFI, compared to 5.2%4.5% of total RICs and auto loans at December 31, 2016. NPLs in the unsecured and other consumer loan portfolio decreased $2.1 million from December 31, 2016 to September 30, 2017. At September 30, 20172020 and December 31, 2016, non-performing personal unsecured and other consumer loans accounted for 0.8% and 0.9% of total unsecured and other consumer loans,2019, respectively.


125Consumer Loans Secured by Real Estate

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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


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% atSeptember 30, 2020 and December 31, 2016 to 50.8% at September 30, 2017 for residential mortgages and from 38.4% at December 31, 2016 to 32.9% at September 30, 2017 for Home Equity loans.2019, respectively:

September 30, 2020December 31, 2019
(dollars in thousands)Residential mortgagesHome equity loans and lines of creditResidential mortgagesHome equity loans and lines of credit
NPLs - HFI$164,001 $94,872 $134,957 $107,289 
Total LHFI7,132,279 4,288,526 8,835,702 4,770,344 
NPLs as a percentage of total LHFI2.3 %2.2 %1.5 %2.2 %
The dollar value of NPLs in foreclosure status decreased from $168.2 million at December 31, 2016 to $144.4 million at September 30, 2017 for residential mortgages and from $46.2 million at December 31, 2016 to $38.3 million at September 30, 2017 for home equity loans.

The NPL ratio is significantlyusually higher for the Company's residential mortgage loan portfolio compared to its consumerthe home equity loans secured by real estateand lines of credit 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.

In recent years, select states within the Bank’s footprint have experienced delays in the foreclosure process and therefore, impact NPL volume. Counties in New Jersey have historically displayed significant delays in foreclosure sale timelines and New York has been experiencing similar court delays which impacts foreclosure inventory outflow.

Puerto Rico’s economy remains in an economic and fiscal crisis that has already extended for 11 years. The island’s economy continues experiencing adjustments related to the aftermath Foreclosures on consumer loans secured by real estate were $258.9 million or 32.0% of the housing market crisis, the banking industry consolidation in 2010 and multiple rounds of austerity measures implemented in recent years in an attempt to stabilize the public sector fiscal crisis. These circumstances have eroded confidence and prolonged the contraction in economic activity. Refer to the Economic and Business Environment section of MD&A for additional information on the impact of Hurricane Maria on Puerto Rico.

The following table represents the concentration of foreclosuresnon-performing consumer loans secured by state and U.S territory for the Company as a percentage of total foreclosuresreal estate at September 30, 20172020, compared to $242.2 million and 45.9% of consumer loans secured by real estate at December 31, 2016, respectively:2019.
102


 September 30, 2017 December 31, 2016
    
Puerto Rico60.6% 60.0%
New York6.7% 10.7%
Massachusetts3.4% 7.0%
All other states(1)
29.3% 22.3%

(1)States included in this category individually represent less than 10%
Item 2.    Management’s Discussion and Analysis of total foreclosures.Financial Condition and Results of Operations



Delinquencies

The foreclosure closings issue has a greater impact onCompany generally considers an account delinquent when an obligor fails to pay substantially all (defined as 90%) of the residential mortgagescheduled payment by the due date.    

Overall, total delinquencies decreased by $2.2 billion, or 38.5%, from December 31, 2019 to September 30, 2020, most significantly within the RICs and auto loan portfolio, than the consumer real estate secured portfolio which decreased $2.1 billion. Delinquent balances and nonaccrual balances overall were lower as of September 30, 2020 primarily due to the larger volumelarge number of loans in first lien position in that portfolio which have equity upon whichdeferrals granted to foreclose. Exclusive of Chapter 7 bankruptcy NPL accounts, approximately 98.8% of the 90+ day delinquent loan balances in the residential mortgage portfolio are securedborrowers impacted by a first lien, while only 54.4% 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.COVID-19.

Alt-A Loans

TDRs
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 September 30, 2017 and December 31, 2016, the residential mortgage portfolio included the following Alt-A loans:
 September 30, 2017 December 31, 2016
 (dollars in thousands)
    
Alt-A loans$408,735
 $476,229
Alt-A loans as a percentage of the residential mortgage portfolio(1)
4.7% 5.8%
Alt-A loans in NPL status$39,413
 $48,189
Alt-A loans in NPL status as a percentage of residential mortgage NPLs13.9% 16.8%
(1) Includes residential mortgage held for sale

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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


The performance of the Alt-A segment has remained poor, averaging a 9.6% NPL ratio in 2017. Alt-A mortgage originations were discontinued in 2008 and have continued to run off at an average rate of 1.5% per month. Alt-A NPL balances represented 64.6% of the total residential mortgage loan portfolio NPL balance at the end of the first quarter of 2009, when the portfolio was placed in run-off, compared to 13.9% at September 30, 2017. 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.


Troubled Debt Restructurings ("TDRs")


TDRs are loans that have been modified as the Company has agreed to make certain concessions to both meet the needs of the customers and maximize its ultimate recovery on the loans. TDRs occur when a borrower is experiencing or is expected to experience, financial difficulties and the loan is modified with terms that would otherwise not be granted to the borrower. The types of concessions granted are generally interest rate reductions, limitations on accrued interest charged, term extensions, and deferments of principal.


TDRs are generally placed inon nonaccrual status upon modification, unless the loan was performing immediately prior to modification. For most portfolios, TDRs may return to accrual status after demonstrating at least six consecutive monthsa sustained period of sustained payments following modification,repayment performance, as long as the Company believes the principal and interest of the restructured loan will be paid in full. RIC TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured and, at the latest, when the account becomes more than 60 DPD. RIC TDRs are considered for return to accrual when a sustained period of repayment performance has been achieved.the account becomes 60 days or less past due. 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 September 30, 2020
(in thousands)Commercial%Consumer Loans Secured by Real Estate%RICs and Auto Loans%Other Consumer%Total TDRs
Performing$77,377 42.7 %$97,685 49.5 %$3,499,277 91.5 %$35,785 97.3 %$3,710,124 
Non-performing103,926 57.3 %99,813 50.5 %324,340 8.5 %994 2.7 %529,073 
Total$181,303 100.0 %$197,498 100.0 %$3,823,617 100.0 %$36,779 100.0 %$4,239,197 
% of loan portfolio0.5 %n/a1.7 %n/a9.4 %n/a3.4 %n/a4.6 %
(1) Excludes LHFS.
As of December 31, 2019
(in thousands)Commercial%Consumer Loans Secured by Real Estate%RICs and Auto Loans%Other Consumer%Total TDRs
Performing$64,538 49.5 %$182,105 67.8 %$3,332,246 86.6 %$67,465 91.7 %$3,646,354 
Non-performing65,741 50.5 %86,335 32.2 %515,573 13.4 %6,128 8.3 %673,777 
Total$130,279 100.0 %$268,440 100.0 %$3,847,819 100.0 %$73,593 100.0 %$4,320,131 
% of loan portfolio0.3 %n/a2.0 %n/a10.6 %n/a4.6 %n/a4.7 %
(1) Excludes LHFS.
 September 30, 2017 December 31, 2016
 (in thousands)
Performing   
Commercial$162,147
 $214,474
Residential mortgage282,646
 268,777
RICs and auto loans5,385,839
 4,556,770
Other consumer128,905
 129,767
Total performing5,959,537
 5,169,788
Non-performing   
Commercial137,596
 148,038
Residential mortgage124,346
 139,274
RICs and auto loans638,036
 604,864
Other consumer41,958
 44,951
Total non-performing941,936
 937,127
Total$6,901,473
 $6,106,915
103


Performing TDRs totaled $6.0 billion at September 30, 2017, an increase


Item 2.    Management’s Discussion and Analysis of $789.7 million compared to December 31, 2016. Non-performing TDRs totaled $941.9 million at September 30, 2017, an increaseFinancial Condition and Results of $4.8 million compared to December 31, 2016.Operations



The following table provides a summary of TDR activity:
 Nine-Month Period Ended September 30, 2017 Nine-Month Period Ended September 30, 2016Nine-Month Period Ended September 30, 2020Nine-Month Period Ended September 30, 2019
 RICs and auto loans All other loans RICs and auto loans 
All other loans(1)
 (in thousands)
(in thousands)(in thousands)RICs and Auto Loans
All Other Loans(1)
RICs and Auto Loans
All Other Loans(1)
TDRs, beginning of period $5,161,935
 $944,981
 $3,877,660
 $923,857
TDRs, beginning of period$3,847,819 $472,312 $5,251,769 $670,584 
New TDRs(1)
 3,175,818
 209,551
 2,654,582
 63,137
New TDRs(1)
1,442,007 189,658 912,394 66,106 
Charged-Off TDRs (1,538,242) (230,672) (1,167,132) (16,609)Charged-Off TDRs(574,501)(5,803)(1,093,934)(8,657)
Sold TDRs (8,092) (9,239) 5,351
 (7,452)Sold TDRs(27,397)(163,210)(1,363)(5,991)
Payments on TDRs (767,544) (37,023) (516,270) (97,521)Payments on TDRs(864,311)(77,377)(902,745)(110,780)
TDRs, end of period $6,023,875
 $877,598
 $4,854,191
 $865,412
TDRs, end of period$3,823,617 $415,580 $4,166,121 $611,262 
(1)    New TDRs includes drawdowns on lines of credit that have previously been classified as TDRs.


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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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


Commercial

Performing commercial TDRs were $162.1 million, or 54.1% ofThe decrease in total commercial TDRs at September 30, 2017 compared to $214.5 million, or 59.2% of total commercial TDRs at December 31, 2016. The change in performing commercialdelinquent TDRs is primarily attributabledue to payoffs from twothe significant borrowers who were current and performing. The increase in non-performing commercial TDRs can be attributeddeferrals provided to four significant new obligors being modified during the period, comprising $75.3 million of the increase.borrowers in response to COVID-19 impacts.

Residential Mortgages

Performing residential mortgage TDRs increased from $268.8 million, or 65.9% of total residential mortgage TDRs at December 31, 2016, to $282.6 million, or 69.4% of total residential TDRs at September 30, 2017.

RICs

The RIC and auto LHFI is primarily comprised of nonprime loans (70.2% at September 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 23.2% at September 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 itsthe Company’s policies and guidelines, the Company at times offers payment deferralsmay offer extensions (deferrals) to borrowersconsumers on its RICs, under whichwhereby the consumer is allowed to move up toa maximum of three delinquent payments per event to the end of the loan. More than 90% of deferrals granted are for two months. The Company’s policies and guidelines limit the number and frequency of deferralseach new deferral that may be granted to one deferral every six months, andregardless of the length of any prior deferral. The maximum number of lifetime months extended for all automobile RICs was eight, months over the life of a loan, while some marine and RV contracts havehad a maximum of twelve months in extensionsextended 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. However, many of these practices have been temporarily revised to accommodate borrowers impacted by COVID-19, including increasing the maximum number of extensions, allowing more than one deferral every six months and removing the requirement that a requisite number of months have passed since origination. During the deferral period, the Company continues to accrue and collect interest on the loan in accordance with the terms of the deferral agreement.


At the time a deferral is granted, all delinquent amounts may be deferred or paid, resultingpaid. This may result in the classification of the loan as current and therefore not considered a delinquent account. Thereafter,However, there are other instances when a deferral is granted but the loan is not brought completely current, such as when the account days past due is greater than the deferment period granted. Such accounts are aged based on the timely payment of future installments in the same manner as any other account. TDRsHistorically, the majority of deferrals on RICs are placedapproved for borrowers who are either 31-60 or 61-90 DPD and these borrowers are typically reported as current after deferral. For the RIC portfolio, if a customer receives two or more deferrals over the life of the loan, the loan would generally advance to a TDR designation.

However in March 2020, the federal banking agencies issued an “Interagency Statement on nonaccrual status whenLoan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus.” This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19 and concludes that short-term modifications (e.g., six months) made on a good faith basis to borrowers who were impacted by COVID-19 and who were less than 30 days past due as of the implementation date of a relief program are not TDRs. Additionally, Section 4013 of the CARES Act grants companies the option of not applying the GAAP TDR guidance to certain loans with COVID-19 modifications.

In March 2020, the Company believes repayment underbegan actively working with its borrowers impacted by COVID-19 and provided loan modification programs to mitigate the revised terms is not reasonably assured,adverse effects of COVID-19. In both its consumer and consideredcommercial portfolios, the programs generally include payment deferrals for return to accrual when a sustained period of repayment performanceone to six months. In the Company's RIC and auto loan portfolio, the predominant program offering is a deferral of payments to the end of the loan term and waiver of late charges of up to three months. For credit cards, we offer a temporary payment reduction program for a period of up to three months. Payment deferrals on mortgages can be for up to one year. The Company does not consider payment deferrals of up to six months to customers who were current prior to implementation of the Company's relief programs to be TDRs, in accordance with its accounting policy and interagency regulatory guidelines. Additionally, the Company applies the TDR provisions of the CARES Act to certain consumer loans that received COVID19 modifications, if they were current as of December 31, 2019. Consumer loans that are granted deferrals beyond 180 days are not classified as TDRs if they comply with the requirements of the CARES Act.

Since the implementation of the programs in March 2020, we experienced a sharp increase in requests for relief related to COVID-19 nationwide and a significant number of such extensions have been granted. Through September 30, 2020 the Bank had granted extensions to approximately 43,000 unique customer accounts totaling approximately $7.0 billion in connection with COVID-19. Additionally, SC has granted over 911,000 loan extensions to 645,000 unique customer accounts totaling approximately $11 billion of loans that have been achieved.granted a COVID-19 deferral.


The following table provides a summary of SBNA and SC loan balances with active payment deferrals due to COVID-19 as of the end of each reporting period:
104




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



September 30, 2020June 30, 2020
Loan balance of active extensions (1)
% of Portfolio
Loan balance of active extensions (1)
% of Portfolio
Santander Bank
Commercial$949,6192.7%$4,274,15012.0%
Consumer (including SBNA RICs)441,2662.2%1,367,4146.6%
Total SBNA$1,390,8852.5%$5,641,56411.2%
Santander Consumer
RICs$959,2362.9%$3,753,71712.3%
(1) Santander Consumer balances exclude deferrals with payments due in the current month.

As of September 30, 2020, approximately 11% of SBNA customer accounts that received extensions were active, 82% had exited deferral, and 7% had paid down or charged off. Of the loans that have exited deferral status, 98% of the loan balances are less than 30 days past due.

As of September 30, 2020, approximately 33% of SC's unique customer accounts have required COVID-19 assistance. Of these accounts, 86% have exited deferral status, 7% remain in active deferral, 5% have paid-off, and 2% have charged off. Of the loans that have exited deferral status, 85% are less than 30 days past due and 96% of these accounts have made at least one payment since their first COVID-19 extension.

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.charged-off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent deferrals impact the ultimate timing of when an account is charged off,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.credit loss expense. Changes in these ratios and periods are considered in determining the appropriate level of the ALLL and related provision for loan and lease losses.credit loss expense. 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 lossesloss expense 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.



128CREDIT RISK

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 decreased from $129.8 million, or 74.3% of total other consumer loan TDRs, at December 31, 2016, to $128.9 million, or 75.4% of total other consumer loan TDRs, at September 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 September 30, 2017 and December 31, 2016, the Company's delinquencies consisted of the following:
 September 30, 2017 December 31, 2016
 Consumer Loans Secured by Real EstateRICs and auto loansOther Consumer LoansCommercial LoansTotal Consumer Loans Secured by Real EstateRICs and auto loansOther Consumer LoansCommercial LoansTotal
 (dollars in thousands)
Total Delinquencies$618,995$4,314,809$242,608$383,798$5,560,210 $568,517$4,261,192$245,588$257,152$5,332,449
Total Loans(1)
$14,544,659$26,000,107$2,851,609$40,140,421$83,536,796 $14,239,357$26,498,469$3,107,074$44,561,193$88,406,093
Delinquencies as a % of Loans4.3%16.6%8.5%1.0%6.7% 4.0%16.1%7.9%0.6%6.0%

(1) Includes LHFS.

Overall, total delinquencies increased by $227.8 million, or 4.3%, from December 31, 2016 to September 30, 2017. Consumer loans secured by real estate delinquencies increased $50.5 million, primarily due to a decrease in credit quality in the residential mortgage portfolio. RICs and auto loan and other consumer loan delinquencies increased $53.6 million and decreased $3.0 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 $126.6 million.


ALLOWANCE FOR CREDIT LOSSES ("ACL")

The ACL is maintained at levels management considers adequate to provide for losses based upon an evaluation of known and inherent risks in the loan portfolio. Management's evaluation takes into consideration the risksrisk inherent in the portfolio, pastCompany’s loan and lease loss experience, specific loansportfolios is driven by credit and collateral quality, and is affected by borrower-specific and economy-wide facts such as changes in employment, GDP, HPI, CRE price index, used car prices, and other factors. In general, there is an inverse relationship between credit quality of transactions and projections of impairment losses so that transactions with loss potential,better credit quality require a lower expected loss. The Company manages this risk through its underwriting, pricing and credit approval guidelines and servicing policies and practices, as well as geographic and industry concentrations, delinquency trends, the level of originations, credit quality metrics such as FICOscores and CLTV, internal risk ratings, economic conditions and other relevant factors. While management uses the best information available to make such evaluations, future adjustmentsconcentration limits.
The Company's ACL is principally based on various models subject to the ACL may be necessary if conditions differ substantially fromCompany's Model Risk Management Framework. New models are approved by the assumptions used in making the evaluations.


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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 ALLLCompany's Model Risk Management Committee. Models, inputs and documentation are further reviewed and validated at least annually, and the percentage of each loan type to total LHFI at the dates indicated:
 September 30, 2017 December 31, 2016
 Amount 
% of Loans
to Total LHFI
 Amount % of Loans
to Total LHFI
 (dollars in thousands)
Allocated allowance:       
Commercial loans$424,791
 49.1% $449,837
 51.8%
Consumer loans3,484,331
 50.9% 3,317,604
 48.2%
Unallocated allowance47,023
 n/a
 47,023
 n/a
Total ALLL3,956,145
 100.0% 3,814,464
 100.0%
Reserve for unfunded lending commitments116,086
   122,418
  
Total ACL$4,072,231
   $3,936,882
  

General

The ACL increased $135.3 million from December 31, 2016 to September 30, 2017. The increase in the overall ACL was primarily attributable to the increased amount of TDR's within SC's RIC and auto loan portfolio, and $37.0 million of reserves booked for possible losses from Hurricane Maria.

Management regularly monitors the condition of the Company's portfolio, considering factors such as historical loss experience, trends in delinquencies and NPLs, changes in risk composition and underwriting standards, the experience and ability of staff, and regional and national economic conditions and trends.

Generally, the Company’s LHFI are carried at amortized cost, net of ALLL, which includes the estimate of any related net discounts that are expected at the time of charge-off. In the case of loans purchased inCompany completes 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 comprehensivedetailed variance analysis of the ACLhistorical model projections against actual observed results on a quarterly basis. In addition,Required actions resulting from the Company performs a review each quarter of allowance levels and trendsCompany's analysis, if necessary, are governed by major portfolio against the levels of peer banking institutions to benchmark our allowance and industry norms.its ACL Committee.

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.



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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



A loan is consideredManagement uses the qualitative framework to be impaired when, based upon current informationexercise judgment about matters that are inherently uncertain 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,considered by the Company may perform a specific reserve analysis on loans that fail to meet this threshold ifquantitative framework. These adjustments are documented and reviewed through 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 impairedCompany’s risk management processes. Furthermore, management reviews, updates, 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 impairedvalidates its process and is not collateral-dependent, impairment is measured basedloss assumptions on a discounted cash flow ("DCF") methodology.periodic basis. This process involves an analysis of data integrity, review of loss and credit trends, a retrospective evaluation of actual loss information to loss forecasts, and other analyses.


WhenACL levels are collectively reviewed for adequacy and approved quarterly. Required actions resulting from the Company determines thatCompany's analysis, if necessary, are governed by its ACL Committee. The ACL levels are approved by the value of an impaired loan is less than its carrying amount, the Company recognizes impairment through a provision estimate or a charge-offBoard-level committees quarterly.

ACL

Changes 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-offsACL 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 relateddiscussed in Note 3 to the commercial portfolio was $424.8 million at September 30, 2017 (1.1% of commercial LHFI) and $449.8 million at December 31, 2016 (1.0% of commercial LHFI). The primary factor resulting in the decreased ACL allocated to the commercial portfolio is, in part, due to the current economic environment impacting our commercial customers, primarily in the energy sector. Management recorded additional reserves for this portfolio during the first quarter of 2016.Condensed Consolidated Financial Statements.


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.


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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 25.9% of its junior lien home equity principal balances. Of the junior lien home equity loan and line of credit balances that are current, 0.8% have a senior lien that is one or more payments past due. When the senior lien is delinquent but the junior lien is current, allowance levels are adjusted to reflect loss estimates consistent with the delinquency status of the senior lien. The Company also extrapolates these impacts to the junior lien portfolio when the senior lien is serviced by another investor and the delinquency status of that senior lien is unknown.

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

For RICs and personal unsecured loans at SC, the Company estimates the ALLL at a level considered adequate to cover probable credit losses inherent in the non-TDR portfolio, and records impairment on the TDR portfolio 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 Company segregates the portfolio based on homogeneity into pools based on source, then further stratifies each pool by vintage and custom loss forecasting score. For each vintage and risk segment, the Company's vintage model predicts the timing of unit losses and the loan balance at the time of default. Auto loans are charged off when an account becomes 120 days delinquent if the Company has not repossessed the vehicle. The Company writes the vehicle down to the estimated recovery amount of the collateral when the automobile is repossessed and legally available for disposition.

The Company considers changes in the used vehicle index when forecasting recovery rates to apply to the gross losses forecasted by the vintage model. Its models do not include other macro-economic factors. Instead, the 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 billion and $3.3 billion at September 30, 2017 and December 31, 2016, respectively. The allowance as a percentage of held-for-investment consumer loans was 8.4% at September 30, 2017 and 8.0% at December 31, 2016. 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.


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


Unallocated

Additionally, the Company reserves for certain inherent but undetected, losses that are probable within the loan and lease portfolios. This is considered to be reasonably sufficient to absorb imprecisions of models or to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolios. These imprecisions may include loss factors inherent in the loan portfolio that may not have been discreetly contemplated in the general and specific components of the allowance, as well as potential variability in estimates. Period-to-period changes in the Company's historical unallocated ALLL positions are considered in light of these factors. The unallocated ALLL was $47.0 million at September 30, 2017 and December 31, 2016.

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. 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 decreasedincreased from $122.4$91.8 million at December 31, 20162019 to $116.1$148.0 million at September 30, 2017. This change2020. The increase of the reserve for unfunded lending commitments included an increase from the adoption of the CECL standard of $10.4 million while the remainder was primarily duerelated to a reduction during 2016changes in off-balance sheet lending commitments. During the three-month and nine-month periods ended September 30, 2017, SBNA transferred $6.8 billion of unfunded commitments to extend credit to an unconsolidated related party.business environment resulting from COVID-19. The net impact of thebusiness as usual change in the reserve for unfunded lending commitments to the overall ACL was immaterial.




106




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


INVESTMENT SECURITIES


Investment securities consist primarily of U.S. Treasuries, MBS, ABS and stock in the FHLB and FRB.FRB stock. MBS consist of pass-through, collateralized mortgage obligations ("CMOs"),CMOs and adjustable rate mortgages issued by federal agencies. The Company’s MBS are either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by S&P and Moody’s Investor Service at the date of issuance. The Company’s AFS investment strategy is to purchase liquid fixed-rate and floating-rate investments to manage the Company's liquidity position and interest rate risk adequately.


Total investment securities AFS increased $208.8 milliondecreased $3.3 billion to $17.2$11.1 billion at September 30, 2017,2020, compared to $17.0$14.3 billion at December 31, 2016.2019. During the nine-month period ended September 30, 2017,2020, the composition of the Company's investment portfolio changed due to a decrease in U.S. Treasury securities, partially offset with an increase in MBS, which were offsetMBS. U.S. Treasuries decreased by a decrease in ABS.$3.9 billionprimarily due to investment sales and maturities. MBS increased by $1.0 billion$608.6 million primarily due to investment purchases of $4.2 billion,and an increase in unrealized gains, partially offset by $3.1 billion of principal paydownsinvestment sales, maturities and maturities. ABS decreased $674.9 million, primarily due to $447.0 million of principal paydowns. For additional information with respect to the Company’s investment securities, see Note 32 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$5.5 billion at September 30, 2017.2020. The Company had 23125 investment securities classified as held-to-maturityHTM as of September 30, 2017.2020.

Total trading securities increased $7.5 million to $9.1 million at September 30, 2017, compared to $1.6 million at December 31, 2016.


Total gross unrealized losses decreasedgain/(loss) position on investment securities AFS increased by $57.9 million to $175.7$199.3 million during the nine-month period ended September 30, 2017. The majority of the decrease2020. This increase was primarily related to an increase in unrealized losses was in thegains of $200.4 million on MBS, portfolios. The unrealized losses decreased within the MBS portfolios by $56.5 million. Refer to Note 3 to the Condensed Consolidated Financial Statements for additional details.


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


Other investments, which consists primarily of FHLB stock and FRB stock, decreased from $730.8 million at December 31, 2016 to $708.3 million at September 30, 2017, primarily due to the Company redeeming $205.4 million of FHLB stock at par, partially offset by the Company's purchase of $154.8 million of FHLB stock at par. There was no gain or loss associated with these redemptions. During the period ended September 30, 2017, the Company did not purchase any FRB stock.a decrease in interest rates.


The average life of the available-for-saleAFS investment portfolio (excluding certain ABS) at September 30, 20172020 was approximately 4.474.14 years. The average effective duration of the investment portfolio (excluding certain ABS) at September 30, 20172020 was approximately 3.022.60 years. The actual maturities of MBS AFS 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:

September 30, 2017 December 31, 2016
(in thousands)
(in thousands)(in thousands)September 30, 2020December 31, 2019
Investment securities AFS:   Investment securities AFS:
U.S. Treasury securities and government agencies$8,242,685
 $8,163,027
U.S. Treasury securities and government agencies$5,062,082 $9,735,337 
FNMA and FHLMC securities8,399,780
 7,639,823
FNMA and FHLMC securities5,732,838 4,326,299 
State and municipal securities25
 30
State and municipal securities3 9 
Other securities (1)
590,556
 1,221,345
Other securities (1)
284,049 278,113 
Total investment securities AFS17,233,046
 17,024,225
Total investment securities AFS11,078,972 14,339,758 
Investment securities held-to-maturity:   
Investment securities HTM:Investment securities HTM:
U.S. government agencies1,560,850
 1,658,644
U.S. government agencies5,488,576 3,938,797 
Total investment securities held-to-maturity (2)
1,560,850
 1,658,644
Trading securities9,098
 1,630
Total investment securities HTM(2)
Total investment securities HTM(2)
5,488,576 3,938,797 
Other investments708,294
 730,831
Other investments1,657,706 995,680 
Total investment portfolio$19,511,288
 $19,415,330
Total investment portfolio$18,225,254 $19,274,235 
(1)    Other securities primarily include corporate debt securities and ABS.
(2)    Held-to-maturityHTM securities are measured and presented at amortized cost.


The following table presents the securities of single issuers (other than obligations of the United States and its political subdivisions, agencies, and corporations) having an aggregate book value in excess of 10% of the Company's stockholder's equity that were held by the Company at September 30, 2017:2020:

September 30, 2020
September 30, 2017
Amortized Cost Fair Value
(in thousands)
(in thousands)(in thousands)Amortized CostFair Value
FNMA$4,333,536
 $4,280,822
FNMA$3,422,466 $3,472,243 
FHLMC4,172,562
 4,118,958
FHLMC2,231,378 2,260,595 
Government National Mortgage Association (1)
8,180,180
 8,116,671
Government - Treasuries1,669,963
 1,668,107
GNMA (1)
GNMA (1)
10,174,627 10,464,377 
Total$18,356,241
 $18,184,558
Total$15,828,471 $16,197,215 
(1)    Includes U.SU.S. government agency MBS.

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




GOODWILL


The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired less the fair value of liabilities assumed as goodwill. Consistent with ASC 350, the Company does not amortize goodwill, and reviews the goodwill recorded for impairment on an annual basis or more frequently when events or changes in circumstances indicate the potential for goodwill impairment. At September 30, 2017,2020, goodwill totaled $4.5$2.6 billion and represented 3.4%1.8% of total assets and 19.0%12.5% of total stockholder's equity. The following table shows goodwill by reporting units at September 30, 2017:2020:

(in thousands)CBBC&ICRE & VFCIBSCTotal
Goodwill at December 31, 2019$1,880,304 $317,924 $1,095,071 $131,130 $1,019,960 $4,444,389 
Impairment during the period(1,557,384)(290,844)— — — $(1,848,228)
Goodwill at September 30, 2020$322,920 $27,080 $1,095,071 $131,130 $1,019,960 $2,596,161 
  Consumer and Business Banking Commercial Real Estate Commercial Banking Global Corporate Banking SC Santander BanCorp Total
  (in thousands)
Goodwill at September 30, 2017 $1,880,303
 $870,411
 $542,584
 $131,130
 $1,019,960
 $10,537
 $4,454,925


The Company conducted its annual goodwill impairment tests as of October 1, 20162019 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'sCompany’s reporting units. AtAs disclosed in footnote 5 to these Condensed Consolidated Financial Statements, the completionCompany determined that goodwill triggering events occurred in the CBB, C&I and CRE & VF reporting units during the second quarter of 2020.

For the CBB reporting unit’s second quarter valuation analysis, a weighting of 25% to the market approach and 75% to the income approach was applied. For the income approach, the Company selected a discount rate of 10.0%, which represents management’s best estimate of the third quarter review,rate of return expected by market participants and aligns with the reporting unit's cost of equity at the time of the analysis. The Company increased a component of the discount rate to reflect the risk and uncertainty related to the reporting unit’s projected cash flows, which were adjusted downward from the Company’s year-end financial plan as a result of the estimated economic impact of the COVID-19 pandemic. A long-term growth rate of 2.50 %, down from 3.0% at March 31, 2020, was applied in determining the terminal value. For the market approach, the Company selected a 30% control premium based on the Company’s review of transactions observable in the marketplace that were determined to be comparable. The equity value as a multiple of tangible book value of 0.9x was selected based on publicly traded peers of the reporting unit. The results of the fair value analysis did not identify any indicatorsexceed the carrying value for the CBB reporting unit, indicating that the reporting unit was considered to be impaired at June 30, 2020. As a result, the Company recorded a $1.6 billion impairment charge relate to the CBB reporting unit.

For the C&I reporting unit’s second quarter valuation analysis, a weighting of 25% to the market approach and 75% to the income approach was applied. For the income approach, the Company selected a discount rate of 11.4%, which resultedrepresents management’s best estimate of the rate of return expected by market participants and aligns with the reporting unit's cost of equity at the time of the analysis. The Company increased a component of the discount rate to reflect the risk and uncertainty related to the reporting unit’s projected cash flows, which were adjusted downward from the Company’s year-end financial plan as a result of the estimated economic impact of the COVID-19 pandemic. A long-term growth rate of 2.50%, down from 4.0% at October 1, 2019, was applied in determining the terminal value. For the market approach, the Company selected a 30% control premium based on the Company’s review of transactions observable in the Company's conclusionmarketplace that an interim impairment test would be requiredwere determined to be completed.comparable. The equity value as a multiple of tangible book value of 0.8x was selected based on publicly traded peers of the reporting unit. The results of the fair value analysis did not exceed the carrying value for the C&I reporting unit indicating that the reporting unit was considered to be impaired at June 30, 2020. As a result, the Company recorded a $0.3 billion impairment charge relate to the C&I reporting unit.




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


For the CRE & VF reporting unit’s second quarter valuation analysis, a weighting of 25% to the market approach and 75% to the income approach was applied. For the income approach, the Company selected a discount rate of 11.6%, which represents management’s best estimate of the rate of return expected by market participants and aligns with the reporting unit's cost of equity at the time of the analysis. The Company increased a component of the discount rate to reflect the risk and uncertainty related to the reporting unit’s projected cash flows, which were adjusted downward from the Company’s year-end financial plan as a result of the estimated economic impact of the COVID-19 pandemic. A long-term growth rate of 2.50%, down from 3.0% at October 1, 2019, was applied in determining the terminal value. For the market approach, the Company selected a 30% control premium based on the Company’s review of transactions observable in the marketplace that were determined to be comparable. The equity value as a multiple of tangible book value of 1.2x was selected based on publicly traded peers of the reporting unit. The results of the fair value analysis exceeded the carrying value for the CRE & VF reporting unit by less than 5%, indicating that the reporting unit was not considered to be impaired at June 30, 2020.

The Company is in the process of completing its annual goodwill impairment analysis as of October 1, 2020. In addition to completing this analysis in the fourth quarter of 2020, the Company will continue monitoring changes to all reporting units for potential indicators. There is an increased risk that further impairment or impairment within additional reporting units, up to the amount of remaining goodwill, could be recognized based on continued or additional declines in the market in future periods.

DEFERRED TAXES AND OTHER TAX ACTIVITY


The Company'sCompany had a net deferred tax liability balance of $684.3$69.2 million at September 30, 2017 (consisting of a deferred tax asset balance of $958.2 million and a deferred tax liability balance of $1,642.5 million),2020, compared to a net deferred tax liability balance of $430.5 million$1.0 billion at December 31, 20162019 (consisting of a deferred tax asset balance of $989.8$503.7 million and a deferred tax liability balance of $1,420.3 million)$1.5 billion). During the quarter, the Company’s ownership of SC reached the 80% threshold which requires SC to file a consolidated federal tax return with the Company. As a result, SHUSA reversed its deferred tax liability of $306.6 million for the book over tax basis difference in its investment in SC. The $253.8$948.2 million increase ofdecrease in net deferred liabilitiesliability for the nine-month period ended September 30, 20172020 was primarily due to an increase inthe adoption of the CECL standard during the first quarter of 2020 and the reversal of the deferred tax liabilities related to accelerated depreciation on leasing transactions, partially offset by a decrease in deferredliability for the book over tax liabilities related to unremitted foreign earnings of a subsidiary of SC.

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 interestbasis difference associated with the IRS adjustments for all tax years, andCompany’s investment in SC during the lawsuit will determine whether the Company is entitled to a refundthird quarter of the amounts paid.2020.

On November 13, 2015, the Federal District Court issued a written opinion in favor of the Company on all contested issues, and in a judgment issued on January 13, 2016, ordered amounts assessed by the IRS for the years 2003 through 2005 to be refunded to the Company. The IRS appealed that judgment. On December 15, 2016, 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, 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 claim the interest expense deductions. The First Circuit ordered the case to be remanded to the Federal District Court for further proceedings to determine, among other issues, whether penalties should be sustained. On March 16, 2017, the Company filed a petition requesting 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. On remand, the parties are awaiting the Court’s decision on motions for summary judgment filed by the Company regarding the remaining issues.


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In response to the First Circuit's decision, 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 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 million to no change.



OFF-BALANCE SHEET ARRANGEMENTS


See further discussion of the Company's off-balance sheet arrangements in Note 67 and Note 1415 to the Condensed Consolidated Financial Statements, and the Liquidity"Liquidity and Capital ResourcesResources" section of this MD&A.



PREFERRED STOCK

In April 2006,For a discussion of the Company’s Boardstatus of Directors authorized 8,000 shares of Series C Preferred Stock, and grantedlitigation with which the Company authorityis involved with the IRS, please refer to issue fractional shares of the Series C Preferred Stock. Dividends on each share of Series C Preferred Stock are payable quarterly, on a non-cumulative basis, at an annual rate of 7.30%, when and if declared by the Company's Board of Directors. In May 2006, the Company issued 8,000,000 depository shares of Series C Preferred Stock for net proceeds of $195.4 million. Each depository share represents 1/1000th ownership interest in a share of Series C Preferred Stock. As a holder of depository shares, the depository shareholder is entitled to all proportional rights and preferences of the Series C Preferred Stock. The Company’s Board of Directors paid cash dividends to preferred stockholders totaling $11.0 million and $11.5 million for the nine-month periods ended September 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), subjectNote 14 to the prior approval of the FRB. As of September 30, 2017, no shares of the Series C Preferred Stock had been redeemed.Condensed Consolidated Financial Statements.

On October 3, 2017, the Company's Board of Directors declared a cash dividend on the Company's preferred stock of $0.45625 per share, which is payable on November 15, 2017 to shareholders of record as of the close of business on November 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, BSPR redeemed the outstanding $75.0 million of Series B preferred stock. In accordance with the notice of full redemption, each share of preferred stock was redeemed at the redemption price, corresponding to $25 per preference share, plus any unpaid dividends in respect of the most recent dividend period.



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") optimization.


The Company is subject to the regulations of certain federal, state, and foreign agencies and undergoes periodic examinations by those regulatory authorities. At September 30, 20172020 and December 31, 2016,2019, based on the Bank’s capital calculations, the Bank was considered well-capitalized under the applicable capital framework. In addition, the Company's capital levels as of September 30, 20172020 and December 31, 2016,2019, based on the Company’s capitalcapital calculations, exceeded the required capital ratios for BHCs.


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For a discussion of Basel III, which became effective for SHUSA and the Bank on January 1, 2015, including the standardized approach and related future changes to the minimum U.S. regulatory capital ratios, see the section captioned "Regulatory Matters" in this MD&A.


Federal banking laws, regulations and policies also limit the Bank's ability to pay dividends and make other distributions to the Company. The Bank must obtain prior OCC approval to declare a dividend or make any other capital distribution if, after such dividend or distribution: (1) the Bank's total distributions to SHUSA within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years;years, (2) the Bank would not meet capital levels imposed by the OCC in connection with any order;order, or (3) the Bank is not adequately capitalized at the time. The OCC's prior approval would also be required if the Bank were notified by the OCC that it is a problem institution or in troubled condition.

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



Any dividend declared and paid or return of capital has the effect of reducing capital ratios. During the nine-month periods ended September 30, 2020 and 2019, the Company paid cash dividends of $125.0 million, and $150.0 million, respectively, to its common stock shareholder.


The following schedule summarizes the actual capital balances of SHUSA and the Bank at September 30, 2017:2020:

SHUSA
September 30, 2020
Well-capitalized Requirement(1)
Minimum Requirement(1)
CET1 capital ratio15.44 %6.50 %4.50 %
Tier 1 capital ratio16.86 %8.00 %6.00 %
Total capital ratio18.26 %10.00 %8.00 %
Leverage ratio13.19 %5.00 %4.00 %
 SHUSABank
      
 September 30, 2017 
Well-capitalized Requirement(1)
 
Minimum Requirement(1)
September 30, 2020
Well-capitalized Requirement(1)
Minimum Requirement(1)
CET1 capital ratio 15.66% 6.50% 4.50%CET1 capital ratio15.37 %6.50 %4.50 %
Tier 1 capital ratio 17.39% 8.00% 6.00%Tier 1 capital ratio15.37 %8.00 %6.00 %
Total capital ratio 19.10% 10.00% 8.00%Total capital ratio16.61 %10.00 %8.00 %
Leverage ratio 13.40% 5.00% 4.00%Leverage ratio12.13 %5.00 %4.00 %
(1)    As defined by Federal Reserve regulations. The Company'sCapital ratios are presentedthrough March 31, 2020 calculated under athe U.S. Basel III phasing inframework on a transitional basis.

  BANK
       
  September 30, 2017 
Well-capitalized Requirement(2)
 
Minimum Requirement(2)
CET1 capital ratio 18.08% 6.50% 4.50%
Tier 1 capital ratio 18.08% 8.00% 6.00%
Total capital ratio 19.20% 10.00% 8.00%
Leverage ratio 13.69% 5.00% 4.00%

(2) As defined by OCC regulations. The Bank's Capital 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 describedstarting 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 thirdfirst quarter of 2017: (1) a dividend payment of $0.45625 per share on2020 calculated under CECL transition provisions permitted by 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.CARES Act

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LIQUIDITY AND CAPITAL RESOURCES

Overall

The Company continues to maintain strong liquidity positions.liquidity. Liquidity represents the ability of the Company to obtain cost-effective funding to meet the needs of customers as well as the Company's financial obligations. Factors that impact the liquidity position of the Company include loan origination volumes, loan prepayment rates, the maturity structure of existing loans, core deposit growth levels, CD maturity structure and retention, the Company's credit ratings, investment portfolio cash flows, the maturity structure of the Company's wholesale funding, and other factors. These risks are monitored and managed centrally. The Company's Asset/Liability Committee reviews and approves the Company's liquidity policy and guidelines on a regular basis. This process includes reviewing all available wholesale liquidity sources. The Company also forecasts future liquidity needs and develops strategies to ensure adequate liquidity is available at all times. SHUSA conducts monthly liquidity stress test analyses to manage its liquidity under a variety of scenarios, all of which demonstrate that the Company has ample liquidity to meet its short-term and long-term cash requirements.

Further changes to the credit ratings of SHUSA, Santander and its affiliates or the Kingdom of Spain could have a material adverse effect on SHUSA's business, including its liquidity and capital resources. The credit ratings of SHUSA have changed in the past and may change in the future, which could impact its cost of and access to sources of financing and liquidity. Any reductions in the long-term or short-term credit ratings of SHUSA would increase its borrowing costs and require it to replace funding lost due to the downgrade, which may include the loss of customer deposits, and limit its access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements. See further discussion on the impacts of credit ratings actions in the Economic"Economic and Business EnvironmentEnvironment" section of this MD&A.


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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. TheIn addition, the Company has the following majorother sources of funding to meet its liquidity requirements:requirements such as dividends and returns of investments from its subsidiaries, short-term investments held by non-bank affiliates, and access to the capital markets.
On July 2, 2015, the Company entered into a written agreement with the FRB of Boston. Under the terms of this written agreement, the Company is required to make enhancements with respect to, among other matters, Board oversight of the consolidated organization, risk management, capital planning and liquidity risk management.
Until recently, the Company was subject to an additional written agreement with the FRB of Boston on stress testing and capital adequacy. That written agreement was entered into on September 15, 2014, and was terminated on August 17, 2017.

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, Santander and 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 $5.8more than $5.0 billion of stockholders’ equity that supports its access to the securitization markets, credit facilities, and flow agreements.


During the nine-month periodquarter ended September 30, 2017,2020, SC completed on-balance sheet funding transactions totaling approximately $12.3$4.4 billion, including:


three securitizations on its Santander Drive Auto Receivables Trust ("SDART") platform•private amortizing lease facilities for $3.1approximately $1.2 billion; and
issuance of two retained bonds•securitizations on its SDART platform for $155.0 million;approximately $3.3 billion.
four securitizations on its Drive Auto Receivables Trust (“DRIVE"), deeper subprime platform for $4.1 billion;
issuance of 1 retained bond on its DRIVE platform for $113.0 million;
four private amortizing lease facilities for $1.6 billion; and
seven top-ups and two re-levers of private amortizing loan and lease facilities for $3.2 billion.

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SC also completed $3.0approximately $0.6 billion in asset sales which consisted of $300.0 million of recurring monthly sales with its third-party flow partners and $2.6 billion in sales to Santander and $100.0 million in sales to SBNA.third parties during the quarter.


For information regarding SC's debt, see Note 109 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. On June 6, 2017, SIS entered into a revolving subordinated loan agreement with SHUSA not to exceed $290.0 million for a two-year term to mature in 2019. On September 13, 2017,October 16, 2018, the revolving subordinated loan agreement with SHUSA was increased to $350.0 million and on October 6, 2017, it was increased to $495.0$895.0 million.


As needed, SIS will draw down from a another subordinated loan with Santander in order to enable SIS to underwrite certain large transactions in excess of the foregoing subordinated loan.loan described above. At September 30, 2017,2020, there was no outstanding balance on the subordinated loan.


BSI's primary sources of liquidity are from customer deposits and deposits from affiliated banks.

BSPR's primary sources of liquidity include core deposits, FHLB borrowings, wholesale and broker deposits, and liquid investment securities.


Institutional borrowings


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


Available Liquidity


As of September 30, 2017,2020, the Bank had approximately $20.5$19.3 billion in committed liquidity from the FHLB and the FRB. Of this amount, $15.2$16.0 billion was unused and therefore provides additional borrowing capacity and liquidity for the Company. At September 30, 20172020 and December 31, 2016,2019, liquid assets (cash and cash equivalents and LHFS), and securities available-for-saleAFS exclusive of securities pledged as collateral) totaled approximately $20.0$19.4 billion and $21.1$15.0 billion, respectively. These amounts represented 32.2%28.6% and 31.4%24.3% of total deposits at September 30, 20172020 and December 31, 2016,2019, respectively. As of September 30, 2017,2020, the Bank BSI and BSPRBSI had $1.1 billion $2.8 billion, and $1.1 billion,$980.3 million, respectively, in cash held at the FRB. Management believes that the Company has ample liquidity to fund its operations.


BSPR has $855.6 million in committed liquidity from the FHLB, all
111




Item 2.    Management’s Discussion and Analysis of which was unused asFinancial Condition and Results of September 30, 2017, as well as $304.3 million in liquid assets aside from cash unused as of September 30, 2017.Operations



Cash, and cash equivalents, and restricted cash
Nine-Month Period Ended September 30,
(in thousands)20202019
Net cash flows from operating activities$4,894,072 $4,636,896 
Net cash flows from investing activities(161,803)(12,979,078)
Net cash flows from financing activities(1,559,594)9,022,335 
  Nine-Month Period
Ended September 30,
  2017 2016
  (in thousands)
Net cash provided by operating activities $4,011,727
 $3,135,457
Net cash provided by investing activities 1,367,478
 2,514,922
Net cash used in financing activities (7,505,439) (3,267,636)


Cash provided byflows from operating activities


Net cash provided byflow from operating activities was $4.0$4.9 billion for the nine-month period ended September 30, 2017,2020, which was primarily comprised of $1.4 billion in proceeds from sales of LHFS, $2.1 billion in depreciation, amortization and accretion, $2.6 billion of credit loss expense, and $1.8 billion from impairment of goodwill, partially offset by a net loss of $1.1 billion and $2.5 billion of originations of LHFS, net of repayments.

Net cash flow from operating activities was $4.6 billion for the nine-month period ended September 30, 2019, which was primarily comprised of net income of $688.5$916.3 million, $4.3$1.1 billion in proceeds from sales of LHFS, and $758.9 million$1.7 billion in depreciation, amortization and accretion, and $1.7 billion of credit loss expense, partially offset by $3.8$1.1 billion of originations of LHFS, net of repayments. Operating activities were adjusted for the provision for credit losses of $2.0 billion during the period.

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


Net cash provided by operating activities was $3.1 billion for the nine-month period ended September 30, 2016, which was comprised of net income of $610.7 million, $3.9 billion in proceeds from sales of LHFS, and $746.6 million in depreciation, amortization and accretion, and partially offset by $4.6 billion of originations of LHFS, net of repayments. Operating activities were adjusted for the provision for credit losses of $2.2 billion during the period.


Cash used inflows from investing activities


For the nine-month period ended September 30, 2017,2020, net cash provided byflow from investing activities was $1.4 billion,$(161.8) million, primarily due to $6.1 billion of purchases of investment securities available-for-sale and $4.7 billion in operating lease purchases and originations, partially offset by $2.3$3.8 billion in normal loan activity, $5.6 billion of available-for-salepurchases of investment securities AFS, $4.9 billion in operating lease purchases and originations, and $2.2 billion of purchases of HTM investment securities, partially offset by $9.4 billion of AFS investment securities sales, maturities and prepayments, $2.9$3.1 billion in proceeds from sales and terminations of operating leases, $1.1and $3.5 billion in proceeds from sales of LHFI and $778.7 million in manufacturer incentives.LHFI.


For the nine-month period ended September 30, 2016,2019, net cash provided byflow from investing activities was $2.5$(13.0) billion, primarily due to $9.4$7.1 billion in normal loan activity, $6.0 billion of purchases of investment securities available-for-sale, $1.7 billion in normal loan activity, and $4.6AFS, $6.8 billion in operating lease purchases and originations and $1.0 billion of purchases of HTM investment securities, partially offset by $14.7$4.3 billion of available-for-saleAFS investment securities sales, maturities and prepayments, $1.4 billion in proceeds from sales of LHFI, and $1.7$2.7 billion in proceeds from sales and terminations of operating leases.


Cash used inflows from financing activities


For the nine-month period ended September 30, 2017,2020, net cash used inflow from financing activities was $7.5$(1.6) billion, which was primarily due to a decrease in net borrowing activity of $2.4$2.5 billion, $125.0 million in dividends paid on common stock, and $770.5 million in stock repurchases attributable to NCI, partially offset by a $5.2$1.9 billion decreaseincrease in deposits.


Net cash used inflow from financing activities for the nine-month period ended September 30, 20162019 was $3.3$9.0 billion, which was primarily due to a decreasean increase in net borrowing activity of $5.3$4.2 billion and a $5.2 billion increase in deposits, partially offset by a $2.1 billion increase$150.0 million in deposits.dividends paid on common stock and $245.7 million in stock repurchases attributable to NCI.


See the Condensed Consolidated Statements of Cash Flows ("SCF")SCF for further details on the Company's sources and uses of cash.


Credit Facilities


Third-Party Revolving Credit Facilities


Warehouse FacilitiesLines

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.

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 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 twoone credit facilitiesfacility with eight banks providing an aggregate commitment of $3.9$3.5 billion for the exclusive use of supplyingproviding short-term liquidity needs to support Chrysler Capital retaillease financing. As of September 30, 2017 and December 31, 2016,2020, there werewas an outstanding balancesbalance of approximately $1.2 billion on these facilities of $2.8 billion and $3.7 billion, respectively. One ofthis facility in the facilities can be used exclusively for loan financing, and the other for lease financing. Both facilities requireaggregate. The facility requires reduced advance rates in the event of delinquency, credit loss, or residual loss ratios, as well as other metrics exceeding specified thresholds.




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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



SC has eight credit facilities with eleven banks providing an aggregate commitment of $8.3 billion for the exclusive use of providing short-term liquidity needs to support core and Chrysler Capital loan financing. As of September 30, 2020, there was an outstanding balance of approximately $1.3 billion on these facilities in the aggregate. These facilities reduced advance rates in the event of delinquency, credit loss, as well as various other metrics exceeding specific thresholds.

Repurchase FacilitiesAgreements


SC also obtains financing through four investment management or repurchase agreements under which it pledges retained subordinatedsubordinate bonds on its own securitizations as collateral for repurchase agreements with various borrowers and at renewable terms ranging up to 365 days. As of September 30, 20172020 and December 31, 2016,2019, there were outstanding balances of $658.5$311.9 million and $743.3$422.3 million, respectively, under these repurchase facilities.agreements.


SHUSA and Santander Credit FacilitiesLending to SC

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 $2.8 billion of long-term committed revolving credit facilities.

The facilities offered through Santander NY are structured as three- and five-year floating rate facilities, with current maturity dates 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 provides SC with $3.0 billion of committed revolving credit that can be drawn on an unsecured basis maturing in March 2019.basis. The Company also provides SC with $2.1$7.2 billion in variousof term loansfinancing with maturities ranging from March 2019October 2020 to March 2022.June 2025. These loans eliminate in the consolidation of SHUSA.

On October 10, 2017, the Company entered into a $400.0 million loan with SC. Interest accrues on this loan at the rate of 3.10%. The note has a maturity date of October 10, 2020. This loan will eliminate in the consolidation of SHUSA.

In August 2015, under a new agreement with Santander, SC agreed to begin paying Santander a fee of 12.5 basis points per annum on certain warehouse facilities, as they renew, for which Santander provides a guaranteeSC with $4.0 billion of SC's servicing obligations. For revolving commitments, the guarantee fee will be paid on the total committed amountunsecured financing with maturities ranging from June 2022 and for amortizing commitments, the guarantee fee will be paid against each month's ending balance. The guarantee fee will be applicable only for additional facilities upon the execution of the counter-guaranty agreement related to a new facility or if reaffirmation is required on existing revolving or amortizing commitments as evidenced by an executed counter-guaranty agreement. SC recognized guarantee fee expense of $4.6 million and $4.8 million for the nine-months ended September 30, 2017 and 2016, respectively.2022.


Secured Structured Financings


SC's secured structured financings primarily consist of both public, SEC-registered securitizations. SC also executessecuritizations, as well as private securitizations under Rule 144A of the Securities Act, of 1933, as amended (the “Securities Act”), and privately issues amortizing notes. SC has completed eleven securitizations year-to-date in 2017 and currently has 37on-balance sheet securitizations outstanding in the market with a cumulative ABS balance of approximately $15.0$27.0 billion.


Flow Agreements


In addition to SC's credit facilities and secured structured financings, SC has a flow agreement in place with a third party for charged-off assets. 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 hashad 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.consolidated balance sheets. Beginning in 2018, this program was replaced with a new program with SBNA, whereby SC has agreed to provide SBNA with origination support services in connection with the processing, underwriting, and purchasing of retail loans, primarily from FCA dealers, all of which are serviced by SC.


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SC also continues to periodically execute Chrysler Capital-branded securitizations under Rule 144A of the Securities Act. Historically, asAfter retaining the required credit risk retention via a 5% vertical interest, SC transfers all of theremaining notes and residual interests in these securitizations were issued to third parties,parties. SC recordedsubsequently records 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.

Thetransactions.The primary use of liquidity for BSI is to meet customer liquidity requirements, such as loan financing, maturing deposits, investment activities, fundfunds transfers, and payment of its operating expenses.

BSPR uses liquidity for funding loan commitments, satisfying deposit withdrawal requests, and repayments of borrowings.

Dividends and Stock Issuances


At September 30, 2017,2020, the Company's liquidity to meet debt payments, debt service and debt maturities was in excess of 12 months.



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


Dividends, Contributions and Stock Issuances

As of September 30, 2020, the Company had 530,391,043 shares of common stock outstanding. During the three-month and nine-month periods ended September 30, 2017,2020, the Company paid dividends of $5.0zero and $125.0 million, respectively, to its sole shareholder, Santander.


AsSC paid a dividend of $0.22 per share in February 2020, May 2020, and August 2020. SC has paid a total of $212.6 million in dividends through September 30, 2017,2020, of which $50.5 million has been paid to NCI and $162.1 million has been paid to the Company, had 530,391,043which eliminates in the consolidated results of the Company.

On September 30, 2020, the Federal Reserve extended the Interim Policy. Based on the Company's expected average trailing four quarters of net income, SC is prohibited from paying a dividend in the fourth quarter of 2020. Although SC’s standalone income is sufficient to declare and a pay a dividend, SC is consolidated into the Company's capital plan and therefore is subject to the Interim Policy which utilizes the Company’s average trailing income to determine the cap on common stock outstanding.dividends. SC does not currently expect to declare or pay a dividend in the fourth quarter of 2020.


During the three months ended March 31, 2020, SC purchased shares of SC Common Stock through a tender offer.

On August 10, 2020, SC announced that it had substantially exhausted the amount of shares SC was permitted to repurchase under the exception to the Interim Policy the Federal Reserve granted SHUSA and that SC expected to repurchase an immaterial number of shares remaining under the exception approval.

Below are the details of SC's tender offer and other share repurchase programs for the three-month and nine-month periods ended September 30, 20172020 and September 30, 2019:
Three Months EndedNine Months Ended
September 30, 2020September 30, 2019September 30, 2020September 30, 2019
Tender offer:(1)
Number of shares purchased——17,514,707—
Average price per share$— $— $26.00 $— 
Cost of shares purchased(2)
$— $— $455,382 $— 
Other share repurchases:
Number of shares purchased10,198,8005,479,65015,956,56110,194,772
Average price per share$21.91 $25.71 $20.00 $24.08 
Cost of shares purchased(2)
$223,485 $140,909 $319,075 $245,496 
Total number of shares purchased10,198,8005,479,65033,471,26810,194,772
Average price per share$21.91 $25.71 $23.14 $24.08 
Total cost of shares purchased(2)
$223,485 $140,909 $774,457 $245,496 
(1) During the Company paid dividendsthree months ended March 31, 2020, SC purchased shares of $3.65 million and $10.95 million, respectively, on its preferred stock.SC Common Stock through a tender offer.

(2) Cost of shares exclude commissions
On October 3, 2017, SHUSA’s Board of Directors declared a cash dividend on the Company’s preferred stock of $0.45625 per share, which is payable on November 15, 2017 to shareholders of record as of the close of business on November 1, 2017.

On October 20, 2017, SHUSA's Board of Directors declared a cash dividend on the Company's common stock in the amount of $5 million, which is payable on November 16, 2017 to Santander.

On October 25, 2017, SC declared a cash dividend of $0.03 per share, to be paid November 17, 2017 to SC shareholders of record as of close of business November 7, 2017. SC's capital action plan also includes dividend payments for SC's stockholders of $0.05 per share in the first and second quarters of 2018.


During the third quarter of 2017,nine-month period ended September 30, 2020, SHUSA's subsidiaries had the following dividendcapital activity which eliminated in consolidation:
The Bank declared and paid a $50.0 million dividend to SHUSA;
•BSI declared and paid a $30.0$7.5 million dividendin dividends to SHUSA; andSHUSA.
Services and Promotions, LLC•SIS declared and paid a $9.0$4.0 million dividendin dividends to SHUSA.

•SHUSA contributed $25.0 million to SFS.

On November 7, 2017, BSI declared an additional $5.0 million dividendAugust 10, 2020, SC substantively exhausted the amount of shares it was permitted to SHUSA payable on November 28, 2017 which will eliminaterepurchase under the exception to the Federal Reserve's interim capital preservation policy granted in the consolidationthird quarter of SHUSA.


2020 and has acquired an aggregate of 9.58 million of its shares in a combination of open market and privately negotiated repurchases since July 31, 2020. As a result of these repurchases, SHUSA now owns approximately 80.2% of SC.
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Item 2.Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations




CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS


The Company enters into contractual obligations in the normal course of business as a source of funds for its asset growth and asset/liability management and to meet required capital needs. These obligations require the Company to make cash payments over time as detailed in the table below.
 Payments Due by Period
(in thousands)TotalLess than
1 year		Over 1 year
to 3 years		Over 3 years
to 5 years		Over
5 years
Payments due for contractual obligations:
FHLB advances (1)
$3,060,779 $2,308,826 $751,953 $— $— 
Notes payable - revolving facilities2,803,684 812,341 1,991,343 — — 
Notes payable - secured structured financings27,440,072 77,643 9,245,194 11,595,201 6,522,034 
Other debt obligations (1) (2)
18,908,039 1,657,486 10,588,210 4,460,584 2,201,759 
CDs (1)
4,430,657 3,563,261 821,832 42,357 3,207 
Non-qualified pension and post-retirement benefits63,194 7,085 14,071 13,800 28,238 
Operating leases(3)
702,016 136,568 236,624 176,663 152,161 
Total contractual cash obligations$57,408,441 $8,563,210 $23,649,227 $16,288,605 $8,907,399 
Other commitments:
Commitments to extend credit$32,140,936 $7,127,545 $7,296,125 $5,660,716 $12,056,550 
Letters of credit1,626,932 1,147,275 255,148 190,713 33,796 
Total Contractual Obligations and Other Commitments$91,176,309 $16,838,030 $31,200,500 $22,140,034 $20,997,745 
 Payments Due by Period
 Total Less than
1 year		 Over 1 yr
to 3 yrs		 Over 3 yrs
to 5 yrs		 Over
5 yrs
 (in thousands)
FHLB advances (1)
$4,590,010
 $4,032,940
 $557,070
 $—
 $—
Notes payable - revolving facilities5,231,289
 3,971,055
 1,260,234
 —
 —
Notes payable - secured structured financings23,310,484
 1,619,104
 5,219,206
 12,065,609
 4,406,565
Other debt obligations (1) (2)
11,352,184
 2,971,398
 4,177,059
 1,939,251
 2,264,476
Junior subordinated debentures due to capital trust entities (1) (2)
151,746
 151,746
 —
 —
 —
CDs (1)
5,865,838
 2,924,011
 1,902,414
 1,031,681
 7,732
Non-qualified pension and post-retirement benefits128,328
 12,903
 26,203
 25,396
 63,826
Operating leases(3)
735,481
 124,166
 237,167
 157,472
 216,676
Total contractual cash obligations$51,365,360
 $15,807,323
 $13,379,353
 $15,219,409
 $6,959,275
(1)Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based on interest rates in effect at September 30, 2017.2020. 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.
(1)Includes all carrying value adjustments, such as unamortized premiums and discounts and hedge basis adjustments.
(2)Does not include future expected sublease income.

(2)Includes all carrying value adjustments, such as unamortized premiums and discounts and hedge basis adjustments.
(3)Does not include future expected sublease income or interest of $63.8 million.

Excluded from the above table are deposits of $56.1$64.9 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 11 and Note 1415 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 SC has purchased, when losses are lower than originally expected. SC is also obligated to make total return settlement payments to this third-party originator in 2017 if returns on the purchased loans are greater than originally expected. These obligations are accounted for as derivatives.

As a result of the strategic evaluation of its personal lending portfolio, in the third quarter of 2015, SC began reviewing strategic alternatives for exiting the personal loan portfolios. On February 1, 2016, SC completed the sale of substantially all LendingClub loans to a third-party buyer at an immaterial premium to par value. On April 14, 2017, SC sold 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 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. Accordingly, SC has recorded $238 million year-to-date 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 $930 million at September 30, 2017.

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 ("CEO) 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.

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


As of September 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 London Interbank Offered Rate (“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 September 30, 2017 and December 31, 2016 had an unpaid principal balance ("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 $928.3 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%.

The parties continue in discussions on these matters. Completion of the transactions with Mr. Dundon is subject to receipt of applicable regulatory approvals.

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



ASSET AND LIABILITY MANAGEMENT


Interest Rate Risk


Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in market interest rates, and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. Interest rate risk is managed by the Company's Treasury group and measured by its Market Risk Department, with oversight by the Asset/Liability Committee. In managing interest rate risk, the Company seeks to minimize the variability of net interest income across various likely scenarios, while at the same time maximizing net interest income and the net interest margin. To achieve these objectives, the Treasury group works closely with each business line in the Company. The Treasury group also uses various other tools to manage interest rate risk, including wholesale funding maturity targeting, investment portfolio purchase strategies, asset securitizations/sales, and financial derivatives.


Interest rate risk focuses on managing four elements of risk associated with interest rates: basis risk, repricing risk, yield curve risk and option risk. Basis risk stems from rate index timing differences with rate changes, such as differences in the extent of changes in Federal funds rates compared with the three-month LIBOR. Repricing risk stems from the different timing of contractual repricing, such as one-month versus three-month reset dates, as well as the related maturities. Yield curve risk stems from the impact on earnings and market value resulting from different shapes and levels of yield curves. Option risk stems from prepayment or early withdrawal risk embedded in various products. These four elements of risk are analyzed through a combination of net interest income and balance sheet valuation simulations, shocks to those simulations, and scenario and market value analyses, and the subsequent results are reviewed by management. Numerous assumptions are made to produce these analyses, including assumptions about new business volumes, loan and investment prepayment rates, deposit flows, interest rate curves, economic conditions and competitor pricing.

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


Net Interest Income Simulation Analysis


The Company utilizes a variety of measurement techniques to evaluate the impact of interest rate risk, including simulating the impact of changing interest rates on expected future interest income and interest expense, to estimate the Company's net interest income sensitivity. This simulation is run monthly and includes various scenarios that help management understand the potential risks in the Company's net interest income sensitivity. These scenarios include both parallel and non-parallel rate shocks as well as other scenarios that are consistent with quantifying the four elements of risk described above. This information is used to develop proactive strategies to ensure that the Company’s risk position remains within SHUSA Board of Directors-approved limits so that future earnings are not significantly adversely affected by future interest rates.


The table below reflects the estimated sensitivity to the Company’s net interest income based on interest rate changes at September 30, 20172020 and December 31, 2016:2019:

The following estimated percentage increase/(decrease) to
net interest income would result
If interest rates changed in parallel by the amounts belowSeptember 30, 2020December 31, 2019
Down 100 basis points(1.08)%(1.12)%
Up 100 basis points1.94 %1.31 %
Up 200 basis points3.71 %2.56 %

  
The following estimated percentage increase/(decrease) to
net interest income would result
If interest rates changed in parallel by the amounts below September 30, 2017 December 31, 2016
Down 100 basis points (2.70)% (2.14)%
Up 100 basis points 2.38 % 2.36 %
Up 200 basis points 4.49 % 4.36 %

Market Value of Equity ("MVE")MVE Analysis


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


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



Management examines the effect of interest rate changes on MVE. The sensitivity of MVE to changes in interest rates is a measure of longer-term interest rate risk, and highlights the potential capital at risk due to adverse changes in market interest rates. The following table discloses the estimated sensitivity to the Company’s MVE at September 30, 20172020 and December 31, 2016.2019.

The following estimated percentage
increase/(decrease) to MVE would result
If interest rates changed in parallel by the amounts belowSeptember 30, 2020December 31, 2019
Down 100 basis points(5.82)%(3.01)%
Up 100 basis points1.25 %(0.49)%
Up 200 basis points0.19 %(3.17)%
  
The following estimated percentage
increase/(decrease) to MVE would result
If interest rates changed in parallel by the amounts below September 30, 2017 December 31, 2016
Down 100 basis points (2.39)% (1.23)%
Up 100 basis points (0.36)% (0.76)%
Up 200 basis points (2.43)% (2.50)%


As of September 30, 2017,2020, the Company’s MVE profile showedreflected a decrease of 2.39%MVE of 5.82% for downward parallel interest rate shocks of 100 basis points and a decreasean increase of 0.36%1.25 % for upward parallel interest rate shocks of 100 basis points. The asymmetrical sensitivity between up 100 and down 100 shock is due to the negative convexity as a result of the prepayment option embedded in mortgage-related products, the impact of which is not fully offset by the behavior of the funding base (largely non-maturity deposits ("NMDs"))NMDs).


In downward parallel interest rate shocks, mortgage-related products’ prepayments increase, their duration decreases and their market value appreciation is therefore limited. At the same time, with deposit rates already close to zero,remaining at comparatively low levels, the Company cannot effectively transfer interest rate declines to its NMD customers. For upward parallel interest rate shocks, extension risk weighs on a sizable portion of the Company’s mortgage-related products, which are predominantly long-term and fixed-rate; and for larger shocks, the loss in market value is not offset by the change in NMD.NMDs.


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.

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


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.

Prior to 2017, the Company entered into cross-currency swaps to hedge its foreign currency exchange risk on certain Euro-denominated investments, which were sold in 2016.


The Company's 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.


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



The Company typically retains the servicing rights related to residential mortgage loans that are sold. 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 812 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 11 to the Condensed Consolidated Financial Statements.
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ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK


Incorporated by reference from Part I, Item 2, MD&A of Financial Condition and Results of Operations — Asset"Asset and Liability ManagementManagement" above.



ITEM 4 - CONTROLS AND PROCEDURES


Evaluation of Disclosure Controls and Procedures


Our management, with the participation of our CEO and Chief Financial Officer ("CFO"),CFO, has evaluated the effectiveness of our disclosure controls and procedures (asas defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act),Act as of as of the end of the period covered by this Quarterly Report on Form 10-Q.Evaluation Date. Based on suchthat evaluation, our CEO and CFO have concluded that as of September 30, 2017, we did not maintain effectivethe Evaluation Date our disclosure controls and procedures because ofprocedures; (a) are effective to ensure that information required to be disclosed by the material weaknessesCompany 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-2reports filed or submitted under the Exchange Act)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 identifiedrecorded, processed, summarized, and reported within the following material weaknesses:

1.Control Environment

The Company's financial reporting involves complex accounting matters emanating from our majority-owned subsidiary SC. We determined there was a material weaknesstime periods specified in the designSEC's rules and operating effectiveness of the controls pertaining to our oversight of our SC subsidiary'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;forms; and (b) inadequate resourcesinclude controls 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.


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We have identified the following material weaknesses emanating from SC:

2.SC’s Control Environment, Risk Assessment, Control Activities and Monitoring

We did not maintain effective internal control over financial reporting related to 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.

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 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.


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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. Identification, Governance, and Monitoring of Models Used to Estimate Accretion

Various deficiencies were identified in the accretion 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, 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 income 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).

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

9. 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 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 toneinformation required to be disclosed by the Company in such reports is accumulated and communicated throughoutto the organization,Company's management, including the expectation that previously existing deficiencies will be remediated through implementation of processesCEO and controls ensuring strict compliance with GAAP.CFO, as appropriate, to allow timely decisions regarding required disclosure.


To address the material weakness in the control environment (material weakness 1, noted above), the Company is in the process of strengthening its processes and controls as follows:

Established regular working group meetings, with appropriate oversight by management, to 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, and regular reporting and review of changes in the control environment and related accounting processes.

To address the material weakness in SC’s control environment, risk assessment, control activities and monitoring (material weakness 2, noted above), the Company is in the process of strengthening its processes and controls as follows:

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.
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.
Developed and implemented additional documentation, controls and governance for the credit loss allowance and accretion processes.
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 U.S. GAAP.
Increased accounting participation in critical governance activities to ensure an adequate assessment of risk 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.


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To address the material weaknesses related to the application of effective interest method for accretion (material weakness 3, noted above) and the identification, governance and monitoring of models used to estimate accretion (material weakness 7, noted above), the Company has taken the following measures:

Enhanced its accounting documentation and review procedures of key assumptions to ensure the Company’s accretion methodology conforms to Company policy and GAAP.
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.
Developed a comprehensive accretion model documentation manual and implemented on-going performance monitoring to ensure compliance with required standards.
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 is in the process of strengthening its processes and controls as follows:

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.
Increased resources dedicated to analysis, review and documentation to ensure compliance with GAAP and the Company’s policies.
Implemented enhanced review controls over financial statement disclosures for the credit loss allowance and TDRs to ensure compliance with the Company’s policies and GAAP.
Implemented a more comprehensive monitoring plan for the credit loss allowance and TDRs with a specific focus on model inputs, changes in model assumptions and model outputs to ensure effective execution of the Company’s risk strategy.
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.
Conducted a comprehensive design effectiveness review and augmentation of the controls to ensure all critical risks are addressed.
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 transactions (material weakness 8, noted above), the Company has taken the following measures:

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 has taken the following measures:

Improving the review controls over financial statements and the related disclosures to include a more comprehensive disclosure checklist and improved review procedures from certain members of the management.
Designed and implemented additional controls over the preparation and the review of the SCF and Notes to the Consolidated Financial Statements.
Strengthened the review controls, reconciliations and supporting documentation related to the classification of cash flows between operating activities and investing activities in the SCF.
Implemented 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 has taken the following measures:

Improved reconciliation of carrying value to key information sources.
Increased management reviews of the goodwill carrying value calculation.

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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 to these areas, we are still in the process of developing and implementing these processes and procedures and testing these controls and believe additional time is required to complete development and implementation, and to demonstrate the sustainability of these procedures. 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, the material weaknesses cannot 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 were not remediated at September 30, 2017.

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'sCompany’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 monthsquarter ended September 30, 20172020 that have materially affected, or are reasonably likely to materially affect, itsour internal control over financial reporting. Although a substantial portion of the Company’s workforce continues to work remotely due to the COVID-19 pandemic, this has not materially affected our internal controls over financial reporting. We continue to monitor and assess the COVID-19 situation to minimize potential impacts, if any, it may have on the design and operating effectiveness of our internal controls.



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PART IIII. OTHER INFORMATION



ITEM 1 - LEGAL PROCEEDINGS


Reference should be madeRefer to Note 1214 to the Condensed Consolidated Financial Statements for disclosure regarding the lawsuit filed by SHUSA against the IRS and Note 1415 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 factorsflow that are set forth under Part I, Item IA, Risk Factors, in the Company's Annual Report on Form 10-K for 2019. In addition to the risk factors disclosed in that Form 10-K for the year ended December 31, 2016.2019, the Company is subject to risks related to CECL as well as the COVID-19 outbreak, discussed further below.


Our adoption of the new standard on the measurement of credit losses on financial instruments and its resulting impact on our ACL and impairments may prove to be insufficient to absorb probable losses inherent in our loan portfolio.


The CECL standard replaces the incurred loss impairment framework in current GAAP with one that reflects expected credit losses over the full expected life of financial assets and commitments, and requires consideration of a broader range of reasonable and supportable information, including estimation of future expected changes in macroeconomic conditions. Additionally, the standard changes the accounting framework for PCD HTM debt securities and loans, and requires measurement of AFS debt securities using an allowance instead of reducing the carrying amount as under the previous OTTI framework.

The Company adopted this standard using the modified retrospective method for all financial assets measured at amortized cost and net investment in leases. Results for reporting periods beginning after January 1, 2020 are presented under ASC 326, while prior period amounts continue to be reported in accordance with previously applicable GAAP.

Management's evaluation takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, economic forecasts and other relevant factors in accordance with GAAP and based on regulatory requirements. 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. Future reserves may be different due to changes in macroeconomic conditions. Provisions for credit losses are charged to credit loss expense in amounts sufficient to maintain the ACL at levels considered adequate to cover ECL in the Company’s HFI loan portfolios.

The process for determining our ACL is complex, and we may from time to time make changes to our process for determining our ACL. In addition, regulatory agencies periodically review our ACL, as well as our methodology for calculating our ACL, and may require an increase in the credit loss expense or the recognition of additional loan charge-offs based on judgments different than those of management. Changes that we make to enhance our process for determining our ACL may lead to an increase in our ACL. Any increase in our ACL will result in a decrease in net income and capital, and may have a material adverse effect on us. Material changes to our methodology for determining our allowance for loan losses could result in the need to restate our financial statements or fines, penalties, potential regulatory action and damage to our reputation.

The current outbreak COVID-19, has materially impacted our business, and the continuance of this pandemic or any future outbreak of any other highly contagious diseases or other public health emergency, could materially and adversely impact our business, financial condition, liquidity and results of operations.

COVID-19 was first reported in China in December 2019 and has now spread throughout the world, including in the United States. The outbreak has been declared a public health emergency of international concern and a pandemic by the World Health Organization. As of the date hereof, a significant number of countries and the majority of state governments have also made emergency declarations related to the outbreak, and have attempted to slow community spread of the virus by providing social distancing guidelines, issuing stay-at-home orders and mandating the closure of certain non-essential businesses.


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The actions taken by authorities, however, may not be sufficient to mitigate the spread of COVID-19. Further, these actions are not always coordinated or consistent across jurisdictions and have caused economic hardship in the jurisdictions in which they have been implemented. For example, in many jurisdictions, businesses have been required to temporarily close or restrict their operations. Further, even for businesses that have remained open, consumer demand has deteriorated rapidly. As a result, earlier this year we experienced a significant decline in our origination of loans and leases. This decline in volume may be exacerbated because, for example, FCA announced in March 2020 that it has suspended production of new vehicles at certain facilities across Europe and North America, which may reduce the availability of new vehicles for FCA dealers after dealerships re-open or consumer demand increases.

Closures and disruptions to businesses in the United States have led to negative effects on our customers. Similar to many other financial institutions, we have taken and will continue to take measures to mitigate our customers’ COVID-related economic challenges. Earlier this year, we announced that we were providing additional support to customers, employees, and communities during the COVID-19 pandemic and revised our servicing practices to increase the maximum number of permitted monthly payment extensions, grant waivers for late charges and provide lease extensions. Unlike the regional impact of natural disasters, such as hurricanes, the COVID-19 outbreak is impacting customers nationwide and is expected to have a materially more significant impact on the performance of our loan and auto lease portfolios than even the most severe historical natural disaster. We have experienced a sharp increase in requests for extensions and modifications related to COVID-19 nationwide, and a significant number of such extensions and modifications have been granted. Further, we have temporarily suspended - and may continue to temporarily suspend - involuntary repossessions, although we may elect to re-initiate involuntary repossessions at any time. These customer support programs may negatively impact our financial performance and other results of operations in the near term and, if the COVID-19 pandemic leads us to conduct such activities on a large scale for a specific period of time, the number of customers experiencing hardship related directly or indirectly to the outbreak of COVID-19 increases or if our customer support programs are not effective in mitigating the effect of COVID-19 on our customers, our business, financial condition and results of operations may be materially and adversely affected .

Further, government and regulatory authorities could also enact laws, regulations, executive orders and other guidance that allow customers to forego making scheduled payments for some period of time, require modifications to receivables (e.g., waiving accrued interest), preclude creditors from exercising certain rights or taking certain actions with respect to collateral, including repossession or liquidation of the collateral, or mandate limited operations or temporary closures of the Company or our vendors as “non-essential businesses” or otherwise. While we have business continuity plans in place, if significant portions of our or our vendors’ workforces are unable to work effectively as a result of the COVID-19 pandemic, including because of illness, stay-at-home orders, facility closures, reductions in services or hours of operation, or ineffective remote work arrangements, there may be servicing disruptions, which could result in reduced collection effectiveness or our ability to operate our business and satisfy our obligations under our third-party servicing agreements. Each of these scenarios could have negative effects on our business, financial condition and results of operations.

We rely upon our ability to access various credit facilities to fund our operations. As international trade and business activity slowed and supply chains were disrupted related to the COVID-19 pandemic, global credit and financial markets experienced significant disruption and volatility. Earlier this year, financial markets experienced significant declines and volatility, and such market conditions may occur again and/or precede recessionary conditions in the U.S. economy. Under these circumstances, we may experience some or all of the risks related to market volatility and recessionary conditions described under the caption "We are vulnerable to disruptions and volatility in the global financial markets" in the Risk Factors section of our Form 10-K. These include reduced demand for our products and services and reduced access to capital markets funding. These risks could have significant adverse impacts on our financial condition, results of operations and cash flows.

Governmental and regulatory authorities implemented fiscal and monetary policies and initiatives to mitigate the effects of the pandemic on the economy and individual businesses and households, such as the reduction of the Federal Reserve’s benchmark interest rate to near zero in March 2020 and the Federal Reserve’s announcement of capital preservation measures applicable to banking organizations in June and September 2020. However, these governmental and regulatory actions may not be successful in mitigating the adverse economic effects of COVID-19 and could affect our net interest income and reduce our profitability. Sustained adverse economic effects from the pandemic may also result in downgrades in our credit ratings or adversely affect the interest rate environment. If our access to funding is reduced or if our costs to obtain such funding significantly increases, our business, financial condition and results of operations could be materially and adversely affected.


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Due to the evolving nature of the pandemic, we are currently unable to estimate the adverse impact of COVID-19 on our business, financial condition, liquidity and results of operations. The pandemic may also cause us to experience lower originations and higher credit losses in our lending portfolio, reduced access to funding or significantly increased costs of funding, impairment of our goodwill and other financial assets and other materially adverse impacts on our business, financial condition, liquidity and results of operations.

ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS


Not applicable.



ITEM 3 - DEFAULTS UPON SENIOR SECURITIES


Not applicable.



ITEM 4 - MINE SAFETY DISCLOSURES


None.



ITEM 5 - OTHER INFORMATION


None.

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ITEM 6 - EXHIBITS


(2.1(3.1))
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)
(3.1)
Amended and Restated Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed January 30, 2009) (Commission File Number 001-16581)
(3.2(3.2))
Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA, Inc.'s Current Report on Form 8-K filed March 27, 2009) (Commission File Number 001-16581)
(3.3(3.3))
Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed February 5, 2010) (Commission File Number 001-16581)
(3.4(3.4))
Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.2 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed June 21, 2011) (Commission File Number 001-16581)
(3.5(3.5))
Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed January 3, 2017) (Commission File Number 001-16581)
(3.6(3.6))
Articles of Amendment to the Articles of Incorporation of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed August 12, 2019) (Commission File Number 001-16581)
(3.7)
(4.1(3.8))
(4.1)Santander Holdings USA, Inc. has certain debt obligations outstanding. None of the instruments evidencing such debt authorizes an amount of securities in excess of 10% of the total assets of Santander Holdings USA, Inc. and its subsidiaries on a consolidated basis; therefore, copies of such instruments are not included as exhibits to this Quarterly Report on Form 10-Q. Santander Holdings USA, Inc. agrees to furnish copies to the SEC on request.
(10.1(10.1))
Underwriting Agreement dated January 22, 2014 among Citigroup Global Markets Inc. and J.P. Morgan Securities LLC, as representatives of the underwriters listed therein, Santander Consumer USA Holdings Inc., Santander Consumer Illinois, Santander Holdings USA, Inc. and the other Selling Stockholders listed in Schedule II thereto (Incorporated by reference to Exhibit 1.1 to the Company's Current Report on Form 8-K filed January 28, 2014) (Commission File Number 001-16581)
(10.2)
Shareholders Agreement dated January 28, 2014 among the Company, Santander Consumer USA Holdings Inc., Sponsor Holdings, DDFS, Thomas G. Dundon and Banco Santander, S.A. (Incorporated by reference to Exhibit 1.2 to Santander Holdings USA, Inc.’s Current Report on Form 8-K filed January 28, 2014) (Commission File Number 001-16581)
(10.3(10.2))
(10.4)
Written Agreement, dated as of March 21, 2017, by and among Santander Holdings USA, Inc., Santander Consumer USA Inc., and the Federal Reserve Bank of Boston (Incorporated by reference to Exhibit 99.1 of Santander Holdings USA, Inc.'s Current Report on Form 8-K filed March 23, 2017) (Commission File Number 001-16581)
(31.1)
(31.1)
Chief Executive Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)

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(31.2)
(31.2)
Chief Financial Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
(32.1(32.1))
Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
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(32.2(32.2))
Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
(101(101.INS))Interactive Data File (XBRL).Inline XBRL Instance Document (Filed herewith)
(101.SCH)Inline XBRL Taxonomy Extension Schema (Filed herewith)
(101.CAL)Inline XBRL Taxonomy Extension Calculation Linkbase (Filed herewith)
(101.DEF)Inline XBRL Taxonomy Extension Definition Linkbase (Filed herewith)
(101.LAB)Inline XBRL Taxonomy Extension Label Linkbase (Filed herewith)
(101.PRE)Inline XBRL Taxonomy Extension Presentation Linkbase (Filed herewith)

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

SANTANDER HOLDINGS USA, INC.
(Registrant)
Date:November 6, 2020/s/ Juan Carlos Alvarez de Soto
Juan Carlos Alvarez de Soto
Chief Financial Officer and Senior Executive Vice President
Date:November 6, 2020
SANTANDER HOLDINGS USA, INC.
(Registrant)
Date:November 13, 2017/s/ Madhukar Dayal
Madhukar Dayal
Chief Financial Officer and Senior Executive Vice President
Date:November 13, 2017/s/ David L. Cornish
David L. Cornish
Chief Accounting Officer, Corporate Controller and Executive Vice President





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