UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2018

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to .

Commission File Number: 001-16581

SANTANDER HOLDINGS USA, INC.

(Exact name of registrant as specified in its charter)

Virginia (State or other jurisdiction of incorporation or organization)	23-2453088 (I.R.S. Employer Identification No.)
75 State Street, Boston, Massachusetts (Address of principal executive offices)	02109 (Zip Code)

(617) 346-7200

Registrant’s telephone number including area code

Indicate by check mark whether the registrant (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
Non-accelerated filer þ	(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 number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class	Outstanding at July 31, 2018
Common Stock (no par value)	530,391,043 shares

INDEX

	Page
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial Statements
Condensed Consolidated Balance Sheets at June 30, 2018 and December 31, 2017	4
Condensed Consolidated Statements of Operations for the three-month and six-month periods ended June 30, 2018 and 2017	5
Condensed Consolidated Statements of Comprehensive Income for the three-month and six-month periods ended June 30, 2018 and 2017	6
Condensed Consolidated Statements of Stockholder's Equity for the six-month periods ended June 30, 2018 and 2017	7
Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2018 and 2017	8
Notes to Condensed Consolidated Financial Statements	9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	80
Item 3. Quantitative and Qualitative Disclosures About Market Risk	129
Item 4. Controls and Procedures	129
PART II. OTHER INFORMATION	133
Item 1. Legal Proceedings	133
Item 1A. Risk Factors	133
Item 2. Unregistered Sales of Equity Securities and use of Proceeds	134
Item 3. Defaults upon Senior Securities	134
Item 4. Mine Safety Disclosures	134
Item 5. Other Information	134
Item 6. Exhibits	135
SIGNATURES	137
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

FORWARD-LOOKING STATEMENTS

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

This Quarterly Report on Form 10-Q of Santander Holdings USA, Inc. (“SHUSA” or the “Company”) contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 regarding the financial condition, results of operations, business plans and future performance of the Company. Words such as “may,” “could,” “should,” “looking forward,” “will,” “would,” “believe,” “expect,” “hope,” “anticipate,” “estimate,” “intend,” “plan,” “assume," "goal," "seek" or similar expressions are intended to indicate forward-looking statements.

Although SHUSA believes that the expectations reflected in these forward-looking statements are reasonable as of the date on which the statements are made, these statements are not guarantees of future performance and involve risks and uncertainties based on various factors and assumptions, many of which are beyond the Company's control. Among the factors that could cause SHUSA’s financial performance to differ materially from that suggested by forward-looking statements are:

• the effects of regulation and/or policies of the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Federal Deposit Insurance Corporation (the "FDIC"), the Office of the Comptroller of the Currency (the “OCC”) and the Consumer Financial Protection Bureau (the “CFPB”), and other changes in monetary and fiscal policies and regulations, including interest rate policies of the Federal Reserve, as well as in the impact of changes in and interpretations of generally accepted accounting principles in the United States of America ("GAAP"), the failure to adhere to which could subject SHUSA to formal or informal regulatory compliance and enforcement actions;

• the slowing or reversal of the current U.S. economic expansion and the strength of the U.S. economy in general and regional and local economies in which SHUSA conducts operations in particular, which may affect, among other things, the level of non-performing assets, charge-offs, and provisions for credit losses;

• the ability of certain European member countries to continue to service their debt and the risk that a weakened European economy could negatively affect U.S.-based financial institutions, counterparties with which SHUSA does business, as well as the stability of global financial markets;

• inflation, interest rate, market and monetary fluctuations, which may, among other things, reduce net interest margins and impact funding sources and the ability to originate and distribute financial products in the primary and secondary markets;

• regulatory uncertainties and changes faced by financial institutions in the U.S. and globally arising from the U.S. presidential administration and Congress and the potential impact those uncertainties and changes could have on SHUSA's business, results of operations, financial condition or strategy;

• the pursuit of protectionist trade or other related policies by the U.S. and/or other countries

• adverse movements and volatility in debt and equity capital markets and adverse changes in the securities markets, including those related to the financial condition of significant issuers in SHUSA’s investment portfolio;

• SHUSA's ability to grow revenue, manage expenses, attract and retain highly-skilled people and raise capital necessary to achieve its business goals and comply with regulatory requirements;

• SHUSA’s ability to effectively manage its capital and liquidity, including approval of its capital plans by its regulators and its ability to continue to receive dividends from its subsidiaries or other investments;

• changes in credit ratings assigned to SHUSA or its subsidiaries;

• the ability to manage risks inherent in our businesses, including through effective use of systems and controls, insurance, derivatives and capital management;

• SHUSA’s ability to manage credit risk that may increase to the extent our loans are concentrated by loan type, industry segment, borrower type or location of the borrower or collateral;

• SHUSA’s ability to timely develop competitive new products and services in a changing environment that are responsive to the needs of SHUSA's customers and are profitable to SHUSA, the acceptance of such products and services by customers, and the potential for new products and services to impose additional unexpected costs, losses, 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, may innovate more effectively, or may develop products and technology that enable those competitors to compete more successfully than SHUSA;

• Santander Consumer USA Inc.'s ("SC's") agreement with Fiat Chrysler Automobiles US LLC ("FCA") may not result in currently anticipated levels of growth, is subject to performance conditions that could result in termination of the agreement, and is also subject to an option giving FCA the right to acquire an equity participation in the Chrysler Capital portion of SC's business;

• changes in customer spending or savings behavior, including changes due to recently enacted tax legislation;

• the ability of SHUSA and its third-party vendors to convert and maintain SHUSA’s data processing and related systems on a timely and acceptable basis and within projected cost estimates;

• SHUSA's ability to control operational risks, data security breach risks and outsourcing risks, and the possibility of errors in quantitative models SHUSA uses to manage its business, including as a result of cyber-attacks, technological failure, human error, fraud or malice, and the possibility that SHUSA's controls will prove insufficient, fail or be circumvented;

• the outcome of ongoing tax audits by federal, state and local income tax authorities that may require SHUSA to pay additional taxes or recover fewer overpayments compared to what has been accrued or paid as of period-end;

• changes to income tax laws and regulations;

• acts of terrorism or domestic or foreign military conflicts; and acts of God, including natural disasters;

• the costs and effects of regulatory or judicial proceedings, including possible business restrictions resulting from such 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.

1

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	DCF: Discounted cash flow
ACL: Allowance for credit losses	DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act
AFS: Available-for-sale	DOJ: Department of Justice
ALLL: Allowance for loan and lease losses	DRIVE: Drive Auto Receivables Trust
Alt-A: Loans originated through brokers outside the Bank's geographic footprint, often lacking full documentation	DTI: Debt-to-income
ASC: Accounting Standards Codification	ECOA: Equal Credit Opportunity Act
ASU: Accounting Standards Update	EPS: Enhanced Prudential Standards
ATM: Automated teller machine	ETR: Effective tax rate
Bank: Santander Bank, National Association	Exchange Act: Securities Exchange Act of 1934, as amended
BEA: Bureau of Economic Analysis	FASB: Financial Accounting Standards Board
BHC: Bank holding company	FBO: Foreign banking organization
BOLI: Bank-owned life insurance	FCA: Fiat Chrysler Automobiles US LLC
BSI: Banco Santander International	FDIA: Federal Deposit Insurance Corporation Improvement Act
BSPR: Banco Santander Puerto Rico	FDIC: Federal Deposit Insurance Corporation
CBP: Citizens Bank of Pennsylvania	Federal Reserve: Board of Governors of the Federal Reserve System
CCAR: Comprehensive Capital Analysis and Review	FHLB: Federal Home Loan Bank
CD: Certificate(s) of deposit	FHLMC: Federal Home Loan Mortgage Corporation
CEF: Closed end fund	FICO®: Fair Isaac Corporation credit scoring model
CEO: Chief Executive Officer	Final Rule: Rule implementing certain of the EPS mandated by Section 165 of the DFA
CEVF: Commercial equipment vehicle financing	FINRA: Financial Industrial Regulatory Authority
CET1: Common equity Tier 1	FNMA: Federal National Mortgage Association
CFPB: Consumer Financial Protection Bureau	FOB: Financial Oversight and Management Board of Puerto Rico
Change in Control: First quarter 2014 change in control and consolidation of SC	FRB: Federal Reserve Bank
Chrysler Agreement: Ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC, formerly Chrysler Group LLC, signed by SC	FVO: Fair value option
Chrysler Capital: Trade name used in providing services under the Chrysler Agreement	GAAP: Accounting principles generally accepted in the United States of America
CIB: Corporate and Investment Banking	GAP: Guaranteed auto protection
CID: Civil investigative demand	GCB: Global Corporate Banking
CLTV: Combined loan-to-value	HFI: Held for investment
CMO: Collateralized mortgage obligation	HTM: Held to maturity
CMP: Civil monetary penalty	IHC: U.S. intermediate holding company
CODM: Chief Operating Decision Maker	IPO: Initial public offering
Company: Santander Holdings USA, Inc.	IRS: Internal Revenue Service
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	ISDA: International Swaps and Derivatives Association, Inc.
COSO: Committee of Sponsoring Organizations	LendingClub: LendingClub Corporation, a peer-to-peer personal lending platform company from which SC acquires loans under flow agreements
Covered Fund: hedge fund or a private equity fund under the Volcker Rule	LCR: Liquidity coverage ratio

2

CPR: Changes in anticipated loan prepayment rates	LHFI: Loans held-for-investment
CRA: Community Reinvestment Act
CRE: Commercial Real Estate	SAM: Santander Asset Management, LLC
LHFS: Loans held-for-sale	Santander NY: New York branch of Santander
LIBOR: London Interbank Offered Rate	Santander UK: Santander UK plc
LTD: Long-term debt	SBNA: Santander Bank, National Association
LTV: Loan-to-value	SC: Santander Consumer USA Holdings Inc. and its subsidiaries
MBS: Mortgage-backed securities	SC Common Stock: Common shares of SC
MD&A: Management's Discussion and Analysis of Financial Condition and Results of Operations	SCF: Statement of cash flows
MSR: Mortgage servicing right	SCRA: Servicemembers' Civil Relief Act
MVE: Market value of equity	SDART: Santander Drive Auto Receivables Trust, a SC securitization platform
NCI: Non-controlling interest	SDGT: Specially Designated Global Terrorist
NMD: Non-maturity deposits	SEC: Securities and Exchange Commission
NMTC: New market tax credits	Securities Act: Securities Act of 1933, as amended
NPL: Non-performing loan	SFS: Santander Financial Services, Inc.
NSFR: Net stable funding ratio	SHUSA: Santander Holdings USA, Inc.
NYSE: New York Stock Exchange	SIS: Santander Investment Securities Inc.
OCC: Office of the Comptroller of the Currency	SPAIN: Santander Prime Auto Issuing Note Trust, a securitization platform
OEM: Original equipment manufacturer	SPE: Special purpose entity
OREO: Other real estate owned	Sponsor Holdings: Sponsor Auto Finance Holding Series LP
OTTI: Other-than-temporary impairment	SSLLC: Santander Securities LLC
Parent Company: the parent holding company of SBNA and other consolidated subsidiaries	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.
PROMESA: Puerto Rico Management and Economic Stability Act	TCJA: Tax Cut and Jobs Act of 2017
REIT: Real estate investment trust	TDR: Troubled debt restructuring
RIC: Retail installment contract	TLAC: Total loss-absorbing capacity
RV: Recreational vehicle	Trusts: Securitization trusts
RWA: Risk-weighted assets	UPB: Unpaid principal balance
S&P: Standard & Poor's	VIE: Variable interest entity
Santander: Banco Santander, S.A.	VOE: Voting rights entity
Santander BanCorp: Santander BanCorp and its subsidiaries

3

PART I. FINANCIAL INFORMATION

ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited)

	June 30, 2018			December 31, 2017
	(in thousands)
ASSETS
Cash and cash equivalents	$	6,127,604		$	6,519,967
Investment securities:
Available-for-sale ("AFS") at fair value	13,064,873			14,413,183
Held-to-maturity ("HTM") (fair value of $2,826,499 and $1,773,938 as of June 30, 2018 and December 31, 2017, respectively)	2,920,087			1,799,808
Other investments (includes Trading securities of $1,874 and $1 as of June 30, 2018 and December 31, 2017, respectively)	700,858			658,864
Loans held-for-investment ("LHFI")(1) (5)	83,136,904			80,740,852
Allowance for loan and lease losses ("ALLL") (5)	(3,810,734		)	(3,911,575		)
Net LHFI	79,326,170			76,829,277
Loans held-for-sale ("LHFS") (2)	1,559,799			2,522,486
Premises and equipment, net (3)	788,062			849,061
Operating lease assets, net (5)(6)	11,834,222			10,474,308
Goodwill	4,444,389			4,444,389
Intangible assets, net	505,194			535,753
Bank-owned life insurance ("BOLI")	1,813,977			1,795,700
Restricted cash (5)	3,123,208			3,818,807
Other assets (4) (5)	3,930,251			3,632,427
TOTAL ASSETS	$	130,138,694		$	128,294,030
LIABILITIES
Accrued expenses and payables	$	3,238,550		$	2,825,263
Deposits and other customer accounts	61,556,548			60,831,103
Borrowings and other debt obligations (5)	38,771,378			39,003,313
Advance payments by borrowers for taxes and insurance	190,604			159,321
Deferred tax liabilities, net	1,144,002			969,996
Other liabilities (5)	1,085,133			799,403
TOTAL LIABILITIES	105,986,215			104,588,399
Commitments and Contingencies (Note 16)
STOCKHOLDER'S EQUITY
Preferred stock (no par value; $25,000 liquidation preference; 7,500,000 shares authorized; 8,000 shares outstanding at both June 30, 2018 and December 31, 2017)	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 June 30, 2018 and December 31, 2017)	17,732,184			17,723,010
Accumulated other comprehensive loss	(409,449		)	(198,431		)
Retained earnings	3,931,614			3,462,674
TOTAL SHUSA STOCKHOLDER'S EQUITY	21,449,794			21,182,698
Noncontrolling interest ("NCI")	2,702,685			2,522,933
TOTAL STOCKHOLDER'S EQUITY	24,152,479			23,705,631
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	130,138,694		$	128,294,030

(1) LHFI includes $152.1 million and $186.5 million of loans recorded at fair value at June 30, 2018 and December 31, 2017, respectively.

(2) Includes $238.9 million and $197.7 million of loans recorded at the fair value option ("FVO") at June 30, 2018 and December 31, 2017, respectively.

(3) Net of accumulated depreciation of $1.5 billion and $1.4 billion at June 30, 2018 and December 31, 2017, respectively.

(4) Includes mortgage servicing rights ("MSRs") of $158.5 million and $146.0 million at June 30, 2018 and December 31, 2017, respectively, for which the Company has elected the FVO. See Note 8 to these Condensed Consolidated Financial Statements for additional information.

(5) The Company has interests in certain securitization trusts ("Trusts") that are considered variable interest entities ("VIEs") for accounting purposes. At June 30, 2018 and December 31, 2017, LHFI included $23.1 billion and $22.7 billion, Operating leases assets, net included $11.7 billion and $10.2 billion, restricted cash included $1.7 billion and $2.0 billion, other assets included $701.3 million and $733.1 million, Borrowings and other debt obligations included $29.5 billion and $28.5 billion, and Other Liabilities included $0.2 billion and $0.2 billion of assets or liabilities that were included within VIEs, respectively. See Note 6 to these Condensed Consolidated Financial Statements for additional information.

(6) Net of accumulated depreciation of $3.1 billion and $3.4 billion at June 30, 2018 and December 31, 2017, respectively.

See accompanying notes to Condensed Consolidated Financial Statements.

4

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,
	2018		2017		2018			2017
	(in thousands)
INTEREST INCOME:
Loans	$	1,813,853	$	1,868,918	$	3,561,579		$	3,707,856
Interest-earning deposits	33,939		20,476		66,452			38,910
Investment securities:
AFS	77,031		95,015		150,536			176,441
HTM	17,181		10,011		34,245			20,643
Other investments	4,599		5,025		9,848			11,188
TOTAL INTEREST INCOME	1,946,603		1,999,445		3,822,660			3,955,038
INTEREST EXPENSE:
Deposits and other customer accounts	92,333		58,824		167,758			120,818
Borrowings and other debt obligations	316,654		298,872		621,344			589,907
TOTAL INTEREST EXPENSE	408,987		357,696		789,102			710,725
NET INTEREST INCOME	1,537,616		1,641,749		3,033,558			3,244,313
Provision for credit losses	379,834		604,768		882,368			1,340,214
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	1,157,782		1,036,981		2,151,190			1,904,099
NON-INTEREST INCOME:
Consumer and commercial fees	136,165		162,334		276,337			316,702
Lease income	569,306		489,043		1,110,202			985,087
Miscellaneous income, net(1) (2)	113,283		69,383		234,085			144,526
TOTAL FEES AND OTHER INCOME	818,754		720,760		1,620,624			1,446,315
Net gains/(losses) on sale of investment securities	419		9,049		(244		)	9,569
TOTAL NON-INTEREST INCOME	819,173		729,809		1,620,380			1,455,884
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and benefits	427,728		455,616		896,505			907,857
Occupancy and equipment expenses	163,171		163,553		322,511			326,264
Technology, outside service, and marketing expense	156,010		162,259		308,292			297,771
Loan expense	97,679		95,872		194,493			194,217
Lease expense	436,795		369,240		861,061			728,032
Other administrative expenses	135,565		95,096		239,746			197,334
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES	1,416,948		1,341,636		2,822,608			2,651,475
OTHER EXPENSES:
Amortization of intangibles	15,288		15,424		30,576			30,915
Deposit insurance premiums and other expenses	14,804		17,596		31,564			35,426
Loss on debt extinguishment	1,201		3,991		3,413			10,740
Other miscellaneous expenses	1,508		8,397		2,946			9,035
TOTAL OTHER EXPENSES	32,801		45,408		68,499			86,116
INCOME BEFORE INCOME TAX PROVISION	527,206		379,746		880,463			622,392
Income tax provision	168,035		91,983		263,356			170,920
NET INCOME INCLUDING NCI	359,171		287,763		617,107			451,472
LESS: NET INCOME ATTRIBUTABLE TO NCI	104,018		104,724		178,416			155,352
NET INCOME ATTRIBUTABLE TO SANTANDER HOLDINGS USA, INC.	$	255,153	$	183,039	$	438,691		$	296,120

(1) Includes impact of $79.2 million and$149.7 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to $95.9 million and $162.0 million for the three-month and six-month periods endedJune 30, 2017 of lower of cost or market adjustments on a portion of the Company's LHFS portfolio.

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

See accompanying notes to Condensed Consolidated Financial Statements.

5

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

(unaudited)

	Three-Month Period Ended June 30,					Six-Month Period Ended June 30,
	2018			2017		2018			2017
	(in thousands)					(in thousands)
NET INCOME INCLUDING NCI	$	359,171		$	287,763	$	617,107		$	451,472
OTHER COMPREHENSIVE INCOME, NET OF TAX
Net unrealized (losses) / gains on cash flow hedge derivative financial instruments, net of tax (1)	(4,739		)	6,523		(22,103		)	4,036
Net unrealized (losses) / gains on AFS investment securities, net of tax (2)	(35,054		)	15,349		(145,984		)	36,318
Pension and post-retirement actuarial gains / (losses), net of tax	625			556		(3,837		)	1,041
TOTAL OTHER COMPREHENSIVE (LOSS) / GAIN, NET OF TAX	(39,168		)	22,428		(171,924		)	41,395
COMPREHENSIVE INCOME	320,003			310,191		445,183			492,867
NET INCOME ATTRIBUTABLE TO NCI	104,018			104,724		178,416			155,352
COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA	$	215,985		$	205,467	$	266,767		$	337,515

(1) Excludes $(0.2) million and $5.8 million of other comprehensive income attributable to NCI for the three-month and six-month periods endedJune 30, 2018 respectively, compared to $3.2 million and $0.2 million for the corresponding periods in 2017.

(2) Excludes $39.1 million impact of other comprehensive income reclassified to Retained earnings as a result of the adoption of ASU 2018-02.

See accompanying notes to Condensed Consolidated Financial Statements.

6

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2018 AND 2017 (in thousands)

(unaudited)

	Common Shares Outstanding	Preferred Stock		Common Stock and Paid-in Capital			Accumulated Other Comprehensive (Loss)/Income			Retained Earnings			Noncontrolling Interest			Total Stockholder's Equity
Balance, January 1, 2017	530,391	195,445		16,599,497			(193,208		)	3,020,149			2,756,875			22,378,758
Cumulative effect adjustment upon adoption of ASU 2016-09	—	—		(26,456		)	—			14,764			37,401			25,709
Comprehensive (loss)/income attributable to SHUSA	—	—		—			41,395			296,120			—			337,515
Other comprehensive income attributable to NCI	—	—		—			—			—			(166		)	(166		)
Net income attributable to NCI	—	—		—			—			—			155,352			155,352
Impact of SC stock option activity	—	—		—			—			—			7,200			7,200
Capital from shareholder	—	—		9,000			—			—			—			9,000
Stock issued in connection with employee benefit and incentive compensation plans	—	—		(164		)	—			—			—			(164		)
Dividends declared on common stock	—	—		—			—			(5,000		)	—			(5,000		)
Dividends declared on preferred stock ($7,300 paid)	—	—		—			—			(10,950		)	—			(10,950		)
Balance, June 30, 2017	530,391	$	195,445	$	16,581,877		$	(151,813	)	$	3,315,083		$	2,956,662		$	22,897,254
Balance, January 1, 2018	530,391	195,445		17,723,010			(198,431		)	3,462,674			2,522,933			23,705,631
Cumulative-effect adjustment upon adoption of new accounting standards and other (Note 1)	—	—		—			(39,094		)	47,549			—			8,455
Comprehensive income attributable to SHUSA	—	—		—			(171,924		)	438,691			—			266,767
Other comprehensive income attributable to NCI	—	—		—			—			—			5,797			5,797
Net income attributable to NCI	—	—		—			—			—			178,416			178,416
Contribution from shareholder and related tax impact (Note17)	—	—		9,174			—			—			—			9,174
Impact of stock issued in connection with employee benefit and incentive compensation plans	—	—		—			—			—			7,074			7,074
Dividends declared and paid on common stock	—	—		—			—			(10,000		)	—			(10,000		)
Dividends declared and paid to NCI	—	—		—			—			—			(11,535		)	(11,535		)
Dividends declared and paid on preferred stock	—	—		—			—			(7,300		)	—			(7,300		)
Balance, June 30, 2018	530,391	$	195,445	$	17,732,184		$	(409,449	)	$	3,931,614		$	2,702,685		$	24,152,479

See accompanying notes to Condensed Consolidated Financial Statements.

7

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	Six-Month Period Ended June 30,
	2018			2017
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income including NCI	$	617,107		$	451,472
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses	882,368			1,340,214
Deferred tax expense	241,916			162,613
Depreciation, amortization and accretion(1)	889,219			724,027
Net loss on sale of loans	148,838			169,072
Net loss/(gain) on sale of investment securities	244			(9,569		)
Net gain on sale of operating leases	(171		)	(100		)
Loss on debt extinguishment	3,413			10,740
Net loss/(gain) on real estate owned and premises and equipment	3,288			(4,910		)
Stock-based compensation	501			(736		)
Equity (income)/loss on equity method investments	(3,392		)	1,506
Originations of LHFS, net of repayments	(2,369,626		)	(2,438,217		)
Purchases of LHFS	(620		)	(3,217		)
Proceeds from sales of LHFS	3,256,748			2,462,255
Purchases of trading securities	(2,260		)	(10,331		)
Proceeds from sales of trading securities	2,567			13,640
Net change in:
Revolving personal loans	(72,921		)	(78,697		)
Other assets and BOLI	(392,151		)	(254,277		)
Other liabilities	704,392			(29,872		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	3,909,460			2,505,613
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of AFS investment securities	39,446			997,306
Proceeds from prepayments and maturities of AFS investment securities	1,118,084			2,552,576
Purchases of AFS investment securities	(1,194,315		)	(5,144,019		)
Proceeds from prepayments and maturities of HTM investment securities	175,806			78,696
Purchases of held to maturity investment securities	(135,898		)	—
Proceeds from sales of other investments	63,024			117,081
Purchases of other investments	(64,678		)	(88,987		)
Proceeds from sales of LHFI	826,085			288,805
Proceeds from the sales of equity method investments	—			17,717
Distributions from equity method investments	2,189			4,305
Contributions to equity method and other investments	(52,341		)	(35,673		)
Proceeds from settlements of BOLI policies	10,888			14,147
Purchases of LHFI	(559,358		)	(136,550		)
Net change in loans other than purchases and sales	(3,525,399		)	1,684,297
Purchases and originations of operating leases	(4,804,003		)	(3,055,983		)
Proceeds from the sale and termination of operating leases(1)	2,212,897			1,845,431
Manufacturer incentives	443,905			551,100
Proceeds from sales of real estate owned and premises and equipment	27,782			63,485
Purchases of premises and equipment	(70,756		)	(58,404		)
NET CASH USED IN INVESTING ACTIVITIES	(5,486,642		)	(304,670		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits and other customer accounts	725,445			(4,284,135		)
Net change in short-term borrowings	571,142			1,677,414
Net proceeds from long-term borrowings	23,140,364			26,834,482
Repayments of long-term borrowings	(22,560,831		)	(26,829,907		)
Proceeds from Federal Home Loan Bank ("FHLB") advances (with terms greater than 3 months)	—			1,000,000
Repayments of FHLB advances (with terms greater than 3 months)	(1,400,000		)	(2,850,000		)
Net change in advance payments by borrowers for taxes and insurance	31,283			14,040
Cash dividends paid to preferred stockholders	(7,300		)	(7,300		)
Dividends paid on common stock	(10,000		)	—
Dividends paid to noncontrolling interest	(11,535		)	—
Proceeds from the issuance of common stock	4,911			3,334
Capital contribution from shareholder	5,741			9,000
NET CASH PROVIDED BY/(USED IN) FINANCING ACTIVITIES	489,220			(4,433,072		)
NET DECREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH (2)	(1,087,962		)	(2,232,129		)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD (2)	10,338,774			13,052,807
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (2)	$	9,250,812		$	10,820,678
NON-CASH TRANSACTIONS
Loans transferred from/(to) held-for-investment ("HFI") (from)/to held-for-sale, net ("HFS")	724,616			30,135
Unsettled purchases of investment securities	—			289,569
Unsettled sales of investment securities	—			308,819
Unsettled clean-up calls	—			(74,405		)
AFS investment securities transferred to HTM investment securities	1,167,189			—

(1) June 30, 2017 cash flow activity has been updated for the operating lease cash flow classification correction. Refer to Note 1 - Basis of Presentation and Accounting Policies for additional information.

(2) The beginning, ending and net change balances for the periods ended June 30, 2018 and June 30, 2017 include restricted cash balances of $3.8 billion, $3.1 billion, and $(695.6) million; and $3.0 billion, $3.3 billion, and $264.1 million, respectively.

See accompanying notes to Condensed Consolidated Financial Statements.

8

NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Introduction

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

The Bank’s primary business consists of attracting deposits and providing other retail banking services through its network of retail branches, and originating small business loans, middle market, large and global commercial loans, multifamily loans, residential mortgage loans, home equity lines of credit, and auto and other consumer loans throughout the Mid-Atlantic and Northeastern areas of the United States, focused throughout Pennsylvania, New Jersey, New York, New Hampshire, Massachusetts, Connecticut, Rhode Island, and Delaware. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios.

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

In conjunction with a ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC ("FCA") that became effective May 1, 2013 (the "Chrysler Agreement"), SC offers a full spectrum of auto financing products and services to FCA customers and dealers under the Chrysler Capital brand. These products and services include consumer RICs and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. Refer to Note 16 for additional details.

On June 1, 2018, SC announced that it is in exploratory discussions with FCA regarding the future of FCA's U.S. finance operations. FCA has announced its intention to establish a captive U.S. auto finance unit and indicated that acquiring Chrysler Capital is one option it will consider. Under the Chrysler Agreement, FCA has the option to acquire, for fair market value, an equity participation in the business offering and providing financial services contemplated by the Chrysler Agreement. The likelihood, timing and structure of any such transaction, and the likelihood that the Chrysler Agreement will terminate, cannot be reasonably determined. On July 11, 2018, in order to facilitate discussions regarding the Chrysler Agreement, FCA and the Company entered into a tolling agreement pursuant to which the parties agreed to preserve their respective rights, claims and defenses under the Chrysler Agreement as they existed on April 30, 2018.

As of June 30, 2018, SC was owned approximately 68.0% by SHUSA and 32.0% by other shareholders. During 2017, SHUSA increased its ownership in SC; refer to additional details in Note 21 of the Company's Annual Report on Form 10-K as of December 31, 2017. Common shares of SC ("SC Common Stock") are listed on the New York Stock Exchange (the "NYSE") under the trading symbol "SC."

Intermediate Holding Company ("IHC")

The enhanced prudential standards mandated by Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the "DFA")(the “Final Rule") were enacted by the Federal Reserve System (the "Federal Reserve") to strengthen regulatory oversight of foreign banking organizations ("FBOs"). Under the Final Rule, FBOs with over $50 billion of U.S. non-branch assets, including Santander, were required to consolidate U.S. subsidiary activities under an IHC. Due to its U.S. non-branch total consolidated asset size, Santander is subject to the Final Rule. As a result of this rule, Santander transferred substantially all of its equity interests in U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. These subsidiaries included Santander BanCorp, BSI, SIS and SSLLC, as well as several other subsidiaries. On July 1, 2017, an additional Santander subsidiary, SFS, a finance company located in Puerto Rico, was transferred to the Company. Additionally,

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

effective July 2, 2018, Santander transferred Santander Asset Management, LLC ("SAM") to the IHC. The contribution of SAM to the Company transferred approximately $5.4 million of assets, $1.0 million of liabilities, and $4.4 million of equity to the Company.

Although SAM is an entity under common control, its results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company. As a result, the Company will report the results of SAM on a prospective basis beginning July 2, 2018.

Basis of Presentation

These Condensed Consolidated Financial Statements include the assets, liabilities, revenues and expense accounts of the Company and its consolidated subsidiaries, including the Bank, SC, and certain special purpose financing trusts utilized in financing transactions that are considered VIEs. The Company generally consolidates VIEs for which it is deemed to be the primary beneficiary and voting interest entities ("VOEs") in which the Company has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. These Consolidated Financial Statements have been prepared by the Company pursuant to Securities and Exchange Commission ("SEC") regulations. Additionally, where applicable, the Company's accounting policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments of a normal and recurring nature necessary for a fair statement of the Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Income, Statements of Stockholder's Equity and Statements of Cash Flows ("SCF") for the periods indicated, and contain adequate disclosure for the fair statement of this interim financial information.

Corrections to Previously Reported Amounts

We have made certain corrections to previously disclosed amounts to correct for errors related to the classification of cash flows from the sale of automobiles returned to the Company at the end of a lease term.

Operating Lease Cash Flow Classification

Beginning June 30, 2014 through September 30, 2017, cash flows from the sale of automobiles returned to the Company at the end of a lease term were incorrectly recorded in the Consolidated SCF, resulting in an overstatement of cash flows from investing activities (Proceeds from the sale and termination of operating leases) and an understatement of cash flows from operating activities (Depreciation, amortization and accretion) in the amount of $288.0 million for the six-month period endedJune 30, 2017. There was no net impact to cash provided by financing activities. The misclassification errors did not impact the net change in cash and cash equivalents, total cash and cash equivalents, net income, or any other operating measure. There was no impact to the Company's Consolidated Balance Sheets, Consolidated Statements of Operations, Consolidated Statements of Other Comprehensive Income, or Consolidated Statements of Equity for any period as a result of the Consolidated SCF error. Management has evaluated the errors and determined they are immaterial to previously issued financial statements. The Company has corrected the balance described above for the six months ended June 30, 2017 in its Consolidated SCF included herein. In future filings, the Company will correct the Consolidated SCF disclosures for the comparative periods when presented.

Significant Accounting Policies

Management has identified (i) the allowance for loan losses for originated and purchased loans and the reserve for unfunded lending commitments, (ii) valuation of automotive leases and residuals, (iii) accretion of discounts and subvention on RICs, (iv) goodwill, (vi) fair value of financial instruments, and (v) income taxes as the Company's significant accounting policies and estimates, in that they are important to the portrayal of the Company's financial condition, results of operations and cash flows and the accounting estimates related thereto require management's most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain. These Condensed Consolidated Financial Statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2017.

As of June 30, 2018, with the exception of the items noted in the section captioned "Recently Adopted Accounting Standards" below, there have been no significant changes to the Company's accounting policies as disclosed in the Annual Report on Form 10-K for the year ended December 31, 2017.

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

Recently Adopted Accounting Standards

Since January 1, 2018, the Company adopted the following Financial Accounting Standards Board ("FASB") Accounting Standards Updates (“ASUs"):

• ASU 2014-09, Revenue from Contracts with Customers (Topic 606), as amended. This ASU requires an entity to recognize revenue for the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It includes a five-step process to assist an entity in achieving the main principles of revenue recognition under ASC 606. Because the ASU does not apply to revenue associated with leases and financial instruments (including loans, securities, and derivatives), it did not have a material impact on the elements of the Company's Consolidated Statements of Operations most closely associated with leases and financial instruments (such as interest income, interest expense and securities gains and losses).

The Company adopted this ASU as of January 1, 2018 using the modified retrospective method of transition, resulting in an immaterial cumulative-effect adjustment recorded to opening retained earnings for the current period. The adoption of this ASU did not result in material changes in the timing of the Company's revenue recognition, but requires gross presentation of certain costs previously offset against revenue. This change in presentation is reflected in the current period and will increase both noninterest revenue and noninterest expense for the Company. The increase is predominantly associated with certain distribution costs on wealth management products (historically offset against Miscellaneous income), with the remainder of the increase associated with certain underwriting service costs (historically offset against Miscellaneous income). Refer to Note 15 for additional details. Results for reporting periods beginning after January 1, 2018 are presented under the new revenue recognition standard, while prior period amounts have not been adjusted and continue to be reported in accordance with our historic accounting.

The cumulative-effect of the changes made to our January 1, 2018 Condensed Consolidated Balance Sheet for the adoption of the new revenue recognition standard were as follows:

(in thousands)	Balance at December 31, 2017		Adjustments			Balance at January 1, 2018
Assets - LHFI	$	80,740,852	$	5,514		$	80,746,366
Other assets	3,632,427		(3,592		)	3,628,835
Total assets	128,294,030		1,922			128,295,952
Liabilities - other liabilities	799,403		(1,378		)	798,025
Total liabilities	104,588,399		(1,378		)	104,587,021
Stockholders' equity - retained earnings	3,462,674		3,300			3,465,974
Total stockholders' equity	23,705,631		3,300			23,708,931

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

The following discloses the impact on the Company's Condensed Balance Sheet at June 30, 2018 and the Condensed Statement of Operations for the three-month and six-month periods endedJune 30, 2018 for the adoption of this new accounting standard:

	June 30, 2018
(in thousands)	As Reported		Balance Without Adoption
Assets - LHFI	$	83,136,904	$	83,131,949
Other assets	3,930,251		3,933,647
Total assets	130,138,694		130,137,135
Liabilities - other liabilities	1,085,133		1,086,511
Total liabilities	105,986,215		105,987,593
Stockholders' equity - retained earnings	3,931,614		3,928,677
Total stockholders' equity	24,152,479		24,149,542

	Three-Month Period Ended June 30, 2018				Six-Month Period Ended June 30, 2018
(in thousands)	As Reported		Balance Without Adoption		As Reported		Balance Without Adoption
Non-interest income
Consumer and commercial fees	$	136,165	$	137,051	$	276,337	$	274,944
Miscellaneous income/(loss)	113,283		105,241		234,085		224,123
Total non-interest income	819,173		812,017		1,620,380		1,609,025
General and administrative expense
Technology, outside service, and marketing expense	156,010		154,284		308,292		304,395
Loan expense	97,679		100,197		194,493		199,390
Other administrative expenses	135,565		130,050		239,746		226,832
Total general and administrative expenses	1,416,948		1,411,596		2,822,608		2,810,694
Income before income tax provision	527,206		527,558		880,463		881,022
Income tax provision	168,035		168,158		263,356		263,552
Net income	$	359,171	$	359,400	$	617,107	$	617,470

• ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, as amended. This new guidance amends the presentation and accounting for certain financial instruments, including liabilities measured at fair value under the FVO and equity investments. The guidance also updates fair value presentation and disclosure requirements for financial instruments measured at amortized cost. The Company adopted this standard on January 1, 2018, and it did not have a material impact on the Company's financial position or results of operations. As a result of the adoption of this standard, the Company reclassified approximately $10.0 million of equity securities from Investments AFS to Other investments on January 1, 2018. Future changes in the fair value of the Company's equity securities will be recognized in the Condensed Consolidated Statements of Operations rather than Other comprehensive Income.

• ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This new guidance amends the hedge accounting model to enable entities to better portray their risk management activities in their financial statements. The amendments expand an entity’s ability to hedge nonfinancial and financial risk components and reduce complexity in hedges of interest rate risk. The guidance eliminates the requirement to separately measure and report hedge ineffectiveness, and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line in which the earnings effect of the hedged item is reported. The new guidance is effective for public companies for fiscal years beginning after December 15, 2018, with early adoption, including adoption in an interim period, permitted. The Company adopted this standard in the first quarter of 2018.  It did not have a material impact

9

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

on the opening balance of retained earnings for the cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness. Refer to Note 12 for further discussion of the Company's derivatives.

• ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The amendments in this ASU allow a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cut and Jobs Act of 2017 (the “TCJA"). As a result of adoption of this ASU in the first quarter of 2018, the Company reclassified $39.1 million from accumulated other comprehensive income with an offsetting credit to retained earnings.

Cumulative net impact to opening Retained earnings

As a result of the adoption of the new accounting standards outlined above, the Company recorded a cumulative net increase to opening Retained earnings of $42.0 million. Those impacts were attributed to the following ASUs adopted during the period:

	Impact to Retained earnings
	(in thousands)
Adoption of ASU 2014-09, Revenue Recognition	$	3,300
Adoption of ASU 2016-1, Financial Instruments	(418		)
Adoption of ASU 2018-02, Statement of Comprehensive Income	39,094
Cumulative-effect adjustment upon adoption of new accounting standards	$	41,976
Other adjustments at subsidiary	5,573
Net impact to opening Retained earnings	$	47,549

The adoption of the following ASUs did not have an impact on the Company's financial position or results of operations:

• ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments

• ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory

• ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (A consensus of the FASB Emerging Issues Task Force)

• ASU 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business

• ASU 2017-05, Other Income - Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets

• ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

• ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting

• ASU 2018-05, Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118

• ASU 2018-06, Codification Improvements to Topic 942, Financial Services—Depository and Lending

As required by the adoption of ASU 2016-18 and ASU 2014-09, the following additional accounting policy disclosures are required for the nature of cash restrictions and revenue recognized from contracts with customers from disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2017:

Cash, Cash Equivalents, and Restricted Cash

Cash deposited to support securitization transactions, lockbox collections, and related required reserve accounts are recorded in the Company's Consolidated Balance Sheets as Restricted cash. Excess cash flows generated by Trusts are added to the restricted cash reserve account, creating additional over-collateralization until the contractual securitization requirement has been reached. Once the targeted reserve requirement is satisfied, additional excess cash flows generated by the Trusts are released to the Company as distributions from the Trusts. Lockbox collections are added to restricted cash and released when transferred to the appropriate warehouse line of credit or trust. The Company also maintains restricted cash primarily related to cash posted as collateral related to derivative agreements, cash restricted for investment purposes and cash advanced for loan purchases.

10

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

Revenue Recognized from Contracts with Customers

Depository services

Depository services are performed under an agreement with a customer, and those services include personal deposit account opening and maintaining, checking service, online banking service, debit card services, etc. Depository service fees related to customer deposits can generally be distinguished between monthly service fees and transactional fees within the single performance obligation of providing depository account services. Monthly account service and maintenance fees are provided over a period of time (usually a month), and revenue is recognized as the Company performs the service (usually at the end of the month). The services for transactional fees are performed at a point in time and revenue is recognized when the transaction occurs.

Commissions and trailer fees

Commission fees are earned from the selling of annuity contracts to customers on behalf of insurance companies, acting as the broker for certain equity trading, and sales of interests in mutual funds. The Company elected the expected value method for estimating commission fees due to the large number of customer contracts with similar characteristics. However, commissions and trailer fees are fully constrained as the Company cannot sufficiently estimate the consideration to which it could be entitled to earn. Commissions are generally associated with point-in-time transactions or agreements that are one year or less. The performance obligation is satisfied immediately and revenue is recognized as the Company performs the service.

Interchange income, net

The Company has entered into agreements with payment networks in which the Company will issue the payment network's credit card as part of the Company's credit card portfolio. Each time a cardholder makes a purchase at a merchant and the transaction is processed, the Company receives an interchange fee in exchange for the authorization and settlement services provided to the payment networks.

The performance obligation for the Company is to provide authorization and settlement services to the payment network when the payment network submits a transaction for authorization. The Company considers the payment network to be the customer, and the Company is acting as a principal when performing the transaction authorization and settlement services. The performance obligation for authorization and settlement services is satisfied at a point in time, and revenue is recognized on the date when the Company authorizes and routes the payment to the merchant. The expenses paid to payment networks are accounted for as considerations payable to the customer and therefore reduce the transaction price. Therefore, interchange income is recorded net against the expenses paid to the payment network and the cost of rewards programs.

The agreements also contain immaterial fixed consideration related to upfront sign-on bonuses and program development bonuses, which are amortized over the remainder of the agreement's life on a straight-line basis.

Underwriting service fees

SIS, as a registered broker-dealer, performs underwriting services by raising investment capital from investors on behalf of corporations that are issuing securities. Underwriting services have one performance obligation, which is satisfied on the day SIS purchases the securities.

Underwriting services include multiple parties in delivering the performance obligation. The Company has evaluated whether it is the principal or agent when we provide underwriting services. The Company acts as the principal when performing underwriting services, and recognizes fees on a gross basis. Revenue is recorded as the difference between the price the Company pays the issuer of the securities and the public offering price, and expenses are recorded as the proportionate share of the underwriting costs incurred by SIS. The Company is the principal because we obtain control of the services provided by third-party vendors and combine them with other services as part of delivering on the underwriting service.

Asset and wealth management fees

Asset and wealth management fees includes fee income generated from discretionary investment management and non-discretionary investment advisory contracts with customers. Discretionary investment management fees are earned for the management of the assets in the customer's account and are are recognized as earned  and charged to the customer on a quarterly basis. Non-discretionary

11

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

investment advisory fees are earned for providing investment advisory services to customers, such as recommending the re-balancing or restructuring of the assets in the customer’s account. The  investment advisory fee is recognized as earned and charged to the customer on a quarterly basis. The fee for the   discretionary and nondiscretionary contracts is based on a percentage of the average assets included in the customer’s account.  

NOTE 2. RECENT ACCOUNTING DEVELOPMENTS

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) and ASU 2018-11 Targeted Improvements in August 2018.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 existing guidance. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2018, with earlier adoption permitted. The Company does not intend to early adopt this ASU. Entities may adopt the amendment retrospectively to each prior reporting period presented in the financial statements with the cumulative effect of initial application recognized at the beginning of the earliest comparative period presented. Alternatively, an entity may adopt the amendment using an optional method with initial application at the adoption date and recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption (comparative period financial statements and disclosures are presented in accordance with current GAAP).

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 AFS debt securities, entities will be required to record allowances rather than reduce the carrying amount, as they do today under the other-than-temporary impairment (“OTTI') model. The standard also simplifies the accounting model for purchased credit-impaired debt securities and loans. The new guidance will be effective for the Company for the first reporting period beginning after December 15, 2019, with earlier adoption permitted. Adoption of this new guidance can be applied only on a prospective basis as a cumulative-effect adjustment to retained earnings. 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

NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)

In addition to those described in detail above, the Company is 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 2017-06, Plan Accounting: Defined Benefit Pension Plans (Topic 960), Defined Contribution Pension Plans (Topic 962), Health and Welfare Benefit Plans (Topic 965): Employee Benefit Plan Master Trust Reporting (a consensus of the Emerging Issues Task Force)

• ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities

• ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception

• ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting

NOTE 3. INVESTMENT SECURITIES

Summary of Investment in Debt Securities - AFS and HTM

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of debt securities AFS at the dates indicated:

	June 30, 2018									December 31, 2017
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
U.S. Treasury securities	$	1,632,805	$	171	$	(15,174	)	$	1,617,802	$	1,006,219	$	—	$	(8,107	)	$	998,112
Corporate debt securities	6,454		—		(1		)	6,453		11,639		21		—			11,660
Asset-backed securities (“ABS”)	475,279		5,066		(2,868		)	477,477		501,575		6,901		(1,314		)	507,162
Equity securities (1)	—		—		—			—		11,428		—		(614		)	10,814
State and municipal securities	20		—		—			20		23		—		—			23
Mortgage-backed securities (“MBS”):
Government National Mortgage Association ("GNMA") - Residential	3,818,120		5,752		(109,410		)	3,714,462		4,745,998		3,531		(62,524		)	4,687,005
GNMA - Commercial	866,797		—		(22,528		)	844,269		1,377,449		179		(19,917		)	1,357,711
Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortage Association ("FNMA") - Residential	6,610,005		237		(257,435		)	6,352,807		6,958,433		1,093		(141,393		)	6,818,133
FHLMC and FNMA - Commercial	52,346		125		(888		)	51,583		23,003		—		(440		)	22,563
Total investments in debt securities AFS	$	13,461,826	$	11,351	$	(408,304	)	$	13,064,873	$	14,635,767	$	11,725	$	(234,309	)	$	14,413,183

(1) Reflects the reclassification of the Company's investments in equity securities to Other investments as a result of the adoption of ASU 2016-01 as of January 1, 2018.

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of debt securities HTM at the dates indicated:

	June 30, 2018									December 31, 2017
(in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Loss			Fair Value
MBS:
GNMA - Residential	$	1,866,434	$	—	$	(69,059	)	$	1,797,375	$	1,447,669	$	722	$	(26,150	)	$	1,422,241
GNMA - Commercial	1,053,653		622		(25,151		)	1,029,124		352,139		325		(767		)	351,697
Total investments in debt securities HTM	$	2,920,087	$	622	$	(94,210	)	$	2,826,499	$	1,799,808	$	1,047	$	(26,917	)	$	1,773,938

13

NOTE 3. INVESTMENT SECURITIES (continued)

The Company continuously evaluates its investment strategies in light of changes in the regulatory and market environments that could have an impact on capital and liquidity. Based on this evaluation, it is reasonably possible that the Company may elect to pursue other strategies relative to its investment securities portfolio. During the six-month period endedJune 30, 2018, the Company transferred approximately $1.2 billion of MBS from AFS to HTM in conjunction with Santander's capital management strategy.

As of June 30, 2018 and December 31, 2017, the Company had investments in debt securities AFS with an estimated fair value of $6.2 billion and $5.9 billion, respectively, pledged as collateral, which was comprised of the following: $3.1 billion and $3.0 billion, respectively, were pledged as collateral for the Company's borrowing capacity with the Federal Reserve Bank (the "FRB"); $2.3 billion and $2.3 billion, respectively, were pledged to secure public fund deposits; $82.2 million and $243.8 million, respectively, were pledged to various independent parties to secure repurchase agreements, support hedging relationships, and for recourse on loan sales; $423.9 million and $0.0 million, respectively, were pledged to deposits with clearing organizations; and $312.8 million and $387.9 million, respectively, were pledged to secure the Company's customer overnight sweep product.

At June 30, 2018 and December 31, 2017, the Company had $47.0 million of accrued interest related to investment securities which is included in the Other assets line of the Company's Condensed Consolidated Balance Sheets.

Contractual Maturity of Debt Securities

Contractual maturities of the Company’s AFS debt securities at June 30, 2018 were as follows:

(in thousands)	Amortized Cost		Fair Value
Due within one year	$	788,156	$	573,700
Due after 1 year but within 5 years	1,211,917		1,416,164
Due after 5 years but within 10 years	181,937		246,373
Due after 10 years	11,279,816		10,828,636
Total	$	13,461,826	$	13,064,873

Contractual maturities of the Company’s HTM debt securities at June 30, 2018 were as follows:

(in thousands)	Amortized Cost		Fair Value
Due after 10 years	$	2,920,087	$	2,826,499
Total	$	2,920,087	$	2,826,499

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 Debt Securities AFS and HTM

The following tables present the aggregate amount of unrealized losses as of June 30, 2018 and December 31, 2017 on securities in the Company’s AFS investment portfolios classified according to the amount of time those securities have been in a continuous loss position:

	June 30, 2018										December 31, 2017
	Less than 12 months					12 months or longer					Less than 12 months					12 months or longer
(in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
U.S. Treasury securities	$	788,943	$	(10,459	)	$	246,895	$	(4,715	)	$	998,112	$	(8,107	)	$	—	$	—
Corporate debt securities	6,439		(1		)	13		—			—		—			—		—
ABS	43,740		(440		)	86,900		(2,428		)	8,013		(125		)	103,559		(1,189		)
Equity securities (1)	—		—			—		—			335		(2		)	10,398		(612		)
MBS:
GNMA - Residential	1,132,254		(29,533		)	1,812,027		(79,877		)	1,236,716		(8,600		)	2,583,955		(53,924		)
GNMA - Commercial	805,131		(21,818		)	39,138		(710		)	1,022,452		(11,492		)	251,209		(8,425		)
FHLMC and FNMA - Residential	3,247,620		(88,401		)	3,082,057		(169,034		)	3,429,678		(32,899		)	3,017,533		(108,494		)
FHLMC and FNMA - Commercial	6,619		(351		)	15,175		(537		)	6,948		(103		)	15,614		(337		)
Total investments in debt securities AFS	$	6,030,746	$	(151,003	)	$	5,282,205	$	(257,301	)	$	6,702,254	$	(61,328	)	$	5,982,268	$	(172,981	)

(1) Reflects the reclassification of the Company's investments in equity securities to Other investments as a result of the adoption of ASU 2016-01 as of January 1, 2018.

14

NOTE 3. INVESTMENT SECURITIES (continued)

The following tables present the aggregate amount of unrealized losses as of June 30, 2018 and December 31, 2017 on debt securities in the Company’s HTM investment portfolios classified according to the amount of time those securities have been in a continuous loss position:

	June 30, 2018										December 31, 2017
	Less than 12 months					12 months or longer					Less than 12 months					12 months or longer
(in thousands)	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
MBS:
GNMA - Residential	$	464,230	$	(14,342	)	$	1,333,145	$	(54,717	)	$	434,322	$	(6,419	)	$	739,612	$	(19,731	)
GNMA - Commercial	626,942		(16,986		)	316,697		(8,165		)	118,951		(767		)	—		—
Total investments in debt securities HTM	$	1,091,172	$	(31,328	)	$	1,649,842	$	(62,882	)	$	553,273	$	(7,186	)	$	739,612	$	(19,731	)

OTTI

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

The Company assesses and recognizes OTTI in accordance with applicable accounting standards. Under these standards, if the Company determines that impairment on its debt securities exists and it has made the decision to sell the security or it is more likely than not that the Company will be required to sell the security prior to recovery of its amortized cost basis, it recognizes the entire portion of the unrealized loss in earnings. If the Company has not made a decision to sell the security and it does not expect that it will be required to sell the security prior to the recovery of the amortized cost basis but the Company has determined that OTTI exists, it recognizes the credit-related portion of the decline in value of the security in earnings.

The Company recorded no OTTI related to its investment securities for the three-month and six-month periods endedJune 30, 2018 and 2017.

Management has concluded that the unrealized losses on its debt securities for which it has not recognized OTTI (which were comprised of 503 individual securities at June 30, 2018) are temporary in nature since (1) they reflect the increase in interest rates, which lowers the current fair value of the securities, (2) they are not related to the underlying credit quality of the issuers, (3) the entire contractual principal and interest due on these securities is currently expected to be recoverable, (4) the Company does not intend to sell these investments at a loss and (5) it is more likely than not that the Company will not be required to sell the investments before recovery of the amortized cost basis, which for the Company's debt securities may be at maturity. Accordingly, the Company has concluded that the impairment on these securities is not other than temporary.

Gains (Losses) and Proceeds on Sales of Debt Securities

Proceeds from sales of investments in debt securities and the realized gross gains and losses from those sales are as follows:

	Three-Month Period Ended June 30, 2018					Six-Month Period Ended June 30,
(in thousands)	2018		2017			2018			2017
Proceeds from the sales of debt securities AFS	$	—	$	1,306,125		$	39,446		$	1,306,125
Gross realized gains	$	419	$	11,125		$	—		$	11,125
Gross realized losses	—		(2,076		)	(244		)	(1,556		)
OTTI	—		—			—			—
Net realized gains/(losses) (1)	$	419	$	9,049		$	(244	)	$	9,569

(1) Includes net realized gains/(losses) on trading securities of $0.4 million and $(0.2) million for the three-month and six-month periods endedJune 30, 2018, respectively, and $(2.1) million and $(1.6) million for the three-month and six-month periods endedJune 30, 2017, respectively.

15

NOTE 3. INVESTMENT SECURITIES (continued)

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

The Company recognized $18 thousand for the six-month period endedJune 30, 2018 in net losses on the sale of AFS investment securities as a result of overall balance sheet and interest rate risk management. The net loss realized for the six-month period endedJune 30, 2018 was primarily comprised of the sale of MBS, including FHLMC residential debt securities and collateralized mortgage obligations ("CMOs") with a fair value of $0.3 million for a loss of $18 thousand.

The Company recognized $11.1 million for the three-month and six-month periods endedJune 30, 2017 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 three-month and six-month periods endedJune 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 CMOs with a book value of $555.6 million for a gain of $9.3 million.

Other Investments

Other Investments consisted of the following as of:

(in thousands)	June 30, 2018		December 31, 2017
FHLB of Pittsburgh and Federal Reserve Bank stock	$	488,134	$	516,693
Low Income Housing Tax Credit investments ("LIHTC")	115,933		88,170
Equity securities not held for trading	10,917		—
CDs with a maturity greater than 90 days	84,000		54,000
Trading securities	1,874		1
Total	$	700,858	$	658,864

Other investments primarily include the Company's investment in the stock of the FHLB of Pittsburgh and the FRB. These stocks do not have readily determinable fair values because their ownership is restricted and they lack a market. The stocks can be sold back only at their par value of $100 per share, and FHLB stock can be sold back only to the FHLB or to another member institution. Accordingly, these stocks are carried at cost. During the three-month and six-month periods endedJune 30, 2018, the Company purchased $23.9 million and $34.1 million of FHLB stock at par, respectively, and redeemed $37.1 million and $63.0 million of FHLB stock at par, respectively. There was no gain or loss associated with these redemptions. During the three-month and six-month periods endedJune 30, 2018, the Company did not purchase any FRB stock.

Other investments also includes LIHTC investments, time deposits with a maturity of greater than 90 days held at non-affiliated financial institutions, trading securities, and $10.9 million of equity securities measured at fair value as of June 30, 2018, with changes in fair value recognized in net income.  These consist primarily of Community Reinvestment Act (“CRA") mutual fund investments reclassified as a result of the first quarter 2018 adoption of ASU 2016-01, discussed further in Note 1. These investments were included in Investments AFS at December 31, 2017.

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.

Realized and Unrealized Gains (Losses) on Equity Securities

	Three-Month Period Ended June 30,					Six-Month Period Ended June 30,
(in thousands)	2018			2017		2018		2017
Net gains/(losses) on equity securities1	$	(78	)	$	36	(31	)	18
Less: net gains/(losses) recognized during the period on equity securities sold during the period1	—			—		—		—
Unrealized gains/(losses) recognized during the reporting period on equity securities still held at the reporting period date1	$	(78	)	$	36	(31	)	18

(1) Changes in the fair value of equity securities were not recognized in earnings prior to the adoption of ASU 2016-01.

16

NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

Overall

The Company's loans are reported at their outstanding principal balances net of any cumulative charge-offs, unamortized deferred fees and costs and unamortized premiums or discounts. The Company maintains an ACL to provide for losses inherent in its portfolios. Certain loans are pledged as collateral for borrowings, securitizations, or special purpose entities (“SPEs"). These loans totaled $48.3 billion at June 30, 2018 and $50.8 billion at December 31, 2017.

Loans that the Company intends to sell are classified as LHFS. The LHFS portfolio balance at June 30, 2018 was $1.6 billion, compared to $2.5 billion at December 31, 2017. LHFS in the residential mortgage portfolio are reported at either estimated fair value (if the FVO is elected) or the lower of cost or fair value. For a discussion on the valuation of LHFS at fair value, see Note 14 to the Condensed Consolidated Financial Statements. Loans under SC’s personal lending platform have been classified as HFS and adjustments to lower of cost or market are recorded through Miscellaneous income, net on the Condensed Consolidated Statements of Operations. As of June 30, 2018, the carrying value of the personal unsecured HFS portfolio was $1.0 billion.

Interest on loans is credited to income as it is earned. Loan origination fees and certain direct loan origination costs are deferred and recognized as adjustments to interest income in the Condensed Consolidated Statements of Operations over the contractual life of the loan utilizing the interest method. Loan origination costs and fees and premiums and discounts on RICs are deferred and recognized in interest income over their estimated lives using estimated prepayment speeds, which are updated on a monthly basis. At June 30, 2018 and December 31, 2017, accrued interest receivable on the Company's loans was $490.8 million and $515.9 million, respectively.

During the six-month period endedJune 30, 2018, the Company sold substantially all of its mortgage warehouse facilities, which had a book value of $499.2 million for net proceeds of $515.8 million. The $16.7 million gain on sale is recognized within Miscellaneous income, net on the Condensed Consolidated Statements of Operations.

17

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

Loan and Lease Portfolio Composition

The following presents the composition of the gross loans and leases HFI by portfolio and by rate type:

	June 30, 2018				December 31, 2017
(dollars in thousands)	Amount		Percent		Amount		Percent
Commercial LHFI:
Commercial real estate ("CRE") loans	$	9,053,402	10.9	%	$	9,279,225	11.5	%
Commercial and industrial loans	14,695,706		17.7	%	14,438,311		17.9	%
Multifamily loans	8,323,925		10.0	%	8,274,435		10.1	%
Other commercial(2)	7,466,771		9.0	%	7,174,739		8.9	%
Total commercial LHFI	39,539,804		47.6	%	39,166,710		48.4	%
Consumer loans secured by real estate:
Residential mortgages	9,464,713		11.4	%	8,846,765		11.0	%
Home equity loans and lines of credit	5,682,230		6.8	%	5,907,733		7.3	%
Total consumer loans secured by real estate	15,146,943		18.2	%	14,754,498		18.3	%
Consumer loans not secured by real estate:
RICs and auto loans - originated	25,404,300		30.6	%	23,081,424		28.6	%
RICs and auto loans - purchased	1,246,606		1.5	%	1,834,868		2.3	%
Personal unsecured loans	1,277,301		1.5	%	1,285,677		1.6	%
Other consumer(3)	521,950		0.6	%	617,675		0.8	%
Total consumer loans	43,597,100		52.4	%	41,574,142		51.6	%
Total LHFI(1)	$	83,136,904	100.0	%	$	80,740,852	100.0	%
Total LHFI:
Fixed rate	$	52,903,597	63.6	%	$	50,653,790	62.7	%
Variable rate	30,233,307		36.4	%	30,087,062		37.3	%
Total LHFI(1)	$	83,136,904	100.0	%	$	80,740,852	100.0	%

(1)Total LHFI includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. These items resulted in a net increase in the loan balances of $1.5 billion and $1.3 billion as of June 30, 2018 and December 31, 2017, respectively.

(2)Other commercial includes commercial equipment vehicle financing ("CEVF") leveraged leases and loans.

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

Portfolio segments and classes

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

The commercial segmentation reflects line of business distinctions. The CRE line of business includes commercial and industrial owner-occupied real estate and specialized lending for investment real estate. The Company's allowance methodology further classifies loans in this line of business into construction and non-construction loans; however, the methodology for development and determination of the allowance is generally consistent between the two portfolios. "Commercial and industrial" includes non-real estate-related commercial and industrial loans. "Multifamily" represents loans for multifamily residential housing units. “Other commercial” includes loans to global customer relationships in Latin America which are not defined as commercial or consumer for regulatory purposes. The remainder of the portfolio primarily represents the CEVF business.

The Company's portfolio classes are substantially the same as its financial statement categorization of loans for the consumer loan populations. “Residential mortgages” includes mortgages on residential property, including single family and 1-4 family units. "Home equity loans and lines of credit" include all organic home equity contracts and purchased home equity portfolios. "RICs and auto loans" includes the Company's direct automobile loan portfolios, but excludes recreational vehicle ("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.

18

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

In accordance with the Company's accounting policy when establishing the collective ACL for originated loans, the Company's estimate of losses on recorded investment includes the estimate of the related net unaccreted discount balance that is expected at the time of charge-off, while it considers the entire unaccreted discount for loan portfolios purchased at a discount as available to absorb the credit losses when determining the ACL specific to these portfolios. This accounting policy is not applicable for the purchased loan portfolios acquired with evidence of credit deterioration, on which we elected to apply the FVO.

The RIC and auto loan portfolio is comprised of: (1) RICs originated by SC prior to the first quarter 2014 consolidation and change in control of SC (the “Change in Control"), (2) RICs originated by SC after the Change in Control, and (3) auto loans originated by SBNA. The composition of the portfolio segment is as follows:

(in thousands)	June 30, 2018			December 31, 2017
RICs - Purchased HFI:
Unpaid principal balance ("UPB") (1)	$	1,310,800		$	1,929,548
UPB - FVO (2)	15,756			24,926
Total UPB	1,326,556			1,954,474
Purchase marks (3)	(79,950		)	(119,606		)
Total RICs - Purchased HFI	1,246,606			1,834,868
RICs - Originated HFI:
UPB (1)	25,540,231			23,373,202
Net discount	(195,499		)	(309,920		)
Total RICs - Originated	25,344,732			23,063,282
SBNA auto loans	59,568			18,142
Total RICs - originated post-Change in Control	25,404,300			23,081,424
Total RICs and auto loans HFI	$	26,650,906		$	24,916,292

(1) UPB does not include amounts related to the loan receivables - unsecured and loan receivables from dealers due to the short-term and revolving nature of these receivables.

(2) The Company elected to account for these loans, which were acquired with evidence of credit deterioration, under the FVO.

(3) Includes purchase marks of $3.5 million and $5.5 million related to purchase loan portfolios on which we elected to apply the FVO at June 30, 2018 and December 31, 2017, respectively.

During the six-month periods endedJune 30, 2018 and 2017, the Company originated $4.7 billion and $3.4 billion, respectively, in Chrysler Capital loans, which represented 49% and 43%, respectively, of the Company's total RIC originations (unpaid pricipal balance). As of June 30, 2018 and December 31, 2017, the Company's carrying value of auto RIC portfolio consisted of $8.0 billion and $8.2 billion, respectively, of Chrysler Capital loans, which represented 33% and 37%, respectively, of the Company's auto RIC portfolio.

19

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

ACL Rollforward by Portfolio Segment

The activity in the ACL by portfolio segment for the three-month and six-month periods endedJune 30, 2018 and 2017 was as follows:

	Three-Month Period Ended June 30, 2018
	Commercial			Consumer			Unallocated		Total
	(in thousands)
ALLL, beginning of period	$	462,074		$	3,344,112		$	47,023	$	3,853,209
(Release of) / Provision for loan and lease losses	(33,213		)	415,940			—		382,727
Charge-offs	(16,665		)	(1,036,520		)	—		(1,053,185		)
Recoveries	14,624			613,359			—		627,983
Charge-offs, net of recoveries	(2,041		)	(423,161		)	—		(425,202		)
ALLL, end of period	$	426,820		$	3,336,891		$	47,023	$	3,810,734
Reserve for unfunded lending commitments, beginning of period	$	89,543		$	323		$	—	$	89,866
Release of reserve for unfunded lending commitments	(2,885		)	(8		)	—		(2,893		)
Reserve for unfunded lending commitments, end of period	86,658			315			—		86,973
Total ACL, end of period	$	513,478		$	3,337,206		$	47,023	$	3,897,707
	Six-Month Period Ended June 30, 2018
(in thousands)	Commercial			Consumer			Unallocated		Total
Allowance for loan and lease losses ("ALLL"), beginning of period	$	443,796		$	3,420,756		$	47,023	$	3,911,575
Provision for loan and lease losses	8,020			896,486			—		904,506
Charge-offs	(49,625		)	(2,255,456		)	—		(2,305,081		)
Recoveries	24,629			1,275,105			—		1,299,734
Charge-offs, net of recoveries	(24,996		)	(980,351		)	—		(1,005,347		)
ALLL, end of period	$	426,820		$	3,336,891		$	47,023	$	3,810,734
Reserve for unfunded lending commitments, beginning of period	$	108,805		$	306		$	—	$	109,111
(Release of) / Provision for reserve for unfunded lending commitments	(22,147		)	9			—		(22,138		)
Reserve for unfunded lending commitments, end of period	86,658			315			—		86,973
Total ACL, end of period	$	513,478		$	3,337,206		$	47,023	$	3,897,707
Ending balance, individually evaluated for impairment(1)	$	83,148		$	1,534,387		$	—	$	1,617,535
Ending balance, collectively evaluated for impairment	343,672			1,802,504			47,023		2,193,199
Financing receivables:
Ending balance	$	39,605,332		$	45,091,371		$	—	$	84,696,703
Ending balance, evaluated under the FVO or lower of cost or fair value	65,528			1,521,803			—		1,587,331
Ending balance, individually evaluated for impairment(1)	509,693			6,332,923			—		6,842,616
Ending balance, collectively evaluated for impairment	39,030,111			37,236,645			—		76,266,756

(1) Consists of loans in troubled debt restructuring ("TDR") status.

20

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

	Three-Month Period Ended June 30, 2017
	Commercial			Consumer			Unallocated		Total
	(in thousands)
ALLL, beginning of period	$	453,019		$	3,422,821		$	47,023	$	3,922,863
(Release of) / Provision for loan and lease losses	26,687			584,998			—		611,685
Charge-offs	(60,514		)	(1,128,919		)	—		(1,189,433		)
Recoveries	9,056			599,437			—		608,493
Charge-offs, net of recoveries	(51,458		)	(529,482		)	—		(580,940		)
ALLL, end of period	$	428,248		$	3,478,337		$	47,023	$	3,953,608
Reserve for unfunded lending commitments, beginning of period	$	119,620		$	776		$	—	$	120,396
(Release of) / Provision for unfunded lending commitments	(6,937		)	20			—		(6,917		)
Loss on unfunded lending commitments	(1,668		)	—			—		(1,668		)
Reserve for unfunded lending commitments, end of period	111,015			796			—		111,811
Total ACL, end of period	$	539,263		$	3,479,133		$	47,023	$	4,065,419
	Six-Month Period Ended June 30, 2017
(in thousands)	Commercial			Consumer			Unallocated		Total
ALLL, beginning of period	$	449,835		$	3,317,606		$	47,023	$	3,814,464
Provision for loan and lease losses	45,465			1,303,556			—		1,349,021
Charge-offs	(86,687		)	(2,366,199		)	—		(2,452,886		)
Recoveries	19,635			1,223,374			—		1,243,009
Charge-offs, net of recoveries	(67,052		)	(1,142,825		)	—		(1,209,877		)
ALLL, end of period	$	428,248		$	3,478,337		$	47,023	$	3,953,608
Reserve for unfunded lending commitments, beginning of period	$	121,613		$	806		$	—	$	122,419
Release of unfunded lending commitments	(8,797		)	(10		)	—		(8,807		)
Loss on unfunded lending commitments	(1,801		)	—			—		(1,801		)
Reserve for unfunded lending commitments, end of period	111,015			796			—		111,811
Total ACL, end of period	$	539,263		$	3,479,133		$	47,023	$	4,065,419
Ending balance, individually evaluated for impairment(1)	$	73,946		$	1,636,770		$	—	$	1,710,716
Ending balance, collectively evaluated for impairment	354,302			1,841,567			47,023		2,242,892
Financing receivables:
Ending balance	$	41,233,130		$	44,227,460		$	—	$	85,460,590
Ending balance, evaluated under the FVO or lower of cost or fair value(1)	160,252			2,377,177			—		2,537,429
Ending balance, individually evaluated for impairment(1)	640,255			6,202,430			—		6,842,685
Ending balance, collectively evaluated for impairment	40,432,623			35,647,853			—		76,080,476

(1) Consists of loans in TDR status.

21

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

The following table presents the activity in the allowance for loan losses for the RICs acquired in the Change in Control and those originated by SC subsequent to the Change in Control.

	Three-Month Period Ended									Six-Month Period Ended
	June 30, 2018									June 30, 2018
(in thousands)	Purchased			Originated			Total			Purchased			Originated			Total
ALLL, beginning of period	$	322,726		$	2,782,640		$	3,105,366		$	384,167		$	2,779,044		$	3,163,211
(Release of) / Provision for loan and lease losses	(30,031		)	397,433			367,402			(45,861		)	884,593			838,732
Charge-offs	(76,265		)	(921,748		)	(998,013		)	(181,775		)	(2,000,263		)	(2,182,038		)
Recoveries	49,791			556,887			606,678			109,690			1,151,838			1,261,528
Charge-offs, net of recoveries	(26,474		)	(364,861		)	(391,335		)	(72,085		)	(848,425		)	(920,510		)
ALLL, end of period	$	266,221		$	2,815,212		$	3,081,433		$	266,221		$	2,815,212		$	3,081,433

	Three-Month Period Ended									Six-Month Period Ended
	June 30, 2017									June 30, 2017
(in thousands)	Purchased			Originated			Total			Purchased			Originated			Total
ALLL, beginning of period	$	495,221		$	2,707,884		$	3,203,105		$	559,092		$	2,538,127		$	3,097,219
Provision for loan and lease losses	55,141			502,256			557,397			81,266			1,162,779			1,244,045
Charge-offs	(150,143		)	(939,328		)	(1,089,471		)	(338,829		)	(1,947,381		)	(2,286,210		)
Recoveries	68,452			521,854			590,306			167,142			1,039,141			1,206,283
Charge-offs, net of recoveries	(81,691		)	(417,474		)	(499,165		)	(171,687		)	(908,240		)	(1,079,927		)
ALLL, end of period	$	468,671		$	2,792,666		$	3,261,337		$	468,671		$	2,792,666		$	3,261,337

Refer to Note 16 for discussion of contingencies and possible losses related to the impact of hurricane activity in regions where the Company has lending activities.

22

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

Non-accrual loans by Class of Financing Receivable

The recorded investment in non-accrual loans disaggregated by class of financing receivables and other non-performing assets is summarized as follows:

(in thousands)	June 30, 2018		December 31, 2017
Non-accrual loans:
Commercial:
CRE	$	123,305	$	139,236
Commercial and industrial	162,134		230,481
Multifamily	28,501		11,348
Other commercial	77,052		83,468
Total commercial loans	390,992		464,533
Consumer:
Residential mortgages	241,886		265,436
Home equity loans and lines of credit	125,834		134,162
RICs and auto loans - originated	1,924,294		1,816,226
RICs - purchased	203,346		256,617
Personal unsecured loans	7,035		2,366
Other consumer	8,570		10,657
Total consumer loans	2,510,965		2,485,464
Total non-accrual loans	2,901,957		2,949,997
Other real estate owned ("OREO")	118,502		130,777
Repossessed vehicles	147,430		210,692
Foreclosed and other repossessed assets	1,212		2,190
Total OREO and other repossessed assets	267,144		343,659
Total non-performing assets	$	3,169,101	$	3,293,656

Age Analysis of Past Due Loans

The servicing practices for RICs originated after January 1, 2017 changed such that there is an increase in the minimum payment requirements. While this change does impact the measurement of customer delinquencies, we concluded that it does not have a significant impact on the amount or timing of the recognition of credit losses and allowance for loan losses. For reporting of past due loans, with respect to RICs originated through our "Chrysler Capital" channel, the required minimum payment is 90% of the scheduled payment. With respect to RICs originated by the Company or acquired from an unaffiliated third-party originator on or after January 1, 2017, the required minimum payment is 90% of the scheduled payment, whereas previous to January 1, 2017, the required minimum payment for certain RICs was 50% of the scheduled payment. The payment following the partial payment must be a full payment, or the account will move into delinquency status at that time.

23

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

The age of recorded investments in past due loans and accruing loans 90 days or greater past due disaggregated by class of financing receivables is summarized as follows:

	As of:
		June 30, 2018
(in thousands)		30-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total Financing Receivables(1)		Recorded Investment > 90 Days and Accruing
Commercial:
CRE		$	15,236	$	82,133	$	97,369	$	8,956,033	$	9,053,402	$	—
Commercial and industrial (1)		66,136		81,113		147,249		14,613,986		14,761,235		—
Multifamily		5,538		8,369		13,907		8,310,018		8,323,925		—
Other commercial		23,740		2,954		26,694		7,440,076		7,466,770		—
Consumer:
Residential mortgages		189,762		194,558		384,320		9,338,096		9,722,416		—
Home equity loans and lines of credit		42,235		82,809		125,044		5,557,186		5,682,230		—
RICs and auto loans - originated		3,038,768		229,528		3,268,296		22,416,117		25,684,413		—
RICs and auto loans - purchased		300,474		21,587		322,061		924,545		1,246,606		—
Personal unsecured loans		91,172		100,735		191,907		2,041,849		2,233,756		88,162
Other consumer		14,351		10,379		24,730		497,220		521,950		—
Total		$	3,787,412	$	814,165	$	4,601,577	$	80,095,126	$	84,696,703	$	88,162

(1) Commercial and industrial loans includes $65.5 million of LHFS at June 30, 2018.

(2) Residential mortgages includes $257.7 million of LHFS at June 30, 2018.

(3) RICs and auto loans includes $280.1 million of LHFS at June 30, 2018.

(4) Personal unsecured loans includes $956.5 million of LHFS at June 30, 2018.

	As of
		December 31, 2017
(in thousands)		30-89 Days Past Due		90 Days or Greater		Total Past Due		Current		Total Financing Receivable(1)		Recorded Investment > 90 Days and Accruing
Commercial:
CRE		$	25,174	$	100,524	$	125,698	$	9,153,527	$	9,279,225	$	—
Commercial and industrial		49,584		75,924		125,508		14,461,981		14,587,489		—
Multifamily		3,562		2,990		6,552		8,267,883		8,274,435		—
Other commercial		34,021		3,359		37,380		7,137,359		7,174,739		—
Consumer:
Residential mortgages		217,558		210,777		428,335		8,628,600		9,056,935		—
Home equity loans and lines of credit		50,919		91,975		142,894		5,764,839		5,907,733		—
RICs and auto loans - originated		3,405,721		327,045		3,732,766		20,449,706		24,182,472		—
RICs and auto loans - purchased		452,235		40,516		492,751		1,342,117		1,834,868		—
Personal unsecured loans		85,394		105,054		190,448		2,157,319		2,347,767		96,461
Other consumer		24,879		14,220		39,099		578,576		617,675		—
Total		$	4,349,047	$	972,384	$	5,321,431	$	77,941,907	$	83,263,338	$	96,461

(1) Commercial and industrial loans included$149.2 million of LHFS at December 31, 2017.

(2) Residential mortgages included $210.2 million of LHFS at December 31, 2017,

(3) RICs and auto loans included $1.1 billion of LHFS at December 31, 2017.

(4) Personal unsecured loans included $1.1 billion of LHFS at December 31, 2017.

24

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

Impaired Loans by Class of Financing Receivable

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

Impaired loans disaggregated by class of financing receivables are summarized as follows:

	June 30, 2018
(in thousands)	Recorded Investment(1)		UPB		Related Specific Reserves		Average Recorded Investment
With no related allowance recorded:
Commercial:
CRE	$	123,390	$	131,958	$	—	$	124,898
Commercial and industrial	42,551		56,786		—		62,546
Multifamily	15,051		15,984		—		12,469
Other commercial	2,143		2,159		—		1,455
Consumer:
Residential mortgages	149,804		202,187		—		128,562
Home equity loans and lines of credit	52,375		54,442		—		52,386
RICs and auto loans - originated	8		8		—		4
RICs and auto loans - purchased	11,091		14,249		—		13,642
Personal unsecured loans(2)	31,380		31,380		—		31,186
Other consumer	4,138		4,138		—		6,848
With an allowance recorded:
Commercial:
CRE	88,132		101,985		12,762		92,906
Commercial and industrial	152,889		171,757		47,874		164,829
Multifamily	—		—		—		3,101
Other commercial	70,495		70,495		22,512		74,104
Consumer:
Residential mortgages	272,569		312,075		30,277		297,331
Home equity loans and lines of credit	62,999		75,158		5,221		63,913
RICs and auto loans - originated	4,886,182		4,921,618		1,243,143		4,837,241
RICs and auto loans - purchased	878,021		992,305		247,611		1,022,249
Personal unsecured loans	16,473		16,860		7,005		16,475
Other consumer	10,351		13,616		1,130		10,972
Total:
Commercial	$	494,651	$	551,124	$	83,148	$	536,308
Consumer	6,375,391		6,638,036		1,534,387		6,480,809
Total	$	6,870,042	$	7,189,160	$	1,617,535	$	7,017,117

(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.

25

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

The Company recognized interest income, not including the impact of purchase accounting adjustments, of $475.0 million for the six-month period endedJune 30, 2018 on approximately $5.8 billion of TDRs that were in performing status as of June 30, 2018.

	December 31, 2017
(in thousands)	Recorded Investment(1)		UPB		Related Specific Reserves		Average Recorded Investment
With no related allowance recorded:
Commercial:
CRE	$	126,406	$	174,842	$	—	$	139,063
Commercial and industrial	82,541		96,324		—		75,338
Multifamily	9,887		10,838		—		10,129
Other commercial	767		911		—		903
Consumer:
Residential mortgages	107,320		128,458		—		141,195
Home equity loans and lines of credit	52,397		54,421		—		50,635
RICs and auto loans - purchased	16,192		20,783		—		25,283
Personal unsecured loans(2)	30,992		30,992		—		28,500
Other consumer	9,557		13,055		—		14,446
With an allowance recorded:
Commercial:
CRE	97,680		117,730		18,523		118,492
Commercial and industrial	176,769		200,382		59,696		196,674
Multifamily	6,201		6,201		313		4,566
Other commercial	77,712		77,772		23,794		42,465
Consumer:
Residential mortgages	322,092		392,833		40,963		303,361
Home equity loans and lines of credit	64,827		77,435		4,770		57,345
RICs and auto loans - originated	4,788,299		4,847,929		1,350,022		4,029,808
RICs and auto loans - purchased	1,166,476		1,318,306		347,663		1,511,212
Personal unsecured loans	16,477		16,661		6,259		16,668
Other consumer	11,592		15,290		2,151		12,343
Total:
Commercial	$	577,963	$	685,000	$	102,326	$	587,630
Consumer	6,586,221		6,916,163		1,751,828		6,190,796
Total	$	7,164,184	$	7,601,163	$	1,854,154	$	6,778,426

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

(2) Includes LHFS.

The Company recognized interest income, not including the impact of purchase accounting adjustments, of $795.4 million for the year ended December 31, 2017 on approximately $5.8 billion of TDRs that were in performing status as of December 31, 2017.

Commercial Lending Asset Quality Indicators

Commercial credit quality disaggregated by class of financing receivables is summarized according to standard regulatory classifications as follows:

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

26

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

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

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

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

LOSS. Credit is considered uncollectible and of such little value that it does not warrant consideration as an active asset. There may be some recovery or salvage value, but there is doubt as to whether, how much or when the recovery would occur.

Commercial loan credit quality indicators by class of financing receivables are summarized as follows:

June 30, 2018	CRE		Commercial and industrial		Multifamily		Remaining commercial		Total(1)
			(in thousands)
Rating:
Pass	$	8,083,421	$	13,542,599	$	8,153,959	$	7,331,209	$	37,111,188
Special mention	622,906		786,928		116,139		57,189		1,583,162
Substandard	318,542		357,163		53,827		16,280		745,812
Doubtful	28,533		74,545		—		62,092		165,170
Total commercial loans	$	9,053,402	$	14,761,235	$	8,323,925	$	7,466,770	$	39,605,332

(1) Financing receivables include LHFS.

December 31, 2017	CRE		Commercial and industrial		Multifamily		Remaining commercial		Total(1)
			(in thousands)
Rating:
Pass	$	8,281,626	$	13,176,248	$	8,123,727	$	7,059,627	$	36,641,228
Special mention	645,835		941,683		105,225		29,657		1,722,400
Substandard	317,510		398,325		45,483		21,747		783,065
Doubtful	34,254		71,233		—		63,708		169,195
Total commercial loans	$	9,279,225	$	14,587,489	$	8,274,435	$	7,174,739	$	39,315,888

(1) Financing receivables include LHFS.

Consumer Lending Asset Quality Indicators-Credit Score

Consumer financing receivables for which either an internal or external credit score is a core component of the allowance model are summarized by credit score as follows:

Credit Score Range(2)	June 30, 2018				December 31, 2017
(dollars in thousands)	RICs and auto loans(3)		Percent		RICs and auto loans(3)		Percent
No FICO®(1)	$	3,403,051	12.6	%	$	4,530,238	17.4	%
<600	14,547,771		54.0	%	13,395,203		51.4	%
600-639	4,812,533		17.9	%	4,332,278		16.7	%
>=640	4,167,664		15.5	%	3,759,621		14.5	%
Total	$	26,931,019	100.0	%	$	26,017,340	100.0	%

(1) Consists primarily of loans for which credit scores are not considered in the ALLL model.

(2) Credit scores updated quarterly.

(3) RICs and auto loans include $280.1 million and $1.1 billion of LHFS at June 30, 2018 and December 31, 2017, respectively, that do not have an allowance.

27

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

Consumer Lending Asset Quality Indicators-FICO and LTV Ratio

For both residential and home equity loans, loss severity assumptions are incorporated in the loan and lease loss reserve models to estimate loan balances that will ultimately charge off. These assumptions are based on recent loss experience within various current LTV bands within these portfolios. LTVs are refreshed quarterly by applying Federal Housing Finance Agency Home price index changes at a state-by-state level to the last known appraised value of the property to estimate the current LTV. The Company's ALLL incorporates the refreshed LTV information to update the distribution of defaulted loans by LTV as well as the associated loss given default for each LTV band. Reappraisals on a recurring basis at the individual property level are not considered cost-effective or necessary; however, reappraisals are performed on certain higher risk accounts to support line management activities, default servicing decisions, or when other situations arise for which the Company believes the additional expense is warranted.

Residential mortgage and home equity financing receivables by LTV and FICO range are summarized as follows:

	Residential Mortgages(1)(3)
June 30, 2018	N/A(2)		LTV<=70%		70.01-80%		80.01-90%		90.01-100%		100.01-110%		LTV>110%		Grand Total
FICO Score	(dollars in thousands)
N/A(2)	$	321,527	$	6,177	$	696	$	125	$	—	$	—	$	—	$	328,525
<600	122		225,222		57,160		36,241		23,164		2,478		1,291		345,678
600-639	—		165,555		40,221		32,254		32,891		723		3,875		275,519
640-679	—		303,105		110,602		84,804		100,378		1,733		7,226		607,848
680-719	51		584,346		263,437		137,239		166,263		2,900		5,241		1,159,477
720-759	89		1,041,861		534,160		193,645		215,346		5,038		6,563		1,996,702
>=760	308		3,248,228		1,191,487		321,021		229,639		6,924		11,060		5,008,667
Grand Total	$	322,097	$	5,574,494	$	2,197,763	$	805,329	$	767,681	$	19,796	$	35,256	$	9,722,416

(1) Includes LHFS.

(2) Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable.

(3) Allowance model considers LTV for financing receivables in first lien position for the Company and combined LTV ("CLTV") for financing receivables in second lien position for the Company.

	Home Equity Loans and Lines of Credit(2)
June 30, 2018	N/A(1)		LTV<=70%		70.01-90%		90.01-110%		LTV>110%		Grand Total
FICO Score	(dollars in thousands)
N/A(1)	$	182,480	$	1,754	$	967	$	—	$	—	$	185,201
<600	7,595		194,995		66,231		16,682		5,645		291,148
600-639	5,127		161,678		53,759		7,206		6,776		234,546
640-679	3,788		289,718		120,930		14,430		7,646		436,512
680-719	7,299		511,686		229,819		22,310		13,956		785,070
720-759	7,402		749,367		319,806		25,554		14,540		1,116,669
>=760	13,709		1,830,019		701,053		56,261		32,042		2,633,084
Grand Total	$	227,400	$	3,739,217	$	1,492,565	$	142,443	$	80,605	$	5,682,230

(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.

28

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

	Residential Mortgages(1)(3)
December 31, 2017	N/A (2)		LTV<=70%		70.01-80%		80.01-90%		90.01-100%		100.01-110%		LTV>110%		Grand Total
FICO Score	(dollars in thousands)
N/A(2)	$	372,116	$	6,759	$	1,214	$	—	$	—	$	—	$	—	$	380,089
<600	21		220,737		55,108		35,617		23,834		2,505		6,020		343,842
600-639	45		155,920		42,420		35,009		34,331		2,696		6,259		276,680
640-679	37		320,248		94,601		90,708		86,740		3,011		2,641		597,986
680-719	98		554,058		236,602		136,980		147,754		3,955		10,317		1,089,764
720-759	92		952,532		480,900		178,876		183,527		4,760		8,600		1,809,287
>=760	588		3,019,514		1,066,919		263,541		187,713		8,418		12,594		4,559,287
Grand Total	$	372,997	$	5,229,768	$	1,977,764	$	740,731	$	663,899	$	25,345	$	46,431	$	9,056,935

(1) Includes LHFS.

(2) Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable.

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

	Home Equity Loans and Lines of Credit(2)
December 31, 2017	N/A(1)		LTV<=70%		70.01-90%		90.01-110%		LTV>110%		Grand Total
FICO Score	(dollars in thousands)
N/A(1)	$	154,690	$	536	$	238	$	—	$	—	$	155,464
<600	8,064		190,657		64,554		16,634		22,954		302,863
600-639	6,276		158,461		61,250		9,236		9,102		244,325
640-679	6,745		297,003		127,347		19,465		14,058		464,618
680-719	8,875		500,234		258,284		24,675		20,261		812,329
720-759	8,587		724,831		332,508		30,526		19,119		1,115,571
>=760	17,499		1,917,373		768,905		73,573		35,213		2,812,563
Grand Total	$	210,736	$	3,789,095	$	1,613,086	$	174,109	$	120,707	$	5,907,733

(1) Residential mortgages and home equity loans and lines of credit in the "N/A" range for LTV or FICO score primarily represent the balance on loans serviced by others, in run-off portfolios or for which a current LTV or FICO score is unavailable.

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

TDR Loans

The following table summarizes the Company’s performing and non-performing TDRs at the dates indicated:

(in thousands)	June 30, 2018		December 31, 2017
Performing	$	5,809,300	$	5,824,304
Non-performing	804,006		982,868
Total (1)	$	6,613,306	$	6,807,172

Commercial Loan TDRs

All of the Company’s commercial loan modifications are based on the circumstances of the individual customer, including specific customers' complete relationships with the Company. Loan terms are modified to meet each borrower’s specific circumstances at a point in time and may allow for modifications such as term extensions and interest rate reductions. 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.

29

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

Consumer Loan TDRs

The primary modification program for the Company’s residential mortgage and home equity portfolios is a proprietary program designed to keep customers in their homes and, when appropriate, prevent them from entering into foreclosure. The program is available to all customers facing a financial hardship regardless of their delinquency status. The main goal of the modification program is to review the customer’s entire financial condition to ensure that the proposed modified payment solution is affordable according to a specific debt-to-income (“DTI") ratio range. The main modification benefits of the program allow for term extensions, interest rate reductions, and/or deferment of principal. The Company reviews each customer on a case-by-case basis to determine which benefit or combination of benefits will be offered to achieve the target DTI range.

For the Company’s other consumer portfolios, including RICs and auto loans, the terms of the modifications generally include one or a combination of: a reduction of the stated interest rate of the loan to a rate of interest lower than the current market rate for new debt with similar risk, an extension of the maturity date or principal forgiveness.

Consumer TDRs excluding RICs are generally placed on non-accrual status until the Company believes repayment under the revised terms is reasonably assured and a sustained period of repayment performance has been achieved (typically six months for a monthly amortizing loan). Any loan that has remained current for the six months immediately prior to modification will remain on accrual status after the modification is implemented. RIC TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured, and considered for return to accrual when a sustained period of repayment performance has been achieved. The TDR classification will remain on the loan until it is paid in full or liquidated.

In addition to loans identified as TDRs above, the guidance also requires loans discharged under Chapter 7 bankruptcy proceedings to be considered TDRs and collateral-dependent, regardless of delinquency status. TDRs that are collateral-dependent loans must be written down to the fair market value of the collateral, less costs to sell and classified as non-accrual/non-performing loans (“NPLs") for the remaining life of the loan.

TDR Impact to ALLL

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

Upon TDR modification, the Company generally measures impairment based on a present value of expected future cash flows methodology considering all available evidence, 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.

RIC TDRs that subsequently default continue to have impairment measured based on the difference between the recorded investment of the RIC and the present value of expected cash flows. For the Company's other consumer TDR portfolios, impairment on subsequent defaults is generally measured based on the fair value of the collateral, if applicable, less its estimated cost to sell.

Typically, commercial loans whose terms are modified in a TDR will have been identified as impaired prior to modification and accounted for generally using a present value of expected future cash flows methodology, unless the loan is considered collateral-dependent. Loans considered collateral-dependent are measured for impairment based on 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.

30

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

Financial Impact and TDRs by Concession Type

The following tables detail the activity of TDRs for the three-month and six-month periods endedJune 30, 2018 and 2017, respectively:

	Three-Month Period Ended June 30, 2018
	Number of Contracts	Pre-TDR Recorded Investment(1)		Term Extension			Rate Reduction			Principal Forbearance		Other(4)			Post-TDR Recorded Investment(2)
	(dollars in thousands)
Commercial:
CRE	24	$	12,384	$	347		$	(1,771	)	$	1,313	$	(893	)	$	11,380
Commercial and industrial	68	2,111		(1		)	—			—		(2		)	2,108
Consumer:
Residential mortgages(3)	54	8,403		—			—			—		(9		)	8,394
Home equity loans and lines of credit	44	2,840		13			36			—		(24		)	2,865
RICs and auto loans - originated	41,833	704,222		(920		)	—			—		(8		)	703,294
RICs - purchased	1,223	7,915		(27		)	—			—		—			7,888
Personal unsecured loans	3,906	6,697		—			—			—		(199		)	6,498
Other consumer	4	215		—			—			—		(1		)	214
Total	47,156	$	744,787	$	(588	)	$	(1,735	)	$	1,313	$	(1,136	)	$	742,641
	Six-Month Period Ended June 30, 2018
	Number of Contracts	Pre-TDR Recorded Investment(1)		Term Extension			Rate Reduction			Principal Forbearance		Other(4)			Post-TDR Recorded Investment(2)
	(dollars in thousands)
Commercial:
CRE	51	$	46,892	$	336		$	(1,771	)	$	1,283	$	(1,994	)	$	44,746
Commercial and industrial	149	5,895		(4		)	—			—		(133		)	5,758
Consumer:
Residential mortgages(3)	115	18,330		—			—			—		(729		)	17,601
Home equity loans and lines of credit	138	8,944		13			36			—		(256		)	8,737
RICs and auto loans - originated	74,783	1,271,621		(1,489		)	—			—		(80		)	1,270,052
RICs - purchased	2,842	20,239		(76		)	—			—		(22		)	20,141
Personal unsecured loans	7,568	13,038		—			—			—		(284		)	12,754
Other consumer	7	224		—			—			—		(5		)	219
Total	85,653	$	1,385,183	$	(1,220	)	$	(1,735	)	$	1,283	$	(3,503	)	$	1,380,008

(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.

31

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

	Three-Month Period Ended June 30, 2017
	Number of Contracts	Pre-TDR Recorded Investment(1)		Term Extension			Rate Reduction		Principal Forbearance			Other(4)			Post-TDR Recorded Investment(2)
	(dollars in thousands)
Commercial:
CRE	31	$	129,322	$	(14,269	)	$	127	$	(13,482	)	$	(669	)	$	101,029
Commercial and industrial	145	4,373		(3		)	—		—			(4		)	4,366
Consumer:
Residential mortgages(3)	60	12,981		6			—		—			116			13,103
Home equity loans and lines of credit	17	1,411		—			—		—			417			1,828
RICs and auto loans - originated	45,843	797,572		(787		)	—		—			(40		)	796,745
RICs - purchased	24	101		(1		)	—		—			—			100
Personal unsecured loans	3,572	6,038		—			—		—			(68		)	5,970
Other consumer	48	1,421		—			—		—			1			1,422
Total	49,740	$	953,219	$	(15,054	)	$	127	$	(13,482	)	$	(247	)	$	924,563
	Six-Month Period Ended June 30, 2017
	Number of Contracts	Pre-TDR Recorded Investment(1)		Term Extension			Rate Reduction		Principal Forbearance			Other(4)			Post-TDR Recorded Investment(2)
	(dollars in thousands)
Commercial:
CRE	55	$	159,323	$	(14,271	)	$	127	$	(13,481	)	$	(329	)	$	131,369
Commercial and industrial	387	12,407		(7		)	—		—			(4		)	12,396
Consumer:
Residential mortgages(3)	149	28,974		6			133		—			(200		)	28,913
Home equity loans and lines of credit	36	2,843		—			—		—			538			3,381
RICs and auto loans - originated	96,753	1,704,171		(1,721		)	—		—			(147		)	1,702,303
RICs - purchased	79	390		(6		)	—		—			(2		)	382
Personal unsecured loans	7,890	13,140		—			—		—			(113		)	13,027
Other consumer	107	3,539		—			—		—			—			3,539
Total	105,456	$	1,924,787	$	(15,999	)	$	260	$	(13,481	)	$	(257	)	$	1,895,310

(1) Pre-TDR modification outstanding recorded investment amount is the month-end balance prior to the month in which the modification occurred.

(2) Post-TDR modification outstanding recorded investment amount is the month-end balance for the month in which the modification occurred.

(3) The post-TDR modification outstanding recorded investment amounts for residential mortgages exclude interest reserves.

(4) Other modifications may include modifications such as interest rate reductions, fee waivers, or capitalization of fees.

32

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

TDRs Which Have Subsequently Defaulted

A TDR is generally considered to have subsequently defaulted if, after modification, the loan becomes 90 days past due. For RICs, a TDR is considered to have subsequently defaulted after modification at the earlier of the date of repossession or 120 days past due. The following table details period-end recorded investment balances of TDRs that became TDRs during the past twelve-month period and have subsequently defaulted during the three-month and six-month periods endedJune 30, 2018 and June 30, 2017, respectively.

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
	2018			2017			2018			2017
	Number of Contracts	Recorded Investment(1)		Number of Contracts	Recorded Investment(1)		Number of Contracts	Recorded Investment(1)		Number of Contracts	Recorded Investment(1)
	(dollars in thousands)						(dollars in thousands)
Commercial
CRE	2	$	309	3	$	217	4	$	593	5	$	439
Commercial and industrial	42	1,275		45	1,699		94	2,795		102	3,632
Consumer:
Residential mortgages	32	3,967		67	10,306		96	12,835		120	15,065
Home equity loans and lines of credit	13	608		2	37		20	1,159		4	210
RICs and auto loans	8,786	145,373		10,940	193,280		20,808	347,042		23,221	407,282
Personal Unsecured loans	57	566		1,013	2,522		2,381	3,809		1,936	4,740
Other consumer	1	5		11	158		2	15		22	276
Total	8,933	$	152,103	12,081	$	208,219	23,405	$	368,248	25,410	$	431,644

(1) The recorded investment represents the period-end balance at June 30, 2018 and 2017. Does not include Chapter 7 bankruptcy TDRs.

NOTE 5. OPERATING LEASE ASSETS, NET

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

Operating lease assets, net consisted of the following as of June 30, 2018 and December 31, 2017:

(in thousands)	June 30, 2018			December 31, 2017
Leased vehicles	$	15,885,554		$	14,751,568
Origination fees and other costs	45,685			27,246
Manufacturer subvention payments	(1,152,531		)	(1,047,113		)
Leased vehicles, gross	14,778,708			13,731,701
Less: accumulated depreciation	(3,051,322		)	(3,333,125		)
Leased vehicles, net	11,727,386			10,398,576
Commercial equipment vehicles and aircraft, gross	133,142			93,981
Less: accumulated depreciation	(26,306		)	(18,249		)
Commercial equipment vehicles and aircraft, net	106,836			75,732
Total operating lease assets, net	$	11,834,222		$	10,474,308

33

NOTE 5. OPERATING LEASE ASSETS, NET (continued)

The following summarizes the future minimum rental payments due to the Company as lessor under operating leases as of June 30, 2018 (in thousands):

2018	$	1,065,036
2019	1,676,115
2020	991,768
2021	175,753
2022	10,655
Thereafter	16,679
Total	$	3,936,006

Lease income for the three-month and six-month periods endedJune 30, 2018 was $569.3 million and $1.1 billion, respectively, compared to $489.0 million and $985.1 million, respectively, for the three-month and six-month periods endedJune 30, 2017.

During the three-month and six-month periods endedJune 30, 2018, the Company recognized $65.7 million and $118.9 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 $39.8 million and $62.5 million for the corresponding periods in 2017, respectively. These amounts are recorded within Miscellaneous income, net in the Company's Condensed Consolidated Statements of Operations.

Lease expense for the three-month and six-month periods endedJune 30, 2018 was $436.8 million and $861.1 million, respectively, compared to $369.2 million and $728.0 million respectively, for the three-month and six-month periods endedJune 30, 2017.

NOTE 6. 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 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 in the Condensed Consolidated Financial Statements.

For further description of the Company’s securitization activities, involvement with VIEs and accounting policies regarding consolidation of VIEs, see Note 7 of its Annual Report on Form 10-K for 2017.

On-balance sheet VIEs

The assets of consolidated VIEs that are included in the Company's Condensed Consolidated Financial Statements, presented reflecting 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:

(in thousands)	June 30, 2018		December 31, 2017
Assets
Restricted cash	$	1,657,399	$	1,995,557
Loans(1)(2)	23,095,829		22,712,864
Operating lease assets, net	11,729,482		10,160,327
Various other assets	701,267		733,123
Total Assets	$	37,183,977	$	35,601,871
Liabilities
Notes payable(2)	$	29,515,015	$	28,469,999
Various other liabilities	221,065		197,969
Total Liabilities	$	29,736,080	$	28,667,968

(1) Includes $63.9 million and $1.1 billion of RICs HFS at June 30, 2018 and December 31, 2017, respectively.

(2) Reflects the impacts of purchase accounting.

34

NOTE 6. VIEs (continued)

Certain amounts shown above are greater than the amounts shown in the corresponding line items in the accompanying Condensed Consolidated Balance Sheets due to intercompany eliminations between the VIEs and other entities consolidated by the Company. The amounts shown above are also impacted by purchase accounting marks from the Change in Control. For example, for most of its securitizations, the Company retains one or more of the lowest tranches of bonds. Rather than showing investment in bonds as an asset and the associated debt as a liability, these amounts are eliminated in consolidation as required by GAAP.

The Company retains servicing responsibility for receivables transferred to the Trusts and receives a monthly servicing fee on the outstanding principal balance. Supplemental fees, such as late charges, for servicing the receivables are reflected in Miscellaneous income. As of June 30, 2018 and December 31, 2017, the Company was servicing $26.3 billion and $26.1 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 June 30,				Six-Month Period Ended June 30,
(in thousands)	2018		2017		2018		2017
Assets securitized	$	6,511,953	$	4,750,103	$	13,752,897	$	12,396,728
Net proceeds from new securitizations (1)	$	4,581,874	$	3,485,091	$	8,058,196	$	9,061,892
Net proceeds from sale of retained bonds	382,022		157,763		593,632		273,733
Cash received for servicing fees (2)	213,900		215,994		429,690		424,917
Net distributions from Trusts (2)	780,834		729,557		1,325,986		1,407,786
Total cash received from Trusts	$	5,958,630	$	4,588,405	$	10,407,504	$	11,168,328

(1) Includes additional advances on existing securitizations.

(2) These amounts are not reflected in the accompanying Condensed Consolidated SCF because the cash flows are between the VIEs and other entities included in the consolidation.

Off-balance sheet VIEs

During the three- and six-month periods endedJune 30, 2018, the Company sold $1.2 billion and $2.6 billion of gross RICs to VIEs in off-balance sheet securitizations for a loss of $3.2 million and $20.1 million, respectively. During the three and six months ended June 30, 2017, the Company sold $0.5 billion and $1.2 billion of gross RICs to VIEs in off-balance sheet securitizations for a loss of $3.5 million and $6.2 million, respectively. The transactions were executed under securitization platforms with Santander. Santander holds eligible vertical interests in notes and certificates of not less than 5% to comply with the DFA's risk retention rules.

As of June 30, 2018 and December 31, 2017, the Company was servicing $4.9 billion and $3.4 billion, respectively, of gross RICs that have been sold in off-balance sheet securitizations and were subject to an optional clean-up call. The portfolio was comprised as follows:

(in thousands)	June 30, 2018		December 31, 2017
Spain Private Auto Issuing Note ("SPAIN") trust	$	3,967,665	$	2,024,016
Total serviced for related parties	3,967,665		2,024,016
Chrysler Capital securitizations	960,057		1,404,232
Total serviced for third parties	960,057		1,404,232
Total serviced for other portfolio	$	4,927,722	$	3,428,248

Other than repurchases of sold assets due to standard representations and warranties, the Company has no exposure to loss as a result of its involvement with these VIEs.

35

NOTE 6. VIEs (continued)

A summary of the cash flows received from the off-balance sheet Trusts for the periods indicated is as follows:

	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,
(in thousands)	2018		2017		2018		2017
Assets securitized (1)	$	1,156,060	$	536,309	$	2,631,313	$	1,236,331
Net proceeds from new securitizations	$	1,160,119	$	538,478	$	2,634,919	$	1,240,797
Cash received for servicing fees	12,616		11,970		20,694		13,368
Total cash received from Trusts	$	1,172,735	$	550,448	$	2,655,613	$	1,254,165

(1) Represents the UPB at the time of original securitization.

NOTE 7. GOODWILL AND OTHER INTANGIBLES

Goodwill

The following table presents the Company's goodwill by its reporting units at June 30, 2018:

(in thousands)	Consumer and Business Banking		Commercial Banking		CIB		SC		Total
Goodwill	$	1,880,304	$	1,412,995	$	131,130	$	1,019,960	$	4,444,389

During the second quarter of 2018, Santander renamed its Global and Corporate Banking ("GCB") business to Corporate and Investment Banking (CIB) to more accurately reflect its business strategy and business proposition to clients, and to align with the name used by a majority of its competitors in the industry. There were no changes to composition of the reportable segment or reporting unit as a result of this change.

There were no re-allocations of goodwill for the three-month period ended June 30, 2018. During the first quarter of 2018, the reportable segments (and reporting units) formerly known as Commercial Banking and CRE were combined and presented as Commercial Banking. Refer to Note 18 for further discussion on the change in reportable segments. There were no additions or removals of underlying lines of business in connection with this reporting change. As a result, goodwill assigned to these former reporting units of $542.6 million and $870.4 million, for Commercial Banking and CRE, respectively, have been combined.

There were no additions or impairments of goodwill for the three-month and six-month periods endedJune 30, 2018. There were no additions, impairments, or re-allocations of goodwill for the three-month or six-month periods ended June 30, 2017.

The Company conducted its last annual goodwill impairment tests as of October 1, 2017 using generally accepted valuation methods. After conducting an analysis of the fair value of each reporting unit as of October 1, 2017, the Company determined that the full amount of goodwill attributed to Santander BanCorp of $10.5 million was impaired and, as a result, it was written-off, primarily due to the unfavorable economic environment in Puerto Rico and the additional adverse effects of Hurricane Maria. No impairments of goodwill attributed to other reporting units were identified.

Other Intangible Assets

The following table details amounts related to the Company's intangible assets subject to amortization for the dates indicated.

36

NOTE 7. GOODWILL AND OTHER INTANGIBLES (continued)

	June 30, 2018					December 31, 2017
(in thousands)	Net Carrying Amount		Accumulated Amortization			Net Carrying Amount		Accumulated Amortization
Intangibles subject to amortization:
Dealer networks	$	406,804	$	(173,196	)	$	426,411	$	(153,589	)
Chrysler relationship	72,500		(66,250		)	80,000		(58,750		)
Trade name	15,300		(2,700		)	15,900		(2,100		)
Other intangibles	10,590		(58,745		)	13,442		(56,021		)
Total intangibles subject to amortization	$	505,194	$	(300,891	)	$	535,753	$	(270,460	)

At June 30, 2018 and December 31, 2017, the Company did not have any intangibles, other than goodwill, that were not subject to amortization.

Amortization expense on intangible assets was $15.3 million and $30.6 million and for the three-month and six-month periods endedJune 30, 2018, respectively, and $15.4 million and $30.9 million for the three-month and six-month periods endedJune 30, 2017, respectively.

The estimated aggregate amortization expense related to intangibles, excluding any impairment charges, for each of the five succeeding calendar years ending December 31 is:

Year	Calendar Year Amount		Recorded To Date		Remaining Amount To Record
	(in thousands)
2018	$	60,649	$	30,576	$	30,073
2019	58,978		—		58,978
2020	58,645		—		58,645
2021	39,892		—		39,892
2022	39,892		—		39,892
Thereafter	277,714		—		277,714

NOTE 8. OTHER ASSETS

The following is a detail of items that comprise other assets at June 30, 2018 and December 31, 2017:

(in thousands)	June 30, 2018		December 31, 2017
Income tax receivables	$	301,206	$	292,220
Derivative assets at fair value	645,608		448,977
Other repossessed assets	148,641		212,882
MSRs	161,294		149,197
Prepaid expenses	156,800		172,547
OREO	118,503		130,777
Deferred tax asset, net	761,171		771,652
Accrued interest receivable	535,773		563,607
Equity method investments	204,116		194,434
Miscellaneous assets and receivables	897,139		696,134
Total other assets	$	3,930,251	$	3,632,427

Income tax receivables

Income tax receivables consists primarily of accrued federal tax receivables.

37

NOTE 8. OTHER ASSETS (continued)

Derivative assets at fair value

Derivative assets at fair value represent the net amount of derivatives presented in the Condensed Consolidated Financial Statements, including the impact of amounts offsetting recognized assets. Refer to the offsetting of financial assets table in Note 12 to these Condensed Consolidated Financial Statements for the detail of these amounts.

Other repossessed assets and OREO

Other repossessed assets primarily consist of leased assets that have been terminated and are included as grounded inventory, which is obtained through repossession. OREO consists primarily of the Company's foreclosed properties.

MSRs

The Company maintains an MSR asset for sold residential real estate loans serviced for others. At June 30, 2018 and December 31, 2017, the balance of these loans serviced for others accounted for at fair value was $14.6 billion and $14.9 billion, respectively. The Company accounts for a majority of its residential MSRs using the FVO. Changes in fair value are recorded through Miscellaneous income, net on the Condensed Consolidated Statements of Operations. The fair value of the MSRs at June 30, 2018 and December 31, 2017 were $158.5 million and $146.0 million, respectively. See further discussion on the valuation of the MSRs in Note 14. As deemed appropriate, the Company economically hedges MSRs using interest rate swaps and forward contracts to purchase MBS. See further discussion on these derivative activities in Note 12 to these Condensed Consolidated Financial Statements. The remainder of MSRs not accounted for using the FVO are accounted for at lower of cost or market.

For the three-month and six-month periods endedJune 30, 2018, the Company recorded net changes in the fair value of MSRs due to valuation totaling $(1.3) million and $13.8 million, respectively, compared to $(1.2) million and $0.3 million for the corresponding periods in 2017.

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

	Three-Month Period Ended						Six-Month Period Ended
(in thousands)	June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
Fair value at beginning of period(1)	$	160,130		$	149,455		$	145,993		$	146,589
Mortgage servicing assets recognized	2,841			2,866			5,597			8,597
Principal reductions	(3,227		)	(5,037		)	(6,889		)	(9,358		)
Change in fair value due to valuation assumptions	(1,274		)	(1,193		)	13,769			263
Fair value at end of period(1)	$	158,470		$	146,091		$	158,470		$	146,091

(1) The Company had total MSRs of $161.3 million and $149.2 million as of June 30, 2018 andDecember 31, 2017, respectively. The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or market and are not presented within this table.

Deferred tax assets, net

The Company generates deferred tax assets from its normal operating and investing activities. These include deferred tax assets arising from business credits and carryforwards as well as timing difference related to the mark-to-market adjustments on investments recorded at fair value and recording of the allowance for loan losses. Refer to Note 13 of these Condensed Consolidated Financial Statements for more information on tax-related activities.

Equity method investments

The Company makes certain equity investments in various limited partnerships, some of which are considered VIEs, that invest in and lend to qualified community development entities, such as renewable energy investments, through the New Market Tax Credits ("NMTC") and CRA programs. The Company acts only in a limited partner capacity in connection with these partnerships, so the Company has determined that it is not the primary beneficiary of the partnerships because it does not have the power to direct the activities of the partnerships that most significantly impact the partnerships' economic performance.

38

NOTE 8. OTHER ASSETS (continued)

Miscellaneous assets and receivables

Miscellaneous assets and receivables includes subvention receivables in connection with the Chrysler Agreement, investment and capital market receivables, derivatives trading receivables and unapplied payments. The second quarter increase is due to increases in subvention receivables and due from others, primarily at SIS, offset by decreases in investment receivables and wire transfer clearing.

NOTE 9. DEPOSITS AND OTHER CUSTOMER ACCOUNTS

Deposits and other customer accounts are summarized as follows:

	June 30, 2018				December 31, 2017
(dollars in thousands)	Balance		Percent of total deposits		Balance		Percent of total deposits
Interest-bearing demand deposits	$	8,439,484	13.7	%	$	8,784,597	14.4	%
Non-interest-bearing demand deposits	15,430,518		25.1	%	15,402,235		25.3	%
Savings	5,914,126		9.6	%	5,903,897		9.7	%
Customer repurchase accounts	580,451		0.9	%	802,119		1.4	%
Money market	25,392,936		41.3	%	24,530,661		40.3	%
CDs	5,799,033		9.4	%	5,407,594		8.9	%
Total Deposits (1)	$	61,556,548	100.0	%	$	60,831,103	100.0	%

(1) Includes foreign deposits, as defined by the FRB, of $8.6 billion and $9.1 billion at June 30, 2018 and December 31, 2017, respectively.

Deposits collateralized by investment securities, loans, and other financial instruments totaled $2.3 billion and $2.3 billion at June 30, 2018 and December 31, 2017, respectively.

Demand deposit overdrafts that have been reclassified as loan balances were $107.6 million and $38.9 million at June 30, 2018 and December 31, 2017, respectively.

At June 30, 2018 and December 31, 2017, the Company had $1.6 billion and $1.3 billion of CDs greater than $250 thousand.

NOTE 10. BORROWINGS

Total borrowings and other debt obligations at June 30, 2018 were $38.8 billion, compared to $39.0 billion at December 31, 2017. The Company's debt agreements impose certain limitations on dividends other payments and transactions. The Company is currently in compliance with these limitations.

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

Bank

The Bank had no new securities issuances and did not repurchase any outstanding borrowings in the open market during the three-month and six-month periods endedJune 30, 2018.

SHUSA

During the first quarter of 2018, the Company repurchased $63.2 million of its 3.45% senior notes due 2018 and $336.8 million of its 2.70% senior notes due 2019.

During the second quarter of 2018, the Company issued $427.9 million of senior floating rate notes in a private offering. These notes have a floating rate equal to the three-month London Interbank Offered Rate ("LIBOR") plus 100 basis points. The proceeds of these notes will be used for general corporate purposes.

39

NOTE 10. BORROWINGS (continued)

The Company recorded loss on debt extinguishment of $1.2 million and $3.4 million for the three-month and six-month periods endedJune 30, 2018, respectively, which include amounts related to debt repurchases and early repayments at SHUSA and the Bank, compared to $4.0 million and $10.7 million for the three-month and six-month periods endedJune 30, 2017, respectively.

On July 2, 2018, the Company completed a cash tender offer for $484.5 million of its outstanding $663.2 million2.700% Senior Notes Due 2019.

On July 19, 2018, SHUSA's Board of Directors approved the redemption of Sovereign Capital Trust IX junior subordinated debentures and common securities. The redemption is expect to occur in October 2018 consistent with the terms of the trust.

Parent Company and other IHC Entities Borrowings and Debt Obligations

The following table presents information regarding the Parent Company and its subsidiaries' borrowings and other debt obligations at the dates indicated:

	June 30, 2018				December 31, 2017
(dollars in thousands)	Balance		Effective Rate		Balance		Effective Rate
Parent Company
3.45% senior notes, due August 2018	$	181,305	3.62	%	$	244,317	3.62	%
2.70% senior notes, due May 2019	662,531		2.82	%	998,349		2.82	%
2.65% senior notes, due April 2020	997,037		2.82	%	996,238		2.82	%
3.70% senior notes, due March 2022	1,440,053		3.74	%	1,440,044		3.74	%
3.40% senior notes, due January 2023	994,241		3.54	%	993,662		3.54	%
4.50% senior notes, due July 2025	1,095,705		4.56	%	1,095,449		4.56	%
4.40% senior notes, due July 2027	1,049,793		4.40	%	1,049,787		4.40	%
Junior subordinated debentures - Sovereign Capital Trust IX, due July 2036	149,477		4.13	%	149,462		3.14	%
Common securities - Sovereign Capital Trust IX	4,640		4.13	%	4,640		3.14	%
Senior notes, due July 2019 (1)	388,698		2.98	%	388,565		2.31	%
Senior notes, due September 2019 (1)	370,923		2.89	%	370,754		2.34	%
Senior notes, due January 2020 (1)	302,607		2.98	%	302,494		2.40	%
Senior notes, due September 2020 (2)	113,030		3.27	%	115,804		3.32	%
Senior notes, due June 2022(1)	427,838		3.67	%	—		—	%
Subsidiaries
2.00% subordinated debt, maturing through 2042	40,761		2.00	%	40,842		2.00	%
Short-term borrowings, due within one year, maturing through 2018	4,857		0.67	%	24,000		1.38	%
Total due to others overnight, due within one year, due July 2018	23,600		1.90	%	10,000		1.38	%
Short-term borrowings, due within one year, maturing July 2018	21,357		0.25	%	37,546		0.25	%
Short-term borrowings, due within one year, maturing through 2018			—	%	7,123		0.83	%
Total Parent Company and subsidiaries' borrowings and other debt obligations	$	8,268,453	3.59	%	$	8,269,076	3.45	%

(1) These notes bear interest at a rate equal to the three-month LIBOR plus 100 basis points per annum.

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

40

NOTE 10. BORROWINGS (continued)

Bank Borrowings and Debt Obligations

The following table presents information regarding the Bank's borrowings and other debt obligations at the dates indicated:

	June 30, 2018				December 31, 2017
(dollars in thousands)	Balance		Effective Rate		Balance		Effective Rate
8.750% subordinated debentures, due May 2018	$	—	—	%	$	192,019	8.92	%
Subordinated term loan, due February 2019	104,912		7.63	%	111,883		7.12	%
FHLB advances, maturing through July 2019	1,300,000		2.34	%	1,950,000		1.53	%
Securities sold under repurchase agreements	—		—	%	150,000		1.56	%
Real estate investment trust preferred, due May 2020	144,877		13.21	%	144,167		13.35	%
Subordinated term loan, due August 2022	27,212		9.29	%	27,911		8.89	%
Total Bank borrowings and other debt obligations	$	1,577,001	3.81	%	$	2,575,980	3.07	%

The Bank had outstanding irrevocable letters of credit totaling $560.5 million from the FHLB of Pittsburgh at June 30, 2018, used to secure uninsured deposits placed with the Bank by state and local governments and their political subdivisions.

Revolving Credit Facilities

The following tables present information regarding SC's credit facilities as of June 30, 2018 and December 31, 2017:

	June 30, 2018
(dollars in thousands)	Balance		Committed Amount		Effective Rate		Assets Pledged		Restricted Cash Pledged
Warehouse line, maturing on various dates(1)	$	518,345	$	1,250,000	3.36	%	$	780,594	$	5,068
Warehouse line, due November 2019	78,620		500,000		5.06	%	89,182		411
Warehouse line, due August 2019(2)	1,832,943		3,900,000		3.86	%	2,310,677		10,261
Warehouse line, due October 2019	364,777		1,800,000		4.44	%	529,183		180
Warehouse line, due October 2019	217,465		400,000		3.45	%	328,840		158
Warehouse line, due August 2019	287,484		500,000		3.56	%	410,567		24,525
Warehouse line, due November 2020	417,499		1,000,000		3.17	%	632,984		8
Warehouse line, due October 2018	214,500		300,000		3.66	%	248,608		333
Warehouse line, due December 2018	115,100		300,000		4.01	%	181,621		855
Repurchase facility, maturing on various dates(3)(4)	179,934		179,934		3.78	%	259,860		17,818
Repurchase facility, due July 2018(4)(5)	92,167		92,167		3.51	%	129,440		—
Repurchase facility, due September 2018(4)	68,682		68,682		3.56	%	92,358		—
Repurchase facility, due December 2018(4)	115,307		115,307		3.58	%	156,202		—
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)	122,200		750,000		4.60	%	129,268		538
Total SC revolving credit facilities	$	4,625,023	$	12,156,090	3.76	%	$	6,279,384	$	60,155

(1) As of June 30, 2018, one-half of the outstanding balance on this facility matures in March 2019 and the remaining balance matures in March 2020.

(2) This line is held exclusively for financing of Chrysler Capital leases.

(3) The maturity of this repurchase facility ranges from July 2018 to September 2018. Approximately 38% of this matured and settled in July 2018.

(4) These repurchase facilities are collateralized by securitization notes payable retained by SC. No portion of these facilities is unsecured. These facilities have rolling maturities of up to one year. As the borrower, SC is exposed to liquidity risk due to changes in the market value of retrained securities pledged. In some instances, SC places or receives cash collateral with counterparties under collateral arrangements associated with SC's repurchase agreements.

(5) This repurchase facility was settled on maturity in July 2018.

(6) These lines are also collateralized by securitization notes payable and residuals retained by SC. As of June 30, 2018, no portion of these facilities was unsecured.

41

NOTE 10. BORROWINGS (continued)

	December 31, 2017
(dollars in thousands)	Balance		Committed Amount		Effective Rate		Assets Pledged		Restricted Cash Pledged
Warehouse line, maturing on various dates	$	339,145	$	1,250,000	2.53	%	$	461,353	$	12,645
Warehouse line, due November 2019	435,220		500,000		1.92	%	521,365		16,866
Warehouse line, due August 2019	2,044,843		3,900,000		2.96	%	2,929,890		53,639
Warehouse line, due October 2019	226,577		1,800,000		4.95	%	311,336		6,772
Warehouse line, due October 2019	81,865		400,000		4.09	%	114,021		3,057
Warehouse line, due January 2018	336,484		500,000		2.87	%	473,208		—
Warehouse line, due November 2019	403,999		1,000,000		2.66	%	546,782		14,729
Warehouse line, due October 2018	235,700		300,000		2.84	%	289,634		10,474
Warehouse line, due December 2018	—		300,000		1.49	%	—		—
Repurchase facility, maturing on various dates	325,775		325,775		3.24	%	474,188		13,842
Repurchase facility, due April 2018	202,311		202,311		2.67	%	264,120		—
Repurchase facility, due March 2018	147,500		147,500		3.91	%	222,108		—
Repurchase facility, due March 2018	68,897		68,897		3.04	%	95,762		—
Line of credit with related party, due December 2018	—		1,000,000		3.09	%	—		—
Line of credit with related party, due December 2018	750,000		750,000		1.33	%	—		—
Total SC revolving credit facilities	$	5,598,316	$	12,444,483	2.73	%	$	6,703,767	$	132,024

Secured Structured Financings

The following tables present information regarding SC's secured structured financings as of June 30, 2018 and December 31, 2017:

	June 30, 2018
(dollars in thousands)	Balance		Initial Note Amounts Issued		Initial Weighted Average Interest Rate Range	Collateral(2)		Restricted Cash
SC public securitizations, maturing on various dates(1)	$	18,596,271	$	39,882,682	1.16% - 3.53%	$	23,831,801	$	1,588,592
SC privately issued amortizing notes, maturing on various dates	5,704,630		12,938,389		0.88% - 2.89%	6,998,005		26,675
Total SC secured structured financings	$	24,300,901	$	52,821,071	0.88% - 3.53%	$	30,829,806	$	1,615,267

(1) Securitizations executed under Rule 144A of the Securities Act are included within this balance.

(2) Secured structured financings may be collateralized by the SC's collateral overages of other issuances.

42

NOTE 10. BORROWINGS (continued)

	December 31, 2017
(dollars in thousands)	Balance		Initial Note Amounts Issued		Initial Weighted Average Interest Rate Range	Collateral		Restricted Cash
SC public securitizations, maturing on various dates(1)(2)	$	14,995,304	$	36,800,642	0.89% - 2.80%	$	19,873,621	$	1,470,459
SC privately issued amortizing notes, maturing on various dates(1)	7,564,637		12,278,282		0.88% - 4.09%	9,232,658		377,300
Total SC secured structured financings	$	22,559,941	$	49,078,924	0.88% - 4.09%	$	29,106,279	$	1,847,759

(1) SC has entered into various securitization transactions involving its retail automobile installment loans and leases. These transactions are accounted for as secured financings and therefore both the securitized RICs and the related securitization debt issued by SPEs remain on the Condensed Consolidated Balance Sheets. The maturity of this debt is based on the timing of repayments from the securitized assets.

(2) Securitizations executed under Rule 144A of the Securities Act are included within this balance.

Most of SC's secured structured financings are in the form of public, SEC-registered securitizations. SC 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. SC's securitizations and private issuances are collateralized by RICs or vehicle leases. As of June 30, 2018 and December 31, 2017, SC had private issuances of notes backed by vehicle leases outstanding totaling $6.0 billion and $3.7 billion, respectively.

43

NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS)

The following table presents the components of accumulated other comprehensive income/(loss), net of related tax, for the three-month and six-month periods endedJune 30, 2018 and 2017, respectively.

	Total Other Comprehensive Income/(Loss)									Total Accumulated Other Comprehensive (Loss)/Income
	Three-Month Period Ended June 30, 2018									March 31, 2018						June 30, 2018
(in thousands)	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity			Ending Balance
Change in accumulated other comprehensive income on cash flow hedge derivative financial instruments	$	(21,956	)	$	6,772		$	(15,184	)
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments(1)	15,332			(4,887		)	10,445
Net unrealized (losses) on cash flow hedge derivative financial instruments	(6,624		)	1,885			(4,739		)	$	(23,752	)	$	(4,739	)	$	(28,491	)
Change in unrealized (losses) on investments in debt securities AFS	(46,198		)	11,459			(34,739		)
Reclassification adjustment for net (gains) included in net income/(expense) on non-OTTI securities (2)	(419		)	104			(315		)
Net unrealized (losses) on investments in debt securities AFS	(46,617		)	11,563			(35,054		)	(290,522		)	(35,054		)	(325,576		)
Pension and post-retirement actuarial gain(3)	842			(217		)	625			(56,007		)	625			(55,382		)
As of June 30, 2018	$	(52,399	)	$	13,231		$	(39,168	)	$	(370,281	)	$	(39,168	)	$	(409,449	)

	Total Other Comprehensive Income/(Loss)									Total Accumulated Other Comprehensive (Loss)/Income
	Six-Month Period Ended June 30, 2018									December 31, 2017						June 30, 2018
(in thousands)	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity			Ending Balance
Change in accumulated other comprehensive income on cash flow hedge derivative financial instruments	$	(33,417	)	$	2,018		$	(31,399	)
Reclassification adjustment for net losses on cash flow hedge derivative financial instruments(1)	13,645			(4,349		)	9,296
Net unrealized (losses) on cash flow hedge derivative financial instruments	(19,772		)	(2,331		)	(22,103		)	$	(6,388	)	$	(22,103	)	$	(28,491	)
Change in unrealized (losses) on investments in debt securities AFS	(168,442		)	22,246			(146,196		)
Reclassification adjustment for net losses included in net income/(expense) on non-OTTI securities (2)	244			(32		)	212
Net unrealized (losses) on investments in debt securities AFS	(168,198		)	22,214			(145,984		)	(140,498		)	(145,984		)
Cumulative effect of adoption of new ASUs(4)													(39,094		)
Net unrealized (losses) on investments in debt securities AFS - upon adoption													(185,078		)	(325,576		)
Pension and post-retirement actuarial gain(3)	1,684			(5,521		)	(3,837		)	(51,545		)	(3,837		)	(55,382		)
As of June 30, 2018	$	(186,286	)	$	14,362		$	(171,924	)	$	(198,431	)	$	(211,018	)	$	(409,449	)

(1) Net gains/(losses) reclassified into Interest on borrowings and other debt obligations in the Condensed Consolidated Statements of Operations for settlements of interest rate swap contracts designated as cash flow hedges.

(2) Net (gains)/losses reclassified into Net gain on sale of investment securities sales in the Condensed Consolidated Statements of Operations for the sale of AFS securities.

(3) Included in the computation of net periodic pension costs.

(4) Includes impact of other comprehensive income reclassified to Retained earnings as a result of the adoption of ASU 2018-02. Refer to Note 1 for further discussion.

44

NOTE 11. ACCUMULATED OTHER COMPREHENSIVE INCOME / (LOSS) (continued)

	Total Other Comprehensive (Loss)/Income									Total Accumulated Other Comprehensive Loss
	Three-Month Period Ended June 30, 2017									March 31, 2017					June 30, 2017
(in thousands)	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity		Ending Balance
Change in accumulated other comprehensive income on cash flow hedge derivative financial instruments	$	10,205		$	(596	)	$	9,609
Reclassification adjustment for net (gains) on cash flow hedge derivative financial instruments(1)	(4,072		)	986			(3,086		)
Net unrealized gains on cash flow hedge derivative financial instruments	6,133			390			6,523			$	(9,212	)	$	6,523	$	(2,689	)
Change in unrealized gains on investment securities AFS	36,480			(14,369		)	22,111
Reclassification adjustment for net (gains) included in net income/(expense) on non-OTTI securities (2)	(11,125		)	4,363			(6,762		)
Net unrealized gains on investment securities AFS	25,355			(10,006		)	15,349			(109,785		)	15,349		(94,436		)
Pension and post-retirement actuarial gain(4)	911			(355		)	556			(55,244		)	556		(54,688		)
As of June 30, 2017	$	32,399		$	(9,971	)	$	22,428		$	(174,241	)	$	22,428	$	(151,813	)

	Total Other Comprehensive Income/(Loss)									Total Accumulated Other Comprehensive (Loss)/Income
	Six-Month Period Ended June 30, 2017									December 31, 2016					June 30, 2017
(in thousands)	Pretax Activity			Tax Effect			Net Activity			Beginning Balance			Net Activity		Ending Balance
Change in accumulated other comprehensive income on cash flow hedge derivative financial instruments	$	12,151		$	(3,430	)	$	8,721
Reclassification adjustment for net (gains) on cash flow hedge derivative financial instruments(1)	(6,459		)	1,774			(4,685		)
Net unrealized gains on cash flow hedge derivative financial instruments	5,692			(1,656		)	4,036			$	(6,725	)	$	4,036	$	(2,689	)
Change in unrealized gains on investment securities AFS	67,928			(24,477		)	43,451
Reclassification adjustment for net (gains) included in net income/(expense) on non-OTTI securities (2)	(11,125		)	3,992			(7,133		)
Net unrealized gains on investment securities AFS	56,803			(20,485		)	36,318			(130,754		)	36,318		(94,436		)
Pension and post-retirement actuarial gain(4)	1,824			(783		)	1,041			(55,729		)	1,041		(54,688		)
As of June 30, 2017	$	64,319		$	(22,924	)	$	41,395		$	(193,208	)	$	41,395	$	(151,813	)

(1) Net gains/(losses) reclassified into Interest on borrowings and other debt obligations in the Condensed Consolidated Statements of Operations for settlements of interest rate swap contracts designated as cash flow hedges.

(2) Net (gains)/losses reclassified into Net gain on sale of investment securities sales in the Condensed Consolidated Statements of Operations for the sale of AFS securities.

(3) Unrealized losses/(gains) previously recognized in accumulated other comprehensive income on securities for which OTTI was recognized during the period. See further discussion in Note 3 to the Condensed Consolidated Financial Statements.

(4) Included in the computation of net periodic pension costs.

45

NOTE 12. DERIVATIVES

General

The Company uses derivative financial instruments primarily to manage exposure to interest rate, foreign exchange, equity and credit risk, as well as to manage the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. The Company also enters into derivatives with customers to facilitate their risk management activities, and often sells commercial loan customers derivative products to hedge interest rate risk associated with loans made to them by the Bank. The Company uses derivative financial instruments as risk management tools and not for speculative trading purposes for its own account. The fair value of all derivative balances is recorded within Other assets and Other liabilities on the Condensed Consolidated Balance Sheets.

See Note 14 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 or both parties delivering cash or another type of asset to the other party based on a notional amount and an underlying asset, index, interest rate or future purchase commitment or option as specified in the contract. Derivative transactions are often measured in terms of notional amount, but this amount is generally not exchanged, is not recorded on the balance sheet, and does not represent the Company`s exposure to credit loss. The notional amount is the basis on which the financial obligation of each party to the derivative contract is calculated to determine required payments under the contract. The Company controls the credit risk of its derivative contracts through credit approvals, limits and monitoring procedures. The underlying asset is typically a referenced interest rate (commonly the Overnight Indexed Swap ("OIS") rate or LIBOR), security, credit spread or index.

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

Credit Risk Contingent Features

The Company has entered into certain derivative contracts that require the posting of collateral to counterparties when those contracts are in a net liability position. The amount of collateral to be posted is based on the amount of the net liability and thresholds generally related to the Company's long-term senior unsecured credit ratings. In a limited number of instances, counterparties also have the right to terminate their International Swaps and Derivatives Association, Inc. ("ISDA") Master Agreements if the Company's ratings fall below a specified level, typically investment grade. As of June 30, 2018, derivatives in this category had a fair value of $1.5 million. The credit ratings of the Company and the Bank are currently considered investment grade. During the second quarter of 2018, no additional collateral would be required if there were a further 1- or 2- notch downgrade by either Standard & Poor's ("S&P") or Moody's Investor Services ("Moody's").

As of June 30, 2018 and December 31, 2017, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting or termination provisions based on the Company's ratings) that were in a net liability position totaled $10.6 million and $10.4 million, respectively. The Company had $11.9 million and $15.7 million in cash and securities collateral posted to cover those positions as of June 30, 2018 and December 31, 2017, respectively.

46

NOTE 12. DERIVATIVES (continued)

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. 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.

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 highly effective cash flow hedges. The gain or loss on the derivative instrument is reported as a component of accumulated other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same Consolidated Statements of Operations line item as the earnings effect of the hedged item.

The last of the hedges is scheduled to expire in December 2030. The Company includes all components of each derivative's gain or loss in the assessment of hedge effectiveness. As of June 30, 2018, the Company expected $41.5 million of gains/losses recorded in accumulated other comprehensive loss to be reclassified to earnings during the subsequent twelve months as the future cash flows occur.

Derivatives Designated in Hedge Relationships – Notional and Fair Values

Derivatives designated as accounting hedges at June 30, 2018 and December 31, 2017 included:

(dollars in thousands)	Notional Amount		Asset		Liability		Weighted Average Receive Rate		Weighted Average Pay Rate		Weighted Average Life (Years)
June 30, 2018
Cash flow hedges:
Pay fixed — receive variable interest rate swaps	$	4,446,114	$	74,833	$	1,794	1.44	%	2.30	%	1.81
Pay variable - receive fixed interest rate swaps	4,000,000		—		127,205		1.41	%	2.02	%	2.53
Interest rate floor	1,600,000		6,133		—		—	%	—	%	2.20
Total	$	10,046,114	$	80,966	$	128,999	1.20	%	1.82	%	2.16
December 31, 2017
Cash flow hedges:
Pay fixed — receive variable interest rate swaps	$	5,183,511	$	46,422	$	4,458	0.05	%	0.14	%	2.12
Pay variable - receive fixed interest rate swaps	4,000,000		—		80,453		1.41	%	1.42	%	3.02
Interest rate floor	1,000,000		3,020		—		—	%	—	%	2.64
Total	$	10,183,511	$	49,442	$	84,911	0.58	%	0.63	%	2.53

Other Derivative Activities

The Company also enters into derivatives that are not designated as accounting hedges under GAAP. The majority of these derivatives are customer-related derivatives relating to foreign exchange and lending arrangements, as well as derivatives to hedge interest rate risk on SC's secured structured financings and the borrowings under its revolving credit facilities. SC uses both interest rate swaps and interest rate caps to satisfy these requirements and to hedge the variability of cash flows on securities issued by Trusts and borrowings under its warehouse facilities. In addition, derivatives are used to manage risks related to residential and commercial mortgage banking and investing activities. Although these derivatives are used to hedge risk and are considered economic hedges, they are not designated as accounting hedges because the contracts they are hedging are carried at fair value on the balance sheet, resulting in generally symmetrical accounting treatment for the hedging instrument and the hedged item.

47

NOTE 12. DERIVATIVES (continued)

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, FNMA, and private investors. The Company uses forward sales as a means of hedging against the economic impact of changes in interest rates on the mortgages that are originated for sale and on interest rate lock commitments.

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

Customer-related derivatives

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

Other derivative activities

The Company uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. Foreign exchange contracts, which include spot and forward contracts as well as cross-currency swaps, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date 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 overnight indexed swap, a total return swap on Visa, Inc. Class B common shares, and equity options, which manage the Company's market risk associated with certain investments and customer deposit products.

48

NOTE 12. DERIVATIVES (continued)

Derivatives Not Designated in Hedge Relationships – Notional and Fair Values

Other derivative activities at June 30, 2018 and December 31, 2017 included:

	Notional				Asset derivatives Fair value				Liability derivatives Fair value
(in thousands)	June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017		June 30, 2018		December 31, 2017
Mortgage banking derivatives:
Forward commitments to sell loans	$	406,350	$	311,852	$	—	$	3	$	1,209	$	459
Interest rate lock commitments	188,088		126,194		2,384		2,105		—		—
Mortgage servicing	420,000		330,000		2,887		193		15,214		2,092
Total mortgage banking risk management	1,014,438		768,046		5,271		2,301		16,423		2,551
Customer related derivatives:
Swaps receive fixed	10,638,573		9,328,079		30,822		72,912		189,772		70,348
Swaps pay fixed	10,935,332		9,576,893		247,558		110,109		23,340		51,380
Other	2,018,242		1,834,962		14,487		19,971		12,523		18,308
Total customer related derivatives	23,592,147		20,739,934		292,867		202,992		225,635		140,036
Other derivative activities:
Foreign exchange contracts	3,524,342		2,764,999		50,331		24,932		38,434		25,521
Interest rate swap agreements	2,625,796		1,749,349		19,596		9,596		1,243		1,631
Interest rate cap agreements	9,225,194		10,932,707		199,053		135,942		—		32,109
Options for interest rate cap agreements	9,207,853		10,906,081		—		32,165		199,131		135,824
Other	967,997		824,786		5,321		5,874		8,024		5,228
Total	$	50,157,767	$	48,685,902	$	572,439	$	413,802	$	488,890	$	342,900

49

NOTE 12. DERIVATIVES (continued)

Gains (Losses) on All Derivatives

The following Condensed Consolidated Statement of Operations line items were impacted by the Company’s derivative activities for the three-month and six-month periods endedJune 30, 2018 and 2017:

(in thousands)		Three-Month Period Ended June 30,				Six-Month Period Ended June 30,
Derivative Activity(1)	Line Item	2018		2017		2018			2017
Fair value hedges:
Interest rate swaps	Net Interest Income	—		(2,162	)	—			(2,162		)
Cash flow hedges:
Pay fixed-receive variable interest rate swaps	Interest expense on borrowings	7,925		(4,084	)	$	10,689		$	(6,471	)
Pay variable receive-fixed interest rate swap	Interest income on loans	(5,023	)	(3,506	)	(7,043		)	(6,287		)
Other derivative activities:
Forward commitments to sell loans	Miscellaneous income, net	(239	)	3,625		(753		)	(7,315		)
Interest rate lock commitments	Miscellaneous income, net	131		(1,414	)	279			580
Mortgage servicing	Miscellaneous income, net	(3,532	)	1,503		(10,427		)	2,000
Customer related derivatives	Miscellaneous income, net	5,360		(1,124	)	7,946			(2,737		)
Foreign exchange	Miscellaneous income, net	4,520		886		5,808			3,146
Interest rate swaps, caps, and options	Miscellaneous income, net	193		4		10,232			1,511
	Interest expense	—		(1,068	)	—			3,662
Total return settlement	Other administrative expenses	—		—		—			(505		)
Other	Miscellaneous income, net	(392	)	557		(3,545		)	(944		)

(1) Gains are disclosed as positive numbers while losses are shown as a negative number regardless of the line item being affected.

The net amount of change recognized in Other comprehensive income for cash flow hedge derivatives were losses of $15.2 million and $31.4 million, net of tax, for the three-month and six-month periods endedJune 30, 2018, respectively, and gains of $9.6 million and $8.7 million for the three-month and six-month periods endedJune 30, 2017.

The amount of gain reclassified from Other comprehensive income into earnings for cash flow hedge derivatives was $10.4 million and $9.3 million, net of tax, for the three-month and six-month periods endedJune 30, 2018, respectively, and the amount of loss reclassified from Other comprehensive income into earnings for cash flow hedge derivatives was $3.1 million and $4.7 million, net of tax, for the three-month and six-month periods endedJune 30, 2017.

Disclosures about Offsetting Assets and Liabilities

The Company enters into legally enforceable master netting agreements, which reduce risk by permitting netting of transactions with the same counterparty on the occurrence of certain events. A master netting agreement allows two counterparties the ability to net-settle amounts under all contracts, including any related collateral posted, through a single payment and in a single currency. The right to offset and certain terms regarding the collateral process, such as valuation, credit events and settlement, are contained in the ISDA Master Agreement. The Company's financial instruments, including resell and repurchase agreements, securities lending arrangements, derivatives and cash collateral, may be eligible for offset on its Condensed Consolidated Balance Sheets.

The Company has elected to present derivative balances on a gross basis even if the derivative is subject to a legally enforceable nettable 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 offset in the Condensed Consolidated Balance 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 offset in the Condensed Consolidated Balance Sheets" section of the tables below.

50

NOTE 12. DERIVATIVES (continued)

Information about financial assets and liabilities that are eligible for offset on the Condensed Consolidated Balance Sheet as of June 30, 2018 and December 31, 2017, respectively, is presented in the following tables:

	Offsetting of Financial Assets
							Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
(in thousands)	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Condensed Consolidated Balance Sheet		Net Amounts of Assets Presented in the Condensed Consolidated Balance Sheet		Financial Instruments		Cash Collateral Received		Net Amount
June 30, 2018
Cash flow hedges	$	80,966	$	—	$	80,966	$	—	$	43,921	$	37,045
Other derivative activities(1)	570,055		7,739		562,316		1,987		145,171		415,158
Total derivatives subject to a master netting arrangement or similar arrangement	651,021		7,739		643,282		1,987		189,092		452,203
Total derivatives not subject to a master netting arrangement or similar arrangement(2)	2,384		—		2,384		—		—		2,384
Total Derivative Assets	$	653,405	$	7,739	$	645,666	$	1,987	$	189,092	$	454,587
December 31, 2017
Cash flow hedges	$	49,442	$	—	$	49,442	$	—	$	3,076	$	46,366
Other derivative activities(1)	411,697		6,731		404,966		2,021		77,975		324,970
Total derivatives subject to a master netting arrangement or similar arrangement	461,139		6,731		454,408		2,021		81,051		371,336
Total derivatives not subject to a master netting arrangement or similar arrangement(2)	2,105		—		2,105		—		—		2,105
Total Derivative Assets	$	463,244	$	6,731	$	456,513	$	2,021	$	81,051	$	373,441

(1) Includes customer-related and other derivatives.

(2) Includes mortgage banking derivatives.

51

NOTE 12. DERIVATIVES (continued)

	Offsetting of Financial Liabilities
							Gross Amounts Not Offset in the Condensed Consolidated Balance Sheet
(in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Condensed Consolidated Balance Sheet		Net Amounts of Liabilities Presented in the Condensed Consolidated Balance Sheet		Financial Instruments		Cash Collateral Pledged		Net Amount
June 30, 2018
Cash flow hedges	$	128,999	$	—	$	128,999	$	—	$	—	$	128,999
Other derivative activities(1)	487,681		20,187		467,494		—		353,640		113,854
Total derivatives subject to a master netting arrangement or similar arrangement	616,680		20,187		596,493		—		353,640		242,853
Total derivatives not subject to a master netting arrangement or similar arrangement(2)	1,209		—		1,209		—		—		1,209
Total Derivative Liabilities	$	617,889	$	20,187	$	597,702	$	—	$	353,640	$	244,062
December 31, 2017
Cash flow hedges	$	84,911	$	—	$	84,911	$	—	$	622	$	84,289
Other derivative activities(1)	342,752		16,236		326,516		—		165,716		160,800
Total derivatives subject to a master netting arrangement or similar arrangement	427,663		16,236		411,427		—		166,338		245,089
Total derivatives not subject to a master netting arrangement or similar arrangement(2)	148		—		148		—		—		148
Total Derivative Liabilities	$	427,811	$	16,236	$	411,575	$	—	$	166,338	$	245,237

(1) Includes customer-related and other derivatives.

(2) Includes mortgage banking derivatives.

NOTE 13. INCOME TAXES

An income tax provision of $168.0 million and $263.4 million was recorded for the three-month and six-month periods endedJune 30, 2018, respectively, compared to $92.0 million and $170.9 million for the corresponding periods in 2017. This resulted in an effective tax rate ("ETR") of 31.9% and 29.9% for the three-month and six-month periods endedJune 30, 2018, respectively, compared to 24.2% and 27.5% for the corresponding periods in 2017.

The increase in the ETR for the three-month and six-month periods endedJune 30, 2018 is primarily due to the tax benefit recognized during the three month period ended June 30, 2017 upon the assertion that undistributed earnings of a Puerto Rico subsidiary would be indefinitely reinvested outside the U.S. During the three months ended December 31, 2017, the Company changed its assertion to reflect a change in management’s strategic objective to no longer permanently reinvest the earnings. The increase was partially offset by the reduction in the federal corporate income tax rate as a result of the TCJA.

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.

52

NOTE 13. INCOME TAXES (continued)

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

As noted above, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%. Due to the complexities involved in accounting for the enactment of the TCJA, SEC Staff Accounting Bulletin (“SAB”) 118 specifies, among other things, that reasonable estimates of the income tax effects of the TCJA should be used, if determinable. Further, SAB 118 clarifies accounting for income taxes under ASC Topic 740, Income Taxes (ASC 740), if information is not yet available or complete and provides for up to a one-year period in which to complete the required analyses and accounting (the measurement period). The Company has obtained and analyzed all currently available information to record the effect of the change in tax law. While we were able to make a reasonable estimate of the impact of the reduction in the corporate tax rate and the other provisions of the TCJA, the accounting may be impacted by other analyses related to the TCJA, technical corrections or other amendments to the TCJA, and further accounting or administrative tax guidance.

The Company filed a lawsuit against the United States in 2009 in Federal District Court in Massachusetts relating to the proper tax consequences of two financing transactions with an international bank through which the Company borrowed $1.2 billion. As a result of these financing transactions, the Company paid foreign taxes of $264.0 million during the years 2003 through 2007 and claimed a corresponding foreign tax credit for foreign taxes paid during those years, which the Internal Revenue Service ("IRS") disallowed. The IRS also disallowed the Company's deductions for interest expense and transaction costs, totaling $74.6 million in tax liability, and assessed penalties and interest totaling approximately $92.5 million. The Company has paid the taxes, penalties and interest associated with the IRS adjustments for all tax years, and the lawsuit will determine whether the Company is entitled to a refund of the amounts paid.

In November 2015, the Federal District Court granted the Company's motions for summary judgment and later ordered amounts assessed by the IRS for the years 2003 through 2005 to be refunded to the Company. The IRS appealed that judgment, and the U.S. Court of Appeals for the First Circuit partially reversed the judgment of the Federal District Court, finding that the Company is not entitled to claim the foreign tax credits it claimed but will be allowed to exclude from income $132.0 million (representing half of the U.K. taxes the Company paid) and will be allowed to claim the interest expense deductions. The case was remanded to the Federal District Court for further proceedings to determine, among other issues, whether penalties should be sustained. Upon remand, the Company filed motions for summary judgment regarding the remaining issues; however, on July 17, 2018, the Court denied the Company’s motions. The Company is currently assessing its legal options.

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 deferred tax assets and a portion of the receivable that would not be realized under the Court's decision. Additionally, the Company established a $36.8 million tax reserve in relation to items that have not yet been determined by the courts, including potential penalties. Over the next 12 months, it is reasonably possible that changes in the reserve for uncertain tax positions could range from a decrease of $36.8 million to no change.

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

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

The Company had a net deferred tax liability balance of $382.8 million at June 30, 2018 (consisting of a deferred tax asset balance of $761.2 million and a deferred tax liability balance of $1.1 billion), compared to a net deferred tax liability balance of $198.3 million at December 31, 2017 (consisting of a deferred tax asset balance of $771.7 million and a deferred tax liability balance of $970.0 million). The $184.5 million increase in net deferred liabilities for the six-month period ended June 30, 2018 was primarily due to an increase in deferred tax liabilities related to accelerated depreciation from leasing transactions; an increase in the deferred tax asset valuation allowance; and a decrease in deferred tax assets on loans marked to market for income tax purposes partially offset by an increase in deferred tax assets related to net operating losses.

53

NOTE 14. FAIR VALUE

General

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

As of June 30, 2018, $14.3 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 $342.0 million of these financial assets were measured using quoted market prices for identical instruments, or Level 1 inputs. Approximately $13.3 billion of these financial assets were measured using valuation methodologies involving market-based and market-derived information, or Level 2 inputs. Approximately $659.8 million of these financial assets were measured using model-based techniques, or Level 3 inputs, and represented approximately 4.6% of total assets measured at fair value on a recurring basis and approximately 0.5% of total consolidated assets.

Fair value is defined in GAAP as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The standard focuses on the exit price in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants. GAAP establishes a fair value reporting hierarchy to maximize the use of observable inputs when measuring fair value and defines the three levels of inputs as noted below:

•Level 1 - Assets or liabilities for which the identical item is traded on an active exchange, such as publicly-traded instruments.

•Level 2 - Assets and liabilities valued based on observable market data for similar instruments. Fair value is estimated using inputs other than quoted prices included within Level 1 that are observable for assets or liabilities, either directly or indirectly.

•Level 3 - Assets or liabilities for which significant valuation assumptions are not readily observable in the market, and instruments valued based on the best available data, some of which is internally developed and considers risk premiums that a market participant would require. Fair value is estimated using unobservable inputs that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities may include financial instruments whose value is determined using pricing services, pricing models with internally developed assumptions, discounted cash flow ("DCF") methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

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

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

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

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

54

NOTE 14. FAIR VALUE (continued)

The Company reviews the assumptions utilized to determine fair value on a quarterly basis. Any changes in methodologies or significant inputs used in determining fair values are further reviewed to determine if a change in fair value level hierarchy has occurred. Transfers in and out of Levels 1, 2 and 3 are considered to be effective as of the end of the quarter in which they occur.

There were no transfers between Levels 1, 2 or 3 during the six-month periods endedJune 30, 2018 and 2017 for any assets or liabilities valued at fair value on a recurring basis.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the assets and liabilities that are measured at fair value on a recurring basis by major product category and fair value hierarchy as of June 30, 2018 and December 31, 2017.

(in thousands)	Level 1		Level 2		Level 3		Balance at June 30, 2018		Level 1		Level 2		Level 3		Balance at December 31, 2017
Financial assets:
U.S. Treasury securities	$	342,021	$	1,275,781	$	—	$	1,617,802	$	139,615	$	858,497	$	—	$	998,112
Corporate debt	—		6,453		—		6,453		—		11,660		—		11,660
ABS	—		130,621		346,856		477,477		—		156,910		350,252		507,162
State and municipal securities	—		20		—		20		—		23		—		23
MBS	—		10,963,121		—		10,963,121		—		12,885,412		—		12,885,412
Investment in debt securities AFS(3)(6)	342,021		12,375,996		346,856		13,064,873		139,615		13,912,502		350,252		14,402,369
Other investments - trading securities	1		1,873		—		1,874		1		—		—		1
RICs HFI(4)	—		—		152,082		152,082		—		—		186,471		186,471
LHFS (1)(5)	—		238,864		—		238,864		—		197,691		—		197,691
MSRs (2)	—		—		158,470		158,470		—		—		145,993		145,993
Other assets - derivatives (3)	—		651,021		2,384		653,405		—		461,139		2,105		463,244
Total financial assets	$	342,022	$	13,267,754	$	659,792	$	14,269,568	$	139,616	$	14,571,332	$	684,821	$	15,395,769
Financial liabilities:
Other liabilities - derivatives (3)	—		616,050		1,839		617,889		—		427,217		594		427,811
Total financial liabilities	$	—	$	616,050	$	1,839	$	617,889	$	—	$	427,217	$	594	$	427,811

(1) LHFS disclosed on the Condensed Consolidated Balance Sheets also includes LHFS that are held at the lower of cost or fair value and are not presented within this table.

(2) The Company has total MSRs of $161.3 million and $149.2 million as of June 30, 2018.and December 31, 2017, respectively. The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or fair value and are not presented within this table.

(3) Refer to Note 3 for the fair value of investment securities and to Note 12 for the fair values of derivative assets and liabilities, on a further disaggregated basis.

(4) RICs collateralized by vehicle titles at SC and RV/marine loans at SBNA.

(5) Residential mortgage loans

(6) Investment in debt securities AFS disclosed on the Consolidated Balance Sheets at December 31, 2017 included $10.8 million of equity securities valued using the net asset value as a practical expedient that are not presented within this table.

55

NOTE 14. 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 1		Level 2		Level 3		Balance at June 30, 2018		Level 1		Level 2		Level 3		Balance at December 31, 2017
Impaired commercial LHFI	$	—	$	127,803	$	324,816	$	452,619	$	—	$	226,832	$	356,343	$	583,175
Foreclosed assets	—		11,951		98,241		110,192		—		20,011		106,581		126,592
Vehicle inventory	—		255,361		—		255,361		—		325,203		—		325,203
LHFS(1)	—		—		1,320,960		1,320,960		—		—		2,324,830		2,324,830
Auto loans impaired due to bankruptcy	—		162,184		—		162,184		—		121,578		—		121,578
MSRs	—		—		9,358		9,358		—		—		9,273		9,273

(1) These amounts include $956.4 million and $1.1 billion of personal loans held for sale that are impaired as of June 30, 2018 and December 31, 2017, respectively.

Valuation Processes and Techniques

Impaired commercial LHFI in the table above represents the recorded investment of impaired commercial loans for which the Company measures impairment during the period based on the fair value of the underlying collateral supporting the loan. Written offers to purchase a specific impaired loan are considered observable market inputs, which are considered Level 1 inputs. Appraisals are obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and are considered Level 2 inputs. Loans for which the value of the underlying collateral is determined using a combination of real estate appraisals, field examinations and internal calculations are classified as Level 3. The inputs in the internal calculations may include the loan balance, estimation of the collectability of the underlying receivables held by the customer used as collateral, sale and liquidation value of the inventory held by the customer used as collateral and historical loss-given-default parameters. In cases in which the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized. The net carrying value of these loans was $402.5 million and $491.5 million at June 30, 2018 and December 31, 2017, respectively. Loans previously impaired which were not marked to fair value during the periods presented are excluded from this table.

Foreclosed assets represent the recorded investment in assets taken during the period presented in foreclosure of defaulted loans, and are primarily comprised of commercial and residential real properties and generally measured at fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of market value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace.

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

The Company's LHFS portfolios that are measured at fair value on a nonrecurring basis primarily consist of personal, commercial, and RICs LHFS. The estimated fair value for these LHFS is calculated based on a combination of estimated market rates for similar loans with similar credit risks and a DCF analysis in which the Company uses significant unobservable inputs on key assumptions, including historical default rates and adjustments to reflect voluntary prepayments, prepayment rates, discount rates reflective of the cost of funding, and credit loss expectations. The lower of cost or fair value adjustment for personal 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.

A portion of the Company's MSRs are measured at fair value on a nonrecurring basis. These MSRs are priced internally using a DCF model. The DCF model incorporates assumptions that market participants would use in estimating future net servicing income, including portfolio characteristics, prepayments assumptions, discount rates, delinquency and foreclosure rates, late charges, other ancillary revenues, cost to service and other economic factors. Due to the unobservable nature of certain valuation inputs, these MSRs are classified as Level 3.

56

NOTE 14. FAIR VALUE (continued)

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 June 30, 2018						Six-Month Period Ended June 30,
(in thousands)	Statement of Operations Location	2018			2017			2018			2017
Impaired LHFI	Provision for credit losses	$	29,891		$	12,969		$	579		$	(32,803	)
Foreclosed assets	Miscellaneous income(1)	(2,129		)	(2,929		)	(4,601		)	(4,671		)
LHFS	Provision for credit losses	(6		)	(13,200		)	(387		)	(13,200		)
LHFS	Miscellaneous income(1)	(79,221		)	(95,921		)	(149,711		)	(162,042		)
Auto loans impaired due to bankruptcy	Provision for credit losses	(6,667		)	(24,513		)	(88,812		)	(48,113		)
MSRs	Miscellaneous income, net	929			102			380			197

(1) These amounts reduce Miscellaneous income.

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

The tables below present the changes in Level 3 balances for the three-month and six-month periods endedJune 30, 2018 and 2017, respectively, for those assets and liabilities measured at fair value on a recurring basis.

	Three-Month Period Ended June 30, 2018															Three-Month Period Ended June 30, 2017
(in thousands)	Investments AFS			RICs Held for Investment			MSRs			Derivatives			Total			Investments AFS			RICs Held for Investment			MSRs			Derivatives			Total
Balances, beginning of period	$	348,634		$	167,597		$	160,130		$	1,746		$	678,107		$	573,454		$	202,473		$	149,455		$	(27,709	)	$	897,673
Losses in other comprehensive income	(1,275		)	—			—			—			(1,275		)	(2,059		)	—			—			—			(2,059		)
Gains/(losses) in earnings	—			4,760			(1,274		)	(1,299		)	2,187			—			4,742			(1,194		)	(1,409		)	2,139
Additions/Issuances	—			1,927			2,841			—			4,768			—			6,396			2,867			—			9,263
Settlements(1)	(503		)	(22,202		)	(3,227		)	98			(25,834		)	16,176			(6,395		)	(5,037		)	98			4,842
Balances, end of period	$	346,856		$	152,082		$	158,470		$	545		$	657,953		$	587,571		$	207,216		$	146,091		$	(29,020	)	$	911,858
Changes in unrealized gains (losses) included in earnings related to balances still held at end of period	$	—		$	4,760		$	(1,274	)	$	(1,430	)	$	2,056		$	—		$	4,742		$	(1,194	)	$	5		$	3,553
	Six-Month Period Ended June 30, 2018															Six-Month Period Ended June 30, 2017
(in thousands)	Investments AFS			RICs HFI			MSRs			Derivatives			Total			Investments AFS			RICs HFI			MSRs			Derivatives			Total
Balances, beginning of period	$	350,252		$	186,471		$	145,993		$	1,514		$	684,230		$	814,567		$	217,170		$	146,589		$	(29,000	)	$	1,149,326
Losses in other comprehensive income	(1,774		)	—			—			—			(1,774		)	(2,678		)	—			—			—			(2,678		)
Gains/(losses) in earnings	—			10,036			13,769			(1,165		)	22,640			—			21,633			263			(215		)	21,681
Additions/Issuances	—			3,276			5,597			—			8,873			—			19,727			8,597			—			28,324
Settlements(1)	(1,622		)	(47,701		)	(6,889		)	196			(56,016		)	(224,318		)	(51,314		)	(9,358		)	195			(284,795		)
Balances, end of period	$	346,856		$	152,082		$	158,470		$	545		$	657,953		$	587,571		$	207,216		$	146,091		$	(29,020	)	$	911,858
Changes in unrealized gains (losses) included in earnings related to balances still held at end of period	$	—		$	10,036		$	13,769		$	(1,444	)	$	22,361		$	—		$	21,633		$	263		$	(795	)	$	21,101

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

57

NOTE 14. FAIR VALUE (continued)

The gains in earnings reported in the table above related to the RICs HFI for which the Company elected the FVO are driven by three primary factors: 1) the recognition of interest 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.

Valuation Processes and Techniques - Recurring Fair Value Assets and Liabilities

The following is a description of the valuation techniques used for instruments measured at fair value on a recurring basis:

Debt Securities Classified as AFS and Trading Securities

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

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

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

Certain ABS are valued using DCF models. The DCF models are obtained from a third-party pricing vendor who uses observable market data and therefore are classified as Level 2. Other ABS that could not be valued using a third-party pricing service are valued using an internally-developed DCF model. When estimating the fair value using this model, the Company uses its best estimate of the key assumptions, which include the discount rates and forward yield curves. The Company uses comparable bond indices based on industry, term, and rating to discount the expected future cash flows. Determining the comparability of assets involves significant subjectivity related to asset type differences, cash flows, performance and other inputs. The inability of the Company to corroborate the fair value of the ABS due to the limited available observable data on these ABS resulted in a fair value classification of Level 3.

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

58

NOTE 14. FAIR VALUE (continued)

RICs HFI

For certain RICs HFI, the Company has elected the FVO. The fair values of RICs are estimated using the DCF model. In estimating the fair value using this model, the Company uses significant unobservable inputs on key assumptions, which includes historical default rates and adjustments to reflect voluntary prepayments, prepayment rates based on available data from a comparable market securitization of similar assets, discount rates reflective of the cost of funding debt issuance and recent historical equity yields, recovery rates based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. Accordingly, RICs HFI for which the Company has elected the FVO are classified as Level 3.

LHFS

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

These loans are regularly traded in active markets, and observable pricing information is available from market participants. The prices are adjusted as necessary to include the embedded servicing value in the loans as well as the specific characteristics of certain loans that are priced based on the pricing of similar loans. These adjustments represent unobservable inputs to the valuation, and are not significant given the relative insensitivity of the value to changes in these inputs to the fair value of the loans. Accordingly, residential mortgage LHFS are classified as Level 2. Gains and losses on residential mortgage LHFS are recognized in the Condensed Consolidated 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 Miscellaneous income, net. See further discussion on MSRs in Note 8.

Listed below are the most significant inputs that are utilized by the Company in the evaluation of residential MSRs:

• A 10% and 20% increase in the CPR speed would decrease the fair value of the residential servicing asset by $5.2 million and $10.0 million, respectively, at June 30, 2018.

• A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $5.9 million and $11.3 million, respectively, at June 30, 2018.

59

NOTE 14. FAIR VALUE (continued)

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

Derivatives

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

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

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

The DCF model is utilized to determine the fair value of the mortgage banking derivatives-interest rate lock commitments and the total return settlement derivative contracts. The significant unobservable inputs for mortgage banking derivatives used in the fair value measurement of the Company's loan commitments are "pull through" percentage and the MSR value that is inherent in the underlying loan value. The pull through percentage is an estimate of loan commitments that will result in closed loans. The significant unobservable inputs for total return settlement derivative contracts used in the fair value measurement of the Company's liabilities are discount percentages, which are based on comparable financial instruments. Significant increases (decreases) in any of these inputs in isolation would result in significantly higher (lower) fair value measurements. Significant increases (decreases) in the fair value of a mortgage banking derivative asset (liability) results when the probability of funding increases (decreases). Significant increases (decreases) in the fair value of a mortgage loan commitment result when the embedded servicing value increases (decreases).

Gains and losses related to derivatives affect various line items in the Condensed Consolidated Statements of Operations. See Note 12 for a discussion of derivatives activity.

60

NOTE 14. FAIR VALUE (continued)

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

The following table presents quantitative information about the significant unobservable inputs within significant Level 3 recurring and nonrecurring assets and liabilities at June 30, 2018 and December 31, 2017:

(dollars in thousands)	Fair Value at June 30, 2018		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Financial Assets:
ABS
Financing bonds	$	304,382	DCF	Discount Rate (1)	3.00% - 3.20% (3.03%)
Sale-leaseback securities	$	42,474	Consensus Pricing (2)	Offered quotes (3)	113.61	%
RICs HFI	$	152,082	DCF	Prepayment rate (CPR) (4)	6.66	%
				Discount Rate (5)	9.50% - 14.50% (12.47% )
				Recovery Rate (6)	25.00% - 43.00% (41.6% )
Personal LHFS	$	956,455	Lower of Market or Income Approach	Market Participant View	70.00% - 80.00%
				Discount Rate	15.00% - 25.00%
				Default Rate	30.00% - 40.00%
				Net Principal Payment Rate	50.00% - 70.00%
				Loss Severity Rate	90.00% - 95.00%
RICs HFS	$	280,113	Income Approach	Expected Yield	1.00% - 2.00%
				Expected Life Time Cumulative Loss	4.00% - 6.00%
				Weighted Average Life	2 -3 years
MSRs (11)	$	158,470	DCF	Prepayment rate ("CPR") (7)	6.91% - 100.00% (8.49%)
				Discount Rate (8)	9.75	%
Mortgage banking interest rate lock commitments	$	2,384	DCF	Pull through percentage (9)	77.52	%
				MSR value (10)	0.73% - 1.03% (1.14%)

(1) Based on the applicable term and discount index.

(2) Consensus pricing refers to fair value estimates that are generally developed using information such as dealer quotes or other third-party valuations or comparable asset prices.

(3) Based on the nature of the input, a range or weighted average does not exist. For sale-leaseback securities, the Company owns one security.

(4) Based on the analysis of available data from a comparable market securitization of similar assets.

(5) Based on the cost of funding of debt issuance and recent historical equity yields.

(6) Based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool.

(7) Average CPR projected from collateral stratified by loan type and note rate.

(8) Average discount rate from collateral stratified by loan type and note rate.

(9) Historical weighted average based on principal balance calculated as the percentage of loans originated for sale divided by total commitments less outstanding commitments. 

(10) MSR value is the estimated value of the servicing right embedded in the underlying loan, expressed in basis points of outstanding unpaid principal balance.

(11) Excludes MSR valued on a non-recurring basis for which we do not consider there to be significant unobservable assumptions.

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NOTE 14. FAIR VALUE (continued)

(dollars in thousands)	Fair Value at December 31, 2017		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Financing bonds
ABS
Financing bonds	$	304,727	DCF	Discount Rate (1)	2.16% - 2.90% (2.28%)
Sale-leaseback securities	$	45,525	Consensus Pricing (2)	Offered Quotes (3)	120.19	%
RICs HFI	$	186,471	DCF	CPR (4)	6.66	%
				Discount Rate (5)	9.50% - 14.50% (12.37%)
				Recovery Rate (6)	25.00% - 43.00% (41.51%)
Personal LHFS	$	1,062,090	Lower of Market or Income Approach	Market Participant View	70.00% - 80.00%
				Discount Rate	15.00% - 20.00%
				Default Rate	30.00% - 40.00%
				Net Principal Payment Rate	50.00% - 70.00%
				Loss Severity Rate	90.00% - 95.00%
RICs HFS	$	1,101,049	DCF	Discount Rate	3.00% - 6.00%
				Default Rate	3.00% - 4.00%
				Prepayment Rate	15.00% - 20.00%
				Loss Severity Rate	50.00% - 60.00%
MSRs (11)	$	145,993	DCF	CPR (7)	0.06% - 46.95% (9.80%)
				Discount Rate (8)	9.90	%
Mortgage banking interest rate lock commitments	$	2,105	DCF	Pull through percentage (9)	76.98	%
				MSR Value (10)	0.73% - 1.03% (0.95%)

(1) Based on the applicable term and discount index.

(2) Consensus pricing refers to fair value estimates that are generally developed using information such as dealer quotes or other third-party valuations or comparable asset prices.

(3) Based on the nature of the input, a range or weighted average does not exist. For sale-leaseback securities, the Company owns one security.

(4) Based on the analysis of available data from a comparable market securitization of similar assets.

(5) Based on the cost of funding of debt issuance and recent historical equity yields.

(6) Based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool.

(7) Average CPR projected from collateral stratified by loan type and note rate.

(8) Average discount rate from collateral stratified by loan type and note rate.

(9) Historical weighted average based on principal balance calculated as the percentage of loans originated for sale divided by total commitments less outstanding commitments. 

(10) MSR value is the estimated value of the servicing right embedded in the underlying loan, expressed in basis points of outstanding unpaid principal balance.

(11) Excludes MSR valued on a non-recurring basis for which we do not consider there to be significant unobservable assumptions.

62

NOTE 14. FAIR VALUE (continued)

Fair Value of Financial Instruments

The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company's financial instruments are as follows:

	June 30, 2018										December 31, 2017
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3		Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and amounts due from depository institutions	$	6,127,604	$	6,127,604	$	6,127,604	$	—	$	—	$	6,519,967	$	6,519,967	$	6,519,967	$	—	$	—
Investment in debt securities AFS (2)	13,064,873		13,064,873		342,021		12,375,996		346,856		14,402,369		14,402,369		139,615		13,912,502		350,252
Investment in debt securities HTM	2,920,087		2,826,499		—		2,826,499		—		1,799,808		1,773,938		—		1,773,938		—
Other investments - trading securities	1,874		1,874		1		1,873		—		1		1		1		—		—
LHFI, net	79,326,170		79,833,705		—		37,803		79,795,902		76,829,277		78,579,144		—		136,832		78,442,312
LHFS	1,559,799		1,559,824		—		238,864		1,320,960		2,522,486		2,522,521		—		197,691		2,324,830
Restricted cash	3,123,208		3,123,208		3,123,208		—		—		3,818,807		3,818,807		3,818,807		—		—
MSRs(1)	161,294		167,828		—		—		167,828		149,197		155,266		—		—		155,266
Derivatives	653,405		653,405		—		651,021		2,384		463,244		463,244		—		461,139		2,105
Financial liabilities:
Deposits	61,556,548		61,556,508		55,757,515		5,798,993		—		60,831,103		60,864,110		55,456,511		5,407,599		—
Borrowings and other debt obligations	38,771,378		38,907,770		—		26,351,342		12,556,428		39,003,313		39,335,087		—		23,281,166		16,053,921
Derivatives	617,889		617,889		—		616,050		1,839		427,811		427,811		—		427,217		594

(1) The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or fair value.

(2) Investment in debt securities AFS disclosed on the Consolidated Balance Sheets at December 31, 2017 included $10.8 million of equity securities valued using net asset value as a practical expedient that are not presented within this table. The balance of these equity securities at June 30, 2018 is $10.9 million and is included in the Other investments line item on the Condensed Consolidated Balance Sheets.

Valuation Processes and Techniques - Financial Instruments

The preceding tables present disclosures about the fair value of the Company's financial instruments. Those fair values for certain instruments are presented based upon subjective estimates of relevant market conditions at a specific point in time and information about each financial instrument. In cases in which quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties resulting in variability in estimates affected by changes in assumptions and risks of the financial instruments at a certain point in time. Therefore, the derived fair value estimates presented above for certain instruments cannot be substantiated by comparison to independent markets. In addition, the fair values do not reflect any premium or discount that could result from offering for sale at one time an entity’s entire holding of a particular financial instrument, nor does it reflect potential taxes and the expenses that would be incurred in an actual sale or settlement. Accordingly, the aggregate fair value amounts presented above do not represent the underlying value of the Company.

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.

63

NOTE 14. FAIR VALUE (continued)

RICs HFI

To reduce accounting and operational complexity, the Company elected the FVO for certain of its RICs HFI. These loans consisted primarily of SC’s RICs accounted for by SC under ASC 310-30, as well as all of SC’s RICs that were more than 60 days past due at the date of the Change in Control, which collectively had an aggregate outstanding UPB of $2.6 billion with a fair value of $1.9 billion at that date. The balance also includes non-performing loans acquired by SC under optional clean up calls from its non-consolidated Trusts.

The following table summarizes the differences between the fair value and the principal balance of LHFS and RICs measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017:

	June 30, 2018							December 31, 2017
(in thousands)	Fair Value		Aggregate UPB		Difference			Fair Value		Aggregate UPB		Difference
LHFS(1)	$	238,864	$	231,327	$	7,537		$	197,691	$	194,928	$	2,763
RICs HFI	152,082		172,448		(20,366		)	186,471		211,580		(25,109		)
Nonaccrual loans	8,523		11,863		(3,340		)	15,023		19,836		(4,813		)

(1) LHFS disclosed on the Condensed Consolidated Balance Sheets also includes LHFS that are held at the lower of cost or fair value that are not presented within this table. There were no nonaccrual loans related to the LHFS measured using the FVO.

Interest income on the Company’s LHFS and RICs HFI is recognized when earned based on their respective contractual rates in Interest income on loans in the Condensed Consolidated Statements of Operations. The accrual of interest is discontinued and reversed once the loans become more than 90 days past due for LHFS and more than 60 days past due for RICs HFI. 

Residential MSRs

The Company elected to account for the majority of its existing portfolio of MSRs at fair value. This election created greater flexibility with regard to risk management of the asset by aligning the accounting for the MSRs with the accounting for risk management instruments, which are also generally carried at fair value. The remainder of the MSRs are accounted for using the lower of cost or fair value and are presented above in the section captioned "Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis."

The Company's residential MSRs that are accounted for at fair value had an aggregate fair value of $158.5 million at June 30, 2018. Changes in fair value totaling a loss of $1.3 million and a gain of $13.8 million were recorded in Miscellaneous income, net in the Condensed Consolidated Statements of Operations during the three-month and six-month periods endedJune 30, 2018, respectively.

64

NOTE 15.NON-INTEREST INCOME

The following table presents the details of the Company's Non-interest income for the following periods:

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
(in thousands)	2018			2017 (1)			2018			2017 (1)
Non-interest income:
Consumer and commercial fees	$	136,165		$	162,334		$	276,337		$	316,702
Lease income	569,306			489,043			1,110,202			985,087
Miscellaneous income, net
Mortgage banking income, net	2,933			15,092			19,278			28,266
BOLI	14,816			14,052			29,384			31,351
Capital market revenue	41,083			39,771			97,696			85,587
Net gain on sale of operating leases	65,742			39,810			118,941			62,525
Asset and wealth management fees	43,922			39,438			87,259			75,939
Loss on sale of non-mortgage loans	(74,872		)	(87,837		)	(118,782		)	(157,604		)
Other miscellaneous income, net	19,659			9,057			309			18,462
Net (losses)/gains on sale of investment securities	419			9,049			(244		)	9,569
Total non-interest income	$	819,173		$	729,809		$	1,620,380		$	1,455,884

(1) - Prior period amounts have not been adjusted under the modified retrospective method. For further information, see Note 1.

Disaggregation of Revenue from Contracts with Customers

Beginning January 1, 2018 the Company adopted the new accounting standard, "Revenue from Contracts with Customers", which requires the Company to disclose a disaggregation of revenue from contracts with customers that falls within the scope of this new accounting standard. The scope of the guidance explicitly excludes net interest income as well as many other revenues for financial assets and liabilities including loans, leases, securities, and derivatives. Therefore, the Company has evaluated the revenue streams within our Non-interest income line items to determine whether they are in-scope or out-of-scope. The following table presents the Company's Non-interest income disaggregated by revenue source.

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
(in thousands)	2018			2017 (1)			2018			2017 (1)
Non-interest income:
In-scope of revenue from contracts with customers:
Depository services(2)	$	57,432		$	62,415		$	115,778		$	122,855
Commission and trailer fees(3)	31,982			30,179			61,432			61,347
Interchange income, net(3)	16,170			16,745			29,643			29,394
Underwriting service fees(3)	24,840			17,962			49,344			42,562
Asset and wealth management fees(3)	42,151			30,816			80,354			59,061
Other revenue from contracts with customers(3)	7,684			7,559			17,686			20,870
Total in-scope of revenue from contracts with customers	180,259			165,676			354,237			336,089
Out-of-scope of revenue from contracts with customers:
Consumer and commercial fees(4)	70,971			94,403			144,175			181,499
Lease income	569,306			489,043			1,110,202			985,087
Miscellaneous income/(loss)(4)	(1,782		)	(28,362		)	12,010			(56,360		)
Net (losses)/gains on sale of investment securities	419			9,049			(244		)	9,569
Total out-of-scope of revenue from contracts with customers	638,914			564,133			1,266,143			1,119,795
Total non-interest income	$	819,173		$	729,809		$	1,620,380		$	1,455,884

(1) - Prior period amounts have not been adjusted under the modified retrospective method. For further information, see Note 1.

(2) - Primarily recorded in the Company's Condensed Consolidated Statements of Operations within Consumer and commercial fees.

(3) - Primarily recorded in the Company's Condensed Consolidated Statements of Operations within Miscellaneous income, net.

(4) - The balance presented excludes certain revenue streams that are considered in-scope and presented above.

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NOTE 15. NON-INTEREST INCOME (continued)

Arrangements with Multiple Performance Obligations

Our contracts with customers may include multiple performance obligations. For such arrangements, we allocate revenue to each performance obligation based on its relative standalone selling price. We generally determine standalone selling prices based on the prices charged to customers or using expected cost plus margin.

Practical Expedients

In instances where incremental costs, such as commission expenses, are incurred and the period of benefit is equal to or less than one year, the Company has elected to apply the practical expedient where the Company expenses such amounts as incurred. These costs are recorded within Compensation and benefits, within the Condensed Consolidated Statements of Operations.

In instances where contracts with customers contain a financing component and the Company expects the customer to pay for the goods or services within one year or less, the Company has elected to apply the practical expedient where the Company does not adjust the contracted amount of consideration for the effects of financing components.

The Company does not disclose the value of unsatisfied performance obligations for (i) contracts with an original expected length of one year or less or (ii) contracts for which we recognize revenue at the amount to which we have the right to invoice for services performed. As a result of the practical expedient and for the Company's material revenue streams, there are no unperformed performance obligations. As a result of the practical expedient and the Company's revenue recognition for contracts with customers, there are no material contract assets or liabilities.

66

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES

Off-Balance Sheet Risk - Financial Instruments

In the normal course of business, the Company utilizes a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers and manage its exposure to fluctuations in interest rates. These financial instruments include commitments to extend credit, letters of credit, loans sold with recourse, forward contracts, and interest rate and cross currency swaps, caps and floors. These financial instruments may involve, to varying degrees, elements of credit, liquidity, and interest rate risk in excess of the amount recognized on the Condensed Consolidated Balance 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 12 to these Condensed Consolidated Financial Statements for discussion of all derivative contract commitments.

The following table details the amount of commitments at the dates indicated:

Other Commitments	June 30, 2018		December 31, 2017
	(in thousands)
Commitments to extend credit	$	29,713,289	$	29,475,864
Letters of credit	1,460,244		1,559,297
Unsecured revolving lines of credit	28,002		27,938
Recourse exposure on sold loans	36,981		46,572
Commitments to sell loans	50,011		19,477
Total commitments	$	31,288,527	$	31,129,148

Commitments to Extend Credit

Commitments to extend credit generally have fixed expiration dates, are variable rate, and contain provisions that permit the Company to terminate or otherwise renegotiate the contracts in the event of a significant deterioration in the customer’s credit quality. These arrangements normally require payment of a fee by the customer, the pricing of which is based on prevailing market conditions, credit quality, probability of funding, and other relevant factors. Since many of these commitments are expected to expire without being drawn upon, the contract amounts are not necessarily indicative of future cash requirements.

Included within the reported balances for Commitments to extend credit at June 30, 2018 and December 31, 2017 are $6.7 billion and $6.4 billion, respectively, of commitments that can be canceled by the Company without notice.

The following table details the amount of commitments to extend credit expiring per period as of the dates indicated:

(in thousands)	June 30, 2018		December 31, 2017
1 year or less	$	4,785,053	$	5,858,236
Over 1 year to 3 years	4,476,079		5,381,113
Over 3 years to 5 years	5,981,334		4,478,320
Over 5 years (1)	14,470,823		13,758,195
Total	$	29,713,289	$	29,475,864

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

Unsecured Revolving Lines of Credit

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

67

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Letters of Credit

The Company’s letters of credit meet the definition of a guarantee. Letters of credit commit the Company to make payments on behalf of its customers if specified future events occur. The guarantees are primarily issued to support public and private borrowing arrangements. The weighted average term of these commitments at June 30, 2018 was 15.5 months. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. In the event of a requested draw by the beneficiary that complies with the terms of the letter of credit, the Company would be required to honor the commitment. The Company has various forms of collateral for these letters of credit, including real estate assets and other customer business assets. The maximum undiscounted exposure related to these commitments at June 30, 2018 was $1.5 billion. The fees related to letters of credit are deferred and amortized over the life of the respective commitments, and were immaterial to the Company’s financial statements at June 30, 2018. Management believes that the utilization rate of these letters of credit will continue to be substantially less than the amount of the commitments, as has been the Company’s experience to date. As of June 30, 2018 and December 31, 2017, the liability related to these letters of credit was $2.4 million and $18.2 million, respectively, which is recorded within the reserve for unfunded lending commitments in Other liabilities on the Condensed Consolidated Balance Sheets. The credit risk associated with letters of credit is monitored using the same risk rating system utilized within the loan and financing lease portfolio. Also included within the reserve for unfunded lending commitments at June 30, 2018 and December 31, 2017 were lines of credit outstanding of $84.6 million and $90.9 million, respectively.

The following table details the amount of letters of credit expiring per period as of the dates indicated:

(in thousands)	June 30, 2018		December 31, 2017
1 year or less	$	753,852	$	918,191
Over 1 year to 3 years	308,273		286,505
Over 3 years to 5 years	313,009		312,881
Over 5 years	85,110		41,720
Total	$	1,460,244	$	1,559,297

Loans Sold with Recourse

The Company has loans sold with recourse that meet the definition of a guarantee. For loans sold with recourse under the terms of its multifamily sales program with FNMA, the Company retained a portion of the associated credit risk. The UPB outstanding of loans sold in these programs was $52.4 million as of June 30, 2018 and $136.0 million as of December 31, 2017. As a result of its agreement with FNMA, the Company retained a 100% first loss position on each multifamily loan sold to FNMA until the earlier

to occur of (i) the aggregate approved losses on multifamily loans sold to FNMA reaching the maximum loss exposure for the

portfolio as a whole of $12.2 million as of June 30, 2018 and $12.2 million as of December 31, 2017 or (ii) the time when such loans sold to FNMA under this program are fully paid off. Any losses sustained as a result of impediments in standard representations and warranties would be in addition to the maximum loss exposure.

At the time of the sale, the Company established a liability which represented the fair value of the retained credit exposure and the amount the Company estimates it would have to pay a third party to assume the retained recourse obligation. The estimated liability is calculated as the present value of losses that the portfolio is projected to incur based upon specific internal information and an industry-based default curve with a range of estimated losses. At June 30, 2018 and December 31, 2017, the Company had zero and $1.3 million, respectively, of reserves classified in Accrued expenses and payables on the Condensed Consolidated Balance Sheets related to the retained credit exposure for loans sold to the FNMA under this program. The Company's commitment will expire in March 2039 based on the maturity of the loans sold with recourse. Losses sustained by the Company may be offset, or partially offset, by proceeds resulting from the disposition of the underlying mortgaged properties. Approval from the FNMA is required for all transactions related to the liquidation of properties underlying the mortgages.

Commitments to Sell Loans

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

68

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

SC Commitments

SC is party to agreements with Bluestem whereby SC is committed to purchase certain new advances on personal revolving financings originated by a third-party retailer, along with existing balances on accounts with new advances, for an initial term ending in April 2020 and renewing through April 2022 at Bluestem's option. As of June 30, 2018 and December 31, 2017, the total unused credit available to customers was $3.8 billion and $3.9 billion, respectively. In 2017, the Company purchased $1.2 billion of receivables out of the $4.0 billion of unused credit available to customers at December 31, 2016. During the six months ended June 30, 2018, the Company purchased $0.5 billion of receivables out of the $3.9 billionunused credit available to customers as of December 31, 2017. In addition, SC purchased $83.8 million of receivables related to newly-opened customer accounts during the six months ended June 30, 2018. Each customer account generated under the agreements generally is approved with a credit limit higher than the amount of the initial purchase, with each subsequent purchase automatically approved as long as it does not cause the account to exceed its limit and the customer is in good standing. As of June 30, 2018 and December 31, 2017, SC was obligated to purchase $15.7 million and $11.5 million, respectively, in receivables that had been originated by the retailer but not yet purchased by SC. SC also is required to make a profit-sharing payment to the retailer each month if performance exceeds a specified return threshold. During the year ended December 31, 2015, SC and the third-party retailer executed an amendment that, among other provisions, increases the profit-sharing percentage retained by SC, gives the retailer the right to repurchase up to 9.99% of the existing portfolio at any time during the term of the agreement, and, provided that the repurchase right is exercised, gives the retailer the right to retain up to 20% of new accounts subsequently originated.

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

In connection with the sale of RICs through securitizations and other sales, SC has made standard representations and warranties customary to the consumer finance industry. Violations of these representations and warranties may require SC to repurchase loans previously sold to on- or off-balance sheet Trusts or other third parties. As of June 30, 2018, there were no loans that were the subject of a demand to repurchase or replace for breach of representations or warranties for SC's ABS or other sales. In the opinion of management, the potential exposure of other recourse obligations related to SC’s RIC sales agreements will not have a material adverse effect on SC’s consolidated financial position, results of operations, or cash flows.

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

Chrysler Agreement

Under terms of the Chrysler Agreement, SC must make revenue-sharing payments to FCA and also must make gain-sharing payments to FCA when residual gains on leased vehicles exceed a specified threshold. SC had accrued $11.1 million and $6.6 million at June 30, 2018 and December 31, 2017, respectively, related to these obligations.

The Chrysler Agreement requires, among other things, that SC bears the risk of loss on loans originated pursuant to the agreement, but also that FCA shares in any residual gains and losses from consumer leases. The agreement also requires that SC maintains at least $5.0 billion in funding available for dealer inventory financing and $4.5 billion of financing dedicated to FCA retail financing. In turn, FCA must provide designated minimum threshold percentages of its subvention business to SC. The Chrysler Agreement is subject to early termination in certain circumstances, including the failure by either party to comply with certain of its ongoing obligations under the agreement. These obligations include SC's meeting specified escalating penetration rates for the first five years of the agreement. SC did not meet these penetration rates. Also, FCA has the option to acquire, for fair market value, an equity participation in the business offering and providing the financial services contemplated by the Chrysler Agreement. If FCA exercises its purchase option, the Chrysler Agreement were to terminate, or the Company otherwise is unable to realize the expected benefits of its relationship with FCA, there could be a materially adverse impact to the Company's and SC's business, financial condition, results of operations, profitability, loan and lease volume, the credit quality of its portfolio, liquidity, funding and growth, and the Company's or SC's ability to implement its business strategy could be materially adversely affected.

69

NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Agreement with Bank of America

Until January 31, 2017, SC had a flow agreement with Bank of America whereby SC was committed to sell up to $300.0 million of eligible loans to the bank each month. On October 27, 2016, Bank of America notified SC that it was terminating the flow agreement effective January 31, 2017 and, accordingly, the flow agreement has terminated. SC retains servicing on all sold loans and may receive or pay a servicer performance payment based on an agreed-upon formula if performance on the sold loans is better or worse, respectively, than expected performance at the time of sale. Servicer payments are due six years from the cut-off date of each loan sale. SC had accrued $7.0 million and $8.1 million at June 30, 2018 and December 31, 2017, respectively, related to this obligation.

Agreement with Citizens Bank of Pennsylvania ("CBP")

Until May 1, 2017, SC sold loans to CBP under terms of a flow agreement and predecessor sale agreements. Under the flow agreement, as amended, CBP's committed purchases of Chrysler Capital prime loans were a maximum of $200.0 million and a minimum of $50.0 million per quarter. SC retains servicing on the sold loans and will 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 $5.0 million and $5.6 million at June 30, 2018 and December 31, 2017, respectively, related to this obligation.

Other Agreements

As of June 30, 2018, SC was party to a forward flow asset sale agreement with a third party under the terms of which SC is committed to sell charged-off loan receivables in bankruptcy status on a quarterly basis until sales total at least $350.0 million. However, any sale of more than $275.0 millionis subject to a market price check. As of June 30, 2018 and December 31, 2017, the remaining aggregate commitments were $78.5 million and $98.9 million, respectively.

Other Contingencies

SC is or may be subject to potential liability under various other contingent exposures. SC had accrued $14.3 million and $6.3 million at June 30, 2018 and December 31, 2017, respectively, for other miscellaneous contingencies.

Impact from Hurricanes

Our footprint was impacted by three significant hurricanes during the third quarter of 2017, Hurricane Harvey, which struck the State of Texas and the surrounding region, Hurricane Irma, which primarily struck the State of Florida, and Hurricane Maria, which struck the island of Puerto Rico. Each of these hurricanes resulted in widespread flooding, power outages and associated damage to real and personal property in the affected areas SC, headquartered in Dallas, Texas, BSI, headquartered in Miami, Florida, and Santander BanCorp, BSPR and SSLLC in Puerto Rico were most directly affected by these hurricanes. In Puerto Rico, there was significant damage to the infrastructure and the power grid on the entire island, which resulted in extended delays in BSPR returning to normal operations.

The Company assessed the potential additional credit losses related to its consumer and commercial lending exposures in the greater Texas, Florida and Puerto Rico regions. As a result, the Company's ALLL had approximately $95 million of reserves at June 30, 2018 related to the hurricanes. However, for credit exposures in Puerto Rico, given the current state of the region, the Company has had limited information with which to estimate probable credit losses. As of June 30, 2018, the Company has approximately $3.4 billion of loan exposures in Puerto Rico, consisting of $1.6 billion in consumer loans and $1.8 billion in commercial loans including $220 million in loans to municipalities. The Company will continue to monitor and assess the impact of these hurricanes on our subsidiaries’ businesses, and may make adjustments to reserves for losses in future periods as additional information related to these potential exposures becomes available.

See discussion under the "Puerto Rico FINRA Arbitrations" section of Note 16 below for further discussion.

Other Off-Balance Sheet Risk

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

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NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Legal and Regulatory Proceedings

Periodically, the Company is party to, or otherwise involved in, various lawsuits, investigations, regulatory matters and other legal proceedings that arise in the ordinary course of business. In view of the inherent difficulty of predicting the outcome of any such lawsuit, investigation, regulatory matter and/or legal proceeding, particularly where the claimants seek very large or indeterminate damages or where the matters present novel legal theories or involve a large number of parties, the Company generally cannot predict the eventual outcome of the pending matters, the timing of the ultimate resolution of the matters, or the eventual loss, fines or penalties related to the matter. Accordingly, except as provided below, the Company is unable to reasonably estimate a range of its potential exposure, if any, to these lawsuits, investigations, regulatory matters and other legal proceedings at this time. However, it is reasonably possible that actual outcomes or losses may differ materially from the Company's current assessments and estimates and any adverse resolution of any of these matters against it could have a material adverse effect on the Company's financial position, liquidity, and results of operations.

In accordance with applicable accounting guidance, the Company establishes an accrued liability for litigation, investigation, regulatory matters and other legal proceedings when those matters present material loss contingencies that are both probable and estimable. In such cases, there may be an exposure to loss in excess of any amounts accrued. When a loss contingency is not both probable and estimable, the Company does not establish an accrued liability. As a litigation, investigation or regulatory matter develops, the Company, in conjunction with any outside counsel handling the matter, evaluates on an ongoing basis whether the matter presents a material loss contingency that is probable and estimable. If a determination is made during a given quarter that a material loss contingency is probable and estimable, an accrued liability is established during such quarter with respect to such loss contingency; the Company continues to monitor the matter for further developments that could affect the amount of the accrued liability previously established.

As of June 30, 2018 and December 31, 2017, the Company accrued aggregate legal and regulatory liabilities of $176.9 million and $161.8 million, respectively. Further, the Company estimates the aggregate range of reasonably possible losses for legal and regulatory proceedings in excess of reserves of up to $273 million and $255 million as of June 30, 2018 and December 31, 2017, respectively. Descriptions of the material lawsuits, regulatory matters and other legal proceedings to which the Company is subject are set forth below.

OCC Identity Theft Protection Product ("SIP") Matter

On March 26, 2015, the Bank entered into a Cease and Desist Order (the "SIP Consent Order") with the OCC regarding identified deficiencies in SBNA's billing practices with regard to SIP, an identity theft protection product from the Bank's third party vendor. Pursuant to the SIP Consent Order, the Bank paid a civil monetary penalty ("CMP") of $6 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 Bank is currently implementing the actions and remediation set forth in the Bank’s action plans to reimburse customers.

CFPB Overdraft Coverage Consent Order

On April 1, 2014, the Bank received a civil investigative demand ("CID") from the CFPB requesting information and documents in connection with the Bank’s marketing to consumers of overdraft coverage for ATM and onetime debit card transactions through a third-party vendor. On July 14, 2016, the Bank entered into a consent order with the CFPB regarding these practices. Pursuant to the terms of the consent order, the Bank paid a CMP of $10.0 million and agreed to validate the elections made by customers who opted in to overdraft coverage for ATM and onetime debit card transactions in connection with telemarketing by the third-party vendor. The Bank was also required to make certain changes to its third-party vendor oversight policy and its customer complaint policy.  The Bank implemented a remediation plan and believes it has met the consent order requirements. It is possible that additional litigation could be filed as a result of these issues.

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NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Other Matters

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

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.

SC Matters

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

Securities Class Action and Shareholder Derivative Lawsuits

Deka Lawsuit: SC is a defendant in a purported securities class action lawsuit (the "Deka Lawsuit") in the United States District Court, Northern District of Texas, captioned Deka Investment GmbH et al. v. Santander Consumer USA Holdings Inc. et al., No. 3:15-cv-2129-K. The Deka Lawsuit is against SC, certain of its current and former directors and executive officers and certain institutions that served as underwriters in SC's initial public offering (the "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 amended class action 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. On December 18, 2015, SC and the individual defendants moved to dismiss the lawsuit, which was denied. On December 2, 2016, the plaintiffs moved to certify the proposed classes. On July 11, 2017, the court entered an order staying the Deka Lawsuit pending the resolution of the appeal of a class certification order in In re Cobalt Int’l Energy, Inc. Sec. Litig., No. H-14-3428, 2017 U.S. Dist. LEXIS 91938 (S.D. Tex. June 15, 2017).

Feldman Lawsuit: On October 15, 2015, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware, captioned Feldman v. Jason A. Kulas, et al., C.A. No. 11614 (the "Feldman Lawsuit"). The Feldman Lawsuit names as defendants certain current and former members of SC’s Board of Directors, and names SC as a nominal defendant. The complaint alleges, among other things, that the current and former director defendants breached their fiduciary duties in connection with overseeing SC’s nonprime auto lending practices, resulting in harm to SC. The complaint seeks unspecified damages and equitable relief. On December 29, 2015, the Feldman Lawsuit was stayed pending the resolution of the Deka Lawsuit.

Jackie888 Lawsuit: On September 27, 2016, a shareholder derivative complaint was filed in the Court of Chancery of the State of Delaware captioned Jackie888, Inc. v. Jason Kulas, et al., C.A. # 12775 (the "Jackie888 Lawsuit"). The Jackie888 Lawsuit names as defendants current and former members of SC’s Board of Directors, and names SC as a nominal defendant. The complaint alleges, among other things, that the defendants breached their fiduciary duties in connection with SC’s accounting practices and controls. The complaint seeks unspecified damages and equitable relief. On April 13, 2017, the Jackie888 Lawsuit was stayed pending the resolution of the Deka Lawsuit.

Parmelee Lawsuits: Two purported securities class action lawsuits filed in March and April 2016 in the United States District Court, Northern District of Texas, were consolidated and are now captioned Parmelee v. Santander Consumer USA Holdings Inc. et al., No. 3:16-cv-783 (the "Parmelee Lawsuits"). The Parmelee Lawsuits were filed against SC and certain of its current and former directors and executive officers on behalf of a class consisting of all those who purchased or otherwise acquired SC securities between February 3, 2015 and March 15, 2016. The complaint alleges, among other things, that SC violated federal securities laws by making false or misleading statements, as well as failing to disclose material adverse facts, in its periodic reports filed under the Exchange Act and certain other public disclosures, in connection with, among other things, SC’s change in its methodology for estimating its ACL and the correction of such ACL for prior periods. On January 3, 2018, the court granted SC’s motion to dismiss the lawsuit as to defendant Ismail Dawood (SC’s former Chief Financial Officer) and denied the motion as to all other defendants. In July 2018, plaintiffs filed a motion seeking preliminary court approval of a class-wide settlement calling for total payment of $9.5 million to the class and its lawyers.

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NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Consumer Lending Cases

SC is also party to various lawsuits pending in federal and state courts alleging violations of state and federal consumer lending laws, including, without limitation, the Equal Credit Opportunity Act (the “ECOA”), the Fair Debt Collection Practices Act, the Fair Credit Reporting Act, Section 5 of the Federal Trade Commission Act, the Telephone Consumer Protection Act, the Truth in Lending Act, wrongful repossession laws, usury laws and laws related to unfair and deceptive acts or practices. In general, these cases seek damages and equitable and/or other relief.

Regulatory 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 Department of Justice (the “DOJ”), the SEC, the Federal Trade Commission and various state regulatory and enforcement agencies.

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

• SC received a civil subpoena from the DOJ under Financial Institutions Reform, Recovery and Enforcement Act, requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime vehicle loans, and also from the SEC requesting the production of documents and communications that, among other things, relate to the underwriting and securitization of nonprime vehicle loans. SC has responded to these requests within the deadlines specified in the subpoenas and has otherwise cooperated with the DOJ and the SEC with respect to these matters.

• In October 2014, May 2015, July 2015 and February 2017, SC received subpoenas and/or CIDs from the attorneys general of California, Illinois, Oregon, New Jersey, Maryland and Washington under the authority of each state's consumer protection statutes. SC has been informed that these states will serve as an executive committee on behalf of a group of 31 state Attorneys General. The subpoenas and/or CIDs from the executive committee states contain broad requests for information and the production of documents related to SC’s underwriting, securitization, servicing and collection of nonprime vehicle loans. SC has responded to these requests within the deadlines specified in the subpoenas and/or CIDs, and has otherwise cooperated with the Attorneys General with respect to this matter.

• In February 2016, the CFPB issued a supervisory letter relating to its investigation of SC’s compliance systems, Board and senior management oversight, consumer complaint handling, marketing of guaranteed auto protection ("GAP") coverage and loan deferral disclosure practices. SC subsequently received a series of CIDs from the CFPB requesting information and testimony regarding SC’s marketing of GAP coverage and loan deferral disclosure practices. SC has responded to these requests within the deadlines specified in the CIDs, and has otherwise cooperated with the CFPB with respect to this matter.

• In August 2017, SC received a CID from the CFPB. The stated purpose of the CID is to determine whether SC has complied with the Fair Credit Reporting Act and related regulations. SC has responded to these requests within the deadlines specified in the CID and has otherwise cooperated with the CFPB with respect to this matter.

Mississippi Attorney General Lawsuit

On January 10, 2017, the Attorney General of the State of Mississippi (the "Mississippi AG") filed a lawsuit against SC in the Chancery Court of the First Judicial District of Hinds County, State of Mississippi, captioned State of Mississippi ex rel. Jim Hood, Attorney General of the State of Mississippi v. Santander Consumer USA Inc., C.A. # G-2017-28. The complaint alleges that SC engaged in unfair and deceptive business practices to induce Mississippi consumers to apply for loans that they could not afford. The complaint asserts claims under the Mississippi Consumer Protection Act (the "MCPA") and seeks unspecified civil penalties, equitable relief and other relief. On March 31, 2017, SC filed motions to dismiss the Mississippi AG’s lawsuit, and subsequently filed a motion to stay the lawsuit pending the resolution of an interlocutory appeal relating to the MCPA before the Mississippi Supreme Court in Purdue Pharma, L.P., et al. v. State, No. 2017-IA- 00300-SCT. On September 25, 2017, the court granted the motion to stay and ordered a stay of all proceedings, excluding discovery and final briefing on motions to dismiss.

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NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

Servicemembers’ Civil Relief Act (“SCRA') Consent Order

In February 2015, SC entered into a consent order with the DOJ, approved by the United States District Court for the Northern District of Texas, which resolves the DOJ's claims against SC that certain of its repossession and collection activities during the period between January 2008 and February 2013 violated the 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 SC’s SCRA compliance for a period of five years and requires SC to undertake certain additional remedial measures.

Intermediate Holding Company (“IHC') Matters

Periodically, SSLLC is party to pending and threatened legal actions and proceedings, including Financial Industry Regulatory Authority (“FINRA”) arbitration actions and class action claims.

Puerto Rico FINRA Arbitrations

As of June 30, 2018, SSLLC had received 458 FINRA arbitration cases related to Puerto Rico bonds and Puerto Rico closed-end funds ("CEFs"). Most of these cases are based upon concerns regarding the local Puerto Rico securities market. The statements of claims allege, among other things, fraud, negligence, breach of fiduciary duty, breach of contract, unsuitability, over-concentration and failure to supervise. There were 327 arbitration cases that remained pending as of June 30, 2018.

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

Puerto Rico CEF Shareholder Derivative and Class Actions

Santander, Santander BanCorp, BSPR, SSLLC, Santander Asset Management, LLC and several directors and members of senior management of these entities are defendants in a purported class action and shareholder derivative suit pending in the United States District Court for the District of the Commonwealth of Puerto Rico captioned Dionisio Trigo Gonzalez et al. v. Banco Santander, S.A. et al., No. 3:2016cv02868. Brought by customers of certain CEFs, the complaint alleges misconduct including that the entities and individuals created, controlled, managed and advised certain CEFs within the First Puerto Rico Family of Funds (the “Funds”) from March 1, 2012 through the present to the detriment of the Funds and their shareholders. Brought on behalf of the Funds and Puerto Rico-based investors, the complaint seeks unspecified damages but alleges damages to be at least tens of millions of dollars. The court denied plaintiffs’ motion to reconsider its earlier decision not to remand the case to Puerto Rico state court.

SSLLC, Santander BanCorp, BSPR, the Company and Santander are defendants in a putative class action alleging federal securities and common law claims relating to the solicitation and purchase of more than $180 million of Puerto Rico bonds and $101 million of CEFs during the period from December 2012 to October 2013. The case is pending in the United States District Court for the District of Puerto Rico and is captioned Jorge Ponsa-Rabell, et. al. v. SSLLC, Civ. No. 3:17-cv-02243. The amended complaint alleges that defendants acted in concert to defraud purchasers in connection with the underwriting and sale of Puerto Rico municipal bonds, CEFs and open-end funds.

Mexican Government Bonds Consolidated Purported Antitrust Class Action: A consolidated purported antitrust class action is pending in the United States District Court, Southern District of New York, captioned In re Mexican Government Bonds Antitrust Litigation, No. 1:18-cv-02830-JPO (the “MGB Lawsuit”). The MGB Lawsuit is against the Company, SIS, Santander, Banco Santander (Mexico), S.A. Institucion de Banca Multiple, Grupo Financiero Santander and Santander Investment Bolsa, Sociedad de Valores, S.A. on behalf of a class of persons who entered into Mexican government bond (“MGB”) transactions between January 1, 2006 and April 19, 2017, where such persons were either domiciled in the United States or, if domiciled outside the United States, transacted in the United States. The complaint alleges, among other things, that the Santander defendants and the other defendants violated U.S. antitrust laws by conspiring to rig auctions and/or fix prices of MGBs.

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NOTE 16. COMMITMENTS, CONTINGENCIES AND GUARANTEES (continued)

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

NOTE 17. 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, 2017. The Company and its affiliates also entered into or were subject to various service agreements with Santander and its affiliates. Each of these agreements was made in the ordinary course of business and on market terms.

Contributions from Santander that impact common stock and paid in capital within the Condensed Consolidated Statements of Stockholder's Equity are disclosed within the table below:

	Six-Month Period Ended June 30,
(in thousands)	2018		2017
Cash contribution	$	5,741	$	9,000
Adjustment to book value of assets purchased on January 1	277		—
Deferred tax asset on purchased assets	3,156		—
Contribution from shareholder	$	9,174	$	9,000

On January 1, 2018, the Company purchased certain assets and assumed certain liabilities of Produban Servicios Informaticos Generales S.L. and Ingenieria De Software Bancario S.L., both affiliates of Santander. The book value and fair value of the net assets acquired was $2.8 million and $15.3 million, respectively. Related to this transaction, in 2017, the Company received a net capital contribution from Santander of $2.8 million, representing cash received of $15.3 million and a return of capital of $12.5 million for the difference between the fair value of the assets purchased and the book value on the balance sheets of the affiliates. The Company re-evaluated the assets received on January 1, 2018 and recorded an additional $0.3 million to additional paid-in capital. The Company contributed these assets at book value of $3.1 million to SBNA, a subsidiary of the Company, on January 1, 2018.

During the six-month period endedJune 30, 2018, the Company recorded a $3.2 million deferred tax asset on the assets purchased by the Company to establish the intangible under Section 197 of the Internal Revenue Code.

On March 29, 2017, SC entered into a Master Securities Purchase Agreement ("MSPA") 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 ending in December 2018. SC will provide servicing on all loans originated under this arrangement. For the three-month and six-month periods endedJune 30, 2017, the Company sold $0.5 billion and $1.2 billion, respectively, of loans at fair value under this MSPA. The MSPA was amended in March 2018 and, under this amended agreement, SC sold $1.2 billion and $2.6 billion, respectively, of prime loans to Santander at fair value during the three-month and six-month periods endedJune 30, 2018. Total losses of $3.2 million and $20.1 million, respectively were recognized for the three-month and six-month periods endedJune 30, 2018, respectively, compared to losses of $3.5 million and $6.2 million, respectively, during the comparable periods in 2017, which are included in Miscellaneous income, net in the Condensed Consolidated Statements of Operations. SC had $70.5 million and $13.0 million of collections due to Santander as of June 30, 2018 and December 31, 2017, respectively.

Beginning 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. During the three-month and six-month periods endedJune 30, 2018, SC facilitated SBNA's purchase of $29 million and $53 million of RICs, respectively. SC recognizes referral fee income and servicing fee income related to this agreement that eliminates in the consolidation of SHUSA.

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NOTE 18. BUSINESS SEGMENT INFORMATION

Business Segment Products and Services

The Company’s reportable segments are focused principally around the customers the Company serves. During the first quarter of 2018, the Chief Operating Decision Maker ("CODM") made certain changes in its business lines that drove a reorganization of its business leadership to provide enhanced customer service to its clients and to better align management teams and resources with the manner in which the CODM allocates resources and assesses business performance. Accordingly, the following changes were made within the Company's reportable segments:

• The Commercial Banking and the CRE reportable segments were combined into the Commercial Banking reportable segment.

• SIS, a subsidiary of SHUSA, that was formerly located within the Other category was moved to the GCB reportable segment.

• The Company's internal funds transfer pricing ("FTP") methodologies and cost allocations were updated to align with Santander corporate criteria for internal management reporting. These FTP and cost allocation changes impact how certain costs are allocated for all reporting segments, excluding SC.

During the second quarter of 2018, Santander renamed its Global and Corporate Banking ("GCB") business to Corporate and Investment Banking ("CIB") to more accurately reflect its business strategy and business proposition to clients, and to align with the name used by a majority of its competitors in the industry. There were no changes to composition of the reportable segment or reporting unit as a result of this change.

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

The Company has identified the following reportable segments:

• The Consumer and Business Banking segment includes the products and services provided to Bank customers through the Bank's branch locations, including consumer deposit, business banking, residential mortgage, unsecured lending and investment services. The branch locations offer a wide range of products and services to consumers and business banking customers, including demand and interest-bearing demand deposit accounts, money market and savings accounts, CDs and retirement savings products. The branch locations also offer lending products such as credit cards, mortgages, home equity lines of credit, and business loans such as commercial lines of credit and business credit cards. In addition, the Bank provides investment services to its retail customers, including annuities, mutual funds, and insurance products. Santander Universities, which provides grants and scholarships to universities and colleges as a way to foster education through research, innovation and entrepreneurship, is the last component of this segment.

• The Commercial Banking segment currently provides commercial lines, loans, and deposits to medium and large business banking customers, as well as financing and deposits for government entities, commercial real estate loans and multifamily loans to customers, commercial loans to dealers and financing for equipment and commercial vehicles. This segment also provides financing and deposits for government entities and niche product financing for specific industries.

• The CIB segment serves the needs of global commercial and institutional customers by leveraging the international footprint of Santander to provide financing and banking services to corporations with over $500 million in annual revenues. CIB also includes SIS, a registered broker-dealer located in New York that provides services in investment banking, institutional sales, and trading and offering research reports of Latin American and European equity and fixed-income securities. CIB's offerings and strategy are based on Santander's local and global capabilities in wholesale banking.

• SC is a specialized consumer finance company focused on vehicle finance and third-party servicing. SC’s primary business is the indirect origination of RICs, principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers. In conjunction with a ten-year private label financing agreement with FCA that became effective May 1, 2013, SC offers a full spectrum of auto financing products and services to FCA customers and dealers under the Chrysler Capital brand. These products and services include consumer RICs and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. SC also originates vehicle loans through a web-based direct lending program, purchases vehicle RICs from other lenders, and services automobile, recreational and marine vehicle portfolios for other lenders. During 2015, SC announced its intention to exit the personal lending business.

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

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NOTE 18. BUSINESS SEGMENT INFORMATION (continued)

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

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

Other income and expenses are managed directly by each reportable segment, including fees, service charges, salaries and benefits, and other direct expenses, as well as certain allocated corporate expenses, and are accounted for within each segment’s financial results. Accounting policies for the lines of business are the same as those used in preparation of the Condensed Consolidated Financial Statements with respect to activities specifically attributable to each business line. However, the preparation of business line results requires management to establish methodologies to allocate funding costs and benefits, expenses and other financial elements to each line of business. Where practical, the results are adjusted to present consistent methodologies for the segments.

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

The CODM manages SC on a historical basis by reviewing the results of SC on a pre-Change in Control basis. The Results of Segments table discloses SC's operating information on the same basis that it is reviewed by the CODM. The adjustments column includes adjustments to reconcile SC's GAAP results to SHUSA's consolidated results.

Results of Segments

The following tables present certain information regarding the Company’s segments.

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NOTE 18. BUSINESS SEGMENT INFORMATION (continued)

For the Three-Month Period Ended	SHUSA Reportable Segments
June 30, 2018	Consumer & Business Banking		Commercial Banking			CIB			Other(2)			SC(3)		SC Purchase Price Adjustments(4)			Eliminations(4)			Total
	(in thousands)
Net interest income	$	316,223	$	160,824		$	30,901		$	66,267		$	946,572	$	7,693		$	9,136		$	1,537,616
Non-interest income	69,647		16,120			64,740			110,271			567,693		2,869			(12,167		)	819,173
Provision for / (release of) credit losses	18,283		(13,001		)	3,764			8,621			352,575		9,592			—			379,834
Total expenses	367,235		84,769			58,507			217,368			713,045		11,683			(2,858		)	1,449,749
Income/(loss) before income taxes	352		105,176			33,370			(49,451		)	448,645		(10,713		)	(173		)	527,206
Intersegment revenue/(expense)(1)	521		2,562			(3,527		)	444			—		—			—			—
Total assets	19,088,997		25,124,793			7,832,197			36,919,571			41,173,136		—			—			130,138,694

For the Six-Month Period Ended	SHUSA Reportable Segments
June 30, 2018	Consumer & Business Banking			Commercial Banking			CIB			Other(2)			SC(3)		SC Purchase Price Adjustments(4)			Eliminations(4)			Total
	(in thousands)
Net interest income	$	621,045		$	315,759		$	63,591		$	129,070		$	1,868,311	$	17,588		$	18,194		$	3,033,558
Non-interest income	152,465			49,708			115,378			221,540			1,099,429		5,555			(23,695		)	1,620,380
Provision for / (release of) credit losses	56,672			(22,742		)	1,709			14,958			811,570		20,201			—			882,368
Total expenses	738,303			167,407			116,574			442,975			1,407,915		23,412			(5,479		)	2,891,107
Income/(loss) before income taxes	(21,465		)	220,802			60,686			(107,323		)	748,255		(20,470		)	(22		)	880,463
Intersegment revenue/(expense)(1)	1,198			4,093			(5,808		)	517			—		—			—			—
Total assets	19,088,997			25,124,793			7,832,197			36,919,571			41,173,136		—			—			130,138,694

(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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NOTE 18. BUSINESS SEGMENT INFORMATION (continued)

For the Three-Month Period Ended	SHUSA Reportable Segments
June 30, 2017	Consumer & Business Banking			Commercial Banking			CIB			Other(2)			SC(3)		SC Purchase Price Adjustments(4)			Eliminations(4)			Total
	(in thousands)
Net interest income	$	277,069		$	162,953		$	40,860		$	65,273		$	1,053,673	$	34,095		$	7,826		$	1,641,749
Non-interest income	94,285			18,858			42,375			155,855			432,373		(3,719		)	(10,218		)	729,809
Provision for / (release of) credit losses	21,410			(1,089		)	13,635			16,051			520,555		34,206			—			604,768
Total expenses	381,844			78,753			59,454			244,249			617,383		11,508			(6,147		)	1,387,044
Income/(loss) before income taxes	(31,900		)	104,147			10,146			(39,172		)	348,108		(15,338		)	3,755			379,746
Intersegment revenue/(expense)(1)	329			1,750			(2,089		)	10			—		—			—			—
Total assets	18,077,481			25,776,884			8,949,566			42,444,282			39,507,482		—			—			134,755,695

For the Six-Month Period Ended	SHUSA Reportable Segments
June 30, 2017	Consumer & Business Banking			Commercial Banking		CIB			Other(2)			SC(3)		SC Purchase Price Adjustments(4)			Eliminations(4)			Total
	(in thousands)
Net interest income	$	539,800		$	315,259	$	83,088		$	122,000		$	2,096,600	$	71,399		$	16,167		$	3,244,313
Non-interest income	176,819			33,781		93,711			304,619			867,221		1,735			(22,002		)	1,455,884
Provision for / (release of) credit losses	43,861			4,297		12,271			31,663			1,155,568		92,554			—			1,340,214
Total expenses	756,864			157,092		106,062			467,939			1,238,717		23,380			(12,463		)	2,737,591
Income/(loss) before income taxes	(84,106		)	187,651		58,466			(72,983		)	569,536		(42,800		)	6,628			622,392
Intersegment revenue/(expense)(1)	1,206			3,052		(4,486		)	228			—		—			—			—
Total assets	18,077,481			25,776,884		8,949,566			42,444,282			39,507,482		—			—			134,755,695

(1) Intersegment revenue/(expense) represents charges or credits for funds used or provided by each of the segments and is included in net interest income.

(2) Other includes the results of the entities transferred to the IHC, earnings from non-strategic assets, the investment portfolio, interest expense on the Bank’s and the 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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Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")

EXECUTIVE SUMMARY

Santander Holdings USA, Inc. ("SHUSA" or the "Company") is the parent holding company of Santander Bank, National Association, (the "Bank" or "SBNA"), a national banking association, and owns approximately 68% of Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SC"), a specialized consumer finance company focused on vehicle finance and third-party servicing. SHUSA is headquartered in Boston, Massachusetts and the Bank's main office is in Wilmington, Delaware. SC is headquartered in Dallas, Texas. SHUSA is a wholly-owned subsidiary of Banco Santander, S.A. ("Santander"). SHUSA is also the parent company of Santander BanCorp (together with its subsidiaries, “Santander BanCorp”), a holding company headquartered in Puerto Rico which offers a full range of financial services through its wholly-owned banking subsidiary, Banco Santander Puerto Rico ("BSPR"); Santander Securities LLC (“SSLLC”), a broker-dealer headquartered in Boston; Banco Santander International (“BSI”), a financial services company located in Miami that offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; Santander Investment Securities Inc. (“SIS”), a registered broker-dealer located in New York providing services in investment banking, institutional sales, trading and offering research reports of Latin American and European equity and fixed-income securities; and several other subsidiaries.

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

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

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

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

Chrysler Capital

SC offers a full spectrum of auto financing products and services to Chrysler customers and dealers under the Chrysler Capital brand ("Chrysler Capital"), the trade name used in providing services under the ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC ("FCA"), formerly Chrysler Group LLC, signed by SC in 2013 (the "Chrysler Agreement"). These products and services include consumer RICs and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit.

Under the terms of the Chrysler Agreement, certain standards were agreed to, including SC meeting specified escalating penetration rates for the first five years, subject to FCA treating SC in a manner consistent with comparable original equipment manufacturers ("OEMs'") treatment of their captive providers, primarily in regard to sales support. The failure of either party to meet its respective obligations under the agreement, including SC's failure to meet target penetration rates, could result in the agreement being terminated. SC did not meet these penetration rates. Chrysler Capital continues to be a focal point of the Company's and SC's strategy, and SC continues to work with FCA to improve penetration rates. SC's penetration rate for the three months ended June 30, 2018 was 32%.

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

On June 1, 2018, SC announced that it was in exploratory discussions with FCA regarding the future of FCA's U.S. finance operations. FCA has announced its intention to establish a captive U.S. auto finance unit and indicated that acquiring Chrysler Capital is one option it will consider. Under the Chrysler Agreement, FCA has the option to acquire, for fair market value, an equity participation in the business offering and providing financial services contemplated by the Chrysler Agreement. In addition, on July 11, 2018, in order to facilitate discussions regarding the Chrysler Agreement, FCA and the Company entered into a tolling agreement pursuant to which the parties agreed to preserve their respective rights, claims and defenses under the Chrysler Agreement as they existed on April 30, 2018.

FCA has not delivered a notice to exercise its purchase option, and the Company remains committed to the success of the Chrysler Capital business. Although the likelihood, timing and structure of any such transaction, and the likelihood that the Chrysler Agreement will terminate, cannot be reasonably determined, termination of the Chrysler Agreement, or a significant change in the business relationship between SC and FCA, could materially adversely affect SC's and SHUSA's operations, including the origination of receivables through the Chrysler Capital portion of SC's business and the servicing of Chrysler Capital receivables. Moreover, there can be no assurance that SC could successfully or timely implement any such transaction without significant disruption of its operations or restructuring, or without incurring additional liabilities, which could involve significant expense to the Company and have a material adverse effect on its business, financial condition and results of operations.

As of June 30, 2018, the Company had a $72.5 million Chrysler relationship intangible. The intangible is related to the upfront fee paid to Chrysler in May 2013. A significant change to the Chrysler Agreement could potentially be considered a triggering event requiring re-evaluation of whether or not the remaining unamortized balance of the upfront fee should be deemed impaired.

In addition, the Company has $1.0 billion of goodwill allocated to the SC reporting unit. A significant change to the Chrysler Agreement could potentially be considered a triggering event requiring an interim goodwill impairment analysis. The Company will continue monitoring changes to the Chrysler Agreement that could lead to a potential impairment indicator in 2018. It is reasonably possible that impairment of the entire goodwill associated with the SC reporting unit could be recognized based on future changes to the Chrysler Agreement.

SC has dedicated financing facilities in place for its Chrysler Capital business. During the six-month period endedJune 30, 2018, SC originated more than $4.7 billion in Chrysler Capital loans, which represented 49% of its total RIC originations (unpaid principal balance), with an approximately even share between prime and non-prime, as well as more than $4.7 billion in Chrysler Capital leases. Since its May 1, 2013 launch, Chrysler Capital has originated more than $49.9 billion in retail loans and $28.3 billion in leases, and facilitated the origination of $3.0 billion in leases and dealer loans for the Bank. As of June 30, 2018, SC's carrying value of auto RIC portfolio consisted of $8.0 billion of Chrysler Capital loans, which represents 33% of SC's carrying value of auto RIC portfolio.

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

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 second quarter of 2018, unemployment remained steady, and the preliminary gross domestic product ("GDP") growth rate grew from the prior quarter, while market results were mixed.

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

The unemployment rate at June 30, 2018 was unchanged at 4.0% compared to 4.1% at March 31, 2018 and was lower compared to 4.4% one year ago. According to the U.S. Bureau of Labor Statistics, employment rose in health care, manufacturing, and professional and business services, while remaining unchanged across other sectors.

The Bureau of Economic Analysis ("BEA") advance estimate indicates that real GDP grew at an annualized rate of 4.1% for the second quarter of 2018, compared to 2.3% for the first quarter of 2018. This marks the highest growth quarter since the third quarter of 2014 and is the result of growth in personal consumption expenditures, exports, nonresidential fixed investment, and government spending. This was offset by lower private inventory investment, residential fixed investment and increased imports.

Market year-to-date returns for the following indices based on closing prices at June 30, 2018 were:

	June 30, 2018
Dow Jones Industrial Average	(1.8)%
S&P 500	1.7%
NASDAQ Composite	8.8%

At itsJune 2018 meeting, the Federal Open Market Committee decided to raise the federal funds rate target to 1.75%-2.00%, reflecting that the labor market has continued to strengthen and that economic activity has continued to expand at a solid pace. Overall inflation remains below the targeted rate of 2.0%.

The 10-year Treasury bond rate at June 30, 2018 was 2.85%, up from 2.40% at December 31, 2017. Within the industry, changes within this metric are 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 2018 information was not available; however, for the first quarter of 2018, mortgage originations decreased approximately 16.6% over the prior quarter and 4.2% year-over-year. Mortgage originations for home purchases decreased18.1% quarter over quarter while they increased2.8% from the same quarter in prior year. Mortgage originations from refinancing activity decreased16.3% from the prior quarter and 14.1% from the same quarter in the prior year. These rates are representative of U.S. national average mortgage origination activity.

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 1.11% of loans using the latest available data, which was as of the first quarter of 2018, compared to 1.17% 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 losses and legal expense.

Credit Rating Actions

The following table presents Moody's, Standard & Poor's ("S&P") and Fitch credit ratings for the Bank, and BSPR, SHUSA, Santander, and the Kingdom of Spain, as of June 30, 2018:

	BANK			BSPR(1)			SHUSA
	Moody's	S&P	Fitch (2)	Moody's	S&P	Fitch (2)	Moody's	S&P	Fitch
Long-Term	Baa1	A-	BBB+	Baa1	N/A	BBB+	Baa3	BBB+	BBB+
Short-Term	P-1	A-2	F-2	P-1/P-2	N/A	F-2	n/a	A-2	F-2
Outlook	Stable	Stable	Stable	Stable	N/A	Stable	Stable	Stable	Stable

	SANTANDER			SPAIN
	Moody's	S&P	Fitch	Moody's	S&P	Fitch
Long-Term	A2	A	A	Baa1	A-	A-
Short-Term	P-1	A-1	F-1	P-2	A-2	F-1
Outlook	Stable	Stable	Stable	Stable	Positive	Stable

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

(2) Short Term Debt and Short Term Deposit Ratings are both F-2.

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

On January 19, 2018, Fitch upgraded Spain's Long-term Foreign Currency and Local Currency rating to A- from BBB+ and upgraded Spain's Short-term Foreign Currency and Local Currency rating to F1 from F2.

On March 23, 2018, Standard & Poor's upgraded Spain's Long-term rating to A1- from BBB+.

On April 6, 2018, Standard & Poor's raised Santander's long- and short-term ratings by one notch to A and A-1, respectively. Standard & Poor's also raised the long term ratings of SHUSA by one notch to BBB+ and SBNA to A-. The short-term ratings for SHUSA and SBNA were not changed.

On April 13, 2018, Moody's upgraded Spain's rating to Baa1 from Baa2.

On April 17, 2018, Moody's upgraded Santander's long- and short-term ratings by one notch to A2 and P-1, respectively.

On July 17, 2018, Fitch upgraded Santander's long- and short-term ratings by one notch to A and F-1, respectively.

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

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

Puerto Rico Economy

On May 3, 2017, the Financial Oversight and Management Board of Puerto Rico (“FOB”) submitted a request to the Federal District Court of Puerto Rico to apply Title III of the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”) to the Commonwealth of Puerto Rico. Title III of PROMESA allows the Commonwealth of Puerto Rico to enter into a debt restructuring process notwithstanding that Puerto Rico is barred from traditional bankruptcy protection under Chapter 9 of the U.S. Bankruptcy Code.

On July 2, 2017, the Puerto Rican Electric Power Authority ("PREPA") submitted a request to the Federal District Court of Puerto Rico to apply Title III of PROMESA to PREPA.

As of June 30, 2018, SHUSA did not have material direct credit exposure to the Commonwealth of Puerto Rico, and its exposure to Puerto Rico municipalities in total was approximately $220.0 million. During the quarter, Puerto Rico’s economic conditions showed signs of returning to pre-hurricane Maria levels, and the fiscal year 2019 consolidated budget for the Commonwealth of Puerto Rico was presented. Other topics under evaluation in the Commonwealth of Puerto Rico included the reduction of the sales and use tax on processed foods, formal process to transform PREPA initiatives, the implementation of the tax reform considering the gradual elimination of the business-to-business tax and sales tax on processed food, and a reduction in the corporate income tax from 39% to 31%. As of June 30, 2018, municipalities had not been designated “covered” territorial instrumentalities subject to the requirements of PROMESA, and the municipalities were current on their debt obligations to SHUSA. Under PROMESA, the FOB has sole discretion to designate territorial instrumentalities such as municipalities as covered entities subject to PROMESA’s requirements. If the FOB determines to designate municipalities as covered entities under PROMESA, the FOB could initiate debt restructuring of municipalities that have debt obligations to SHUSA, if deemed necessary. The municipalities were current on their debt obligations to SHUSA as of June 30, 2018.

Impact from Hurricanes

Our footprint was impacted by three significant hurricanes during the third quarter of 2017, Hurricane Harvey, which struck the State of Texas and the surrounding region, Hurricane Irma, which primarily struck the State of Florida, and Hurricane Maria, which struck the island of Puerto Rico. Each of these hurricanes resulted in widespread flooding, power outages and associated damage to real and personal property in the affected areas. SC, headquartered in Dallas, Texas, BSI, headquartered in Miami, Florida, and Santander BanCorp, BSPR and SSLLC subsidiaries in Puerto Rico were most directly affected by these hurricanes.  In Puerto Rico, there was significant damage to the infrastructure and the power grid on the entire island, which resulted in extended delays in BSPR returning to normal operations.

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

The Company assessed the potential additional credit losses related to its consumer and commercial lending exposures in the greater Texas, Florida and Puerto Rico regions. As a result, the Company's ALLL has approximately $95.0 million of reserves at June 30, 2018 related to the hurricanes. However, for credit exposures in Puerto Rico, given the current state in the region, the Company has had limited information with which to estimate probable credit losses. As of June 30, 2018, the Company has approximately $3.4 billion of loan exposures in Puerto Rico consisting of $1.6 billion in consumer loans and $1.8 billion in commercial loans, including $220.0 million in loans to municipalities. The Company will continue to monitor and assess the impact of these hurricanes on our subsidiaries’ businesses, and may make adjustments to reserves for losses in future periods as additional information related to these potential exposures becomes available.

REGULATORY MATTERS

The activities of the Company and its subsidiaries, including the Bank and SC, are subject to regulation under various U.S. federal laws and regulatory agencies which impose regulations, supervise and conduct examinations, and may affect the operations and management of the Company and its ability to take certain actions, including making distributions to our parent and shareholders. The Company is regulated on a consolidated basis by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), including the Federal Reserve Bank (the "FRB") of Boston, and the Consumer Financial Protection Bureau (the "CFPB"). The Company's banking subsidiaries are further supervised by the Federal Deposit Insurance Corporation (the "FDIC") and the Office of the Comptroller of the Currency (the “OCC”). As a subsidiary of the Company, SC is also subject to regulatory oversight by the Federal Reserve as well as the CFPB.

Payment of Dividends

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

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

Foreign Banking Organizations ("FBOs")

In February 2014, the Federal Reserve issued the final rule implementing certain enhanced prudential standards (“EPS”) mandated by Section 165 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “DFA") (the “FBO Final Rule”). 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 intermediate holding company (an “IHC"). In addition, the FBO Final Rule required U.S. bank holding companies ("BHCs") and FBOs with at least $50 billion in total U.S. consolidated non-branch assets to be subject to EPS and heightened capital, liquidity, risk management, and stress testing requirements. Due to both its global and U.S. non-branch total consolidated asset size, Santander was subject to both of the above provisions of the FBO Final Rule. As a result of this rule, Santander has transferred substantially all of its U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. A phased-in approach is being used for the standards and requirements at both the FBO and the IHC. As a result of the phased-in approach, on July 1, 2017, Santander transferred ownership of Santander Financial Services, Inc. ("SFS" and on July 2, 2018, Santander transferred ownership of an additional entity, Santander Asset Management, LLC ("SAM") to the IHC. As a U.S. BHC with more than $50 billion in total consolidated assets, the Company became subject to the EPS on January 1, 2015. Other standards of the FBO Final Rule will be phased in through January 1, 2019.

Economic Growth Act

In May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act (Economic Growth Act) was signed into law. The Economic Growth Act scales back certain requirements of the DFA, primarily benefiting banks with $10 billion or less in assets, but also reducing regulatory requirements and modifying the enhanced supervision and enhanced prudential standards that may benefit certain mid-sized and larger BHCs and financial institutions. The Company continues to evaluate the impact of the Economic Growth Act, but does not expect significant changes as a result of the new law.

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

Regulatory Capital Requirements

In July 2013, the Federal Reserve, the FDIC and the OCC released final U.S. Basel III regulatory capital rules implementing the global regulatory capital reforms of Basel III that are applicable to both SHUSA and the Bank. The final rules established a comprehensive capital framework that includes both the advanced approaches for the largest internationally active U.S. banks, formerly known as Basel II, and a standardized approach that applies to all banking organizations with over $500 million in assets. Subject to various transition periods, this rule became effective for SHUSA on January 1, 2015.

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

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

The U.S. Basel III regulatory capital rules include deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights ("MSRs"), deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities are deducted from CET1 to the extent any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1. Implementation of the deductions and other adjustments to CET1 for the Company and the Bank began on January 1, 2015 and was initially planned over three years, with a fully phased-in requirement of January 1, 2018. However, during 2017, the regulatory agencies finalized changes to the capital rules that became effective on January 1, 2018.  These changes extended the current treatment and will defer the final transition provision phase-in at non-advanced approach institutions for certain capital elements, and suspend the risk-weighting to 100 percent for deferred taxes and mortgage servicing assets not disallowed from capital, in lieu of advancing to 250 percent.  In addition, the regulatory agencies issued a secondary proposal in 2017 to further revise the capital rule by introducing new treatment of high volatility acquisition, development and construction loans, and by modifying the calculation for minority interest includible within capital, for which the regulators have not released a final decision. 

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

If capital has reached the significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and, in critically undercapitalized situations, appointment of a receiver or conservator. Critically undercapitalized institutions generally may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt. All but well-capitalized institutions are prohibited from accepting brokered deposits without prior regulatory approval. Pursuant to the Federal Deposit Insurance Corporation Improvements Act (the “FDIA”) and OCC regulations, institutions which are not categorized as well-capitalized or adequately-capitalized are restricted from making capital distributions, which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital account of the institution. At June 30, 2018, the Bank met the criteria to be classified as “well-capitalized.”

On April 10, 2018, the Federal Reserve issued a notice of proposed rulemaking ("NPR") seeking comment on a proposal to simplify capital rules for large banks.  If finalized as proposed, the NPR would eliminate the quantitative objection in CCAR and replace the capital conservation buffer. The capital conservation buffer would be replaced with a new stress capital buffer ("SCB"). The SCB is calculated as the maximum decline in CET1 in the severely adverse scenario (subject to a 2.5% floor) plus four quarters of dividends. The proposal would result in new regulatory capital minimums which are equal to 4.5% CET1 plus the SCB, any globally systemically important banks ("GSIBs") surcharge, and any countercyclical capital buffer.  The GSIB buffer is applicable to only the largest and most complex firms and does not apply to SHUSA.  These new minimums would be firm specific and would trigger restrictions on capital distributions and discretionary bonuses in the event a firm falls below their new minimums.  Firms would still submit a capital plan annually and, absent prior Federal Reserve approval, would continue to be limited to the capital distributions included in their capital plan.  Supervisory expectations for capital planning processes would not change under the proposal. The Company is still evaluating the impact this proposed rule would have on its financial position, results of operations and disclosures.

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

Stress Testing and Capital Planning

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

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

Liquidity Rules

In September 2014, the Federal Reserve, the FDIC, and the OCC finalized a rule to implement the Basel III liquidity coverage ratio (the “LCR”) for certain internationally active banks and nonbank financial companies, and a modified version of the LCR for certain depository institution holding companies that are not internationally active. The LCR is designed to ensure that a banking entity maintains an adequate level of unencumbered high-quality liquid assets ("HQLA") equal to its expected net cash outflow for a 30-day time horizon. This rule implements a phased implementation approach under which the most globally important covered companies (more than $700 billion in assets) and large regional financial institutions ($250 billion to $700 billion in assets) were required to begin phasing-in the LCR requirements in January 2015. Smaller covered companies (more than $50 billion in assets), such as the Company, were required to calculate the LCR monthly beginning January 2016. In November 2015, the Federal Reserve published a revised final LCR rule. Under this revision, the Company was required to calculate the modified US LCR (the "US LCR") on a monthly basis beginning with data as of January 31, 2016. There is no requirement to submit the calculation to the Federal Reserve. The Company will be required to publicly disclose its US LCR results beginning October 1, 2018.

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

Recovery and Resolution Planning

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

On January 29, 2018, the Federal Reserve and the Federal Deposit Insurance Corporation (the “FDIC”) completed their assessments of the 2015 resolution plans and provided their expectations for future resolution plans to the 19 foreign-based banking organizations, including Santander. The banking agencies did not object to Santander’s 2015 plan or provide any substantive feedback on the submission. Instead, the banking agencies clarified their expectations for how the 2018 resolution plan should build on the 2015 submission. In addition, the agencies requested that the 2018 plan provide updated information on how any organizational changes, as a result of forming an IHC, impact the resolution strategies. The 2018 resolution plan is due by December 31, 2018.

In September 2016, the OCC issued final guidelines that require a bank with consolidated assets of $50 billion or more to develop and maintain a recovery plan that is appropriate for its size, risk profile, activities, and complexity, including the complexity of its

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organizational and legal entity structure. As provided in the final rule, SBNA completed its initial recovery plan in June. In addition to this bank-only recovery plan, SHUSA annually provides a recovery plan to BSSA for inclusion in its global recovery plan as required by the European Central Bank.

TLAC

The Federal Reserve adopted a final rule in December 2016 that requires certain U.S. organizations to maintain a minimum amount of loss-absorbing instruments, including a minimum amount of unsecured long-term debt ("LTD") (the “TLAC Rule”). The TLAC Rule applies to U.S. GSIBs and to IHCs with $50 billion or more in U.S. non-branch assets that are controlled by a global systemically important FBO. The Company is such an IHC.

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

Volcker Rule

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

Because the term “banking entity” includes an IDI, a depository institution holding company and any of their affiliates, the Volcker Rule has sweeping worldwide application and covers entities such as Santander, the Company, and certain of the Company’s subsidiaries (including the Bank and SC), as well as other Santander subsidiaries in the United States and abroad.

In May 2018, the joint agencies responsible for administering the Volcker Rule released an NPR to revise the Volcker Rule. The NPR would tailor the Volcker Rule’s compliance requirements to the amount of a firm’s trading activity, revise the definition of trading account, clarify certain key provisions in the Volcker Rule, and simplify the information companies are required to provide the banking agencies. The NPR would also replace the short-term intent test in the Volcker Rule with an accounting test. The Company is still evaluating the impact this proposed rule would have on its financial position, results of operations and disclosures.

The Company implemented certain policies and procedures, training programs, recordkeeping, internal controls and other compliance requirements that were necessary to comply with the Volcker Rule. As required by the Volcker Rule, the compliance infrastructure has been tailored to each banking entity based on its size and its level of trading and Covered Fund activities. SHUSA's compliance program includes, among other things, processes for prior approval of new activities and investments permitted under the Volcker Rule, testing and auditing for compliance and a process for attesting annually that the compliance program is reasonably designed to achieve compliance with the rule.

Transactions with Affiliates

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

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

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

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

Regulation AB II

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

Community Reinvestment Act ("CRA")

SBNA and BSPR are subject to the requirements of the CRA, which requires the appropriate federal financial supervisory agency to assess an institution's record of helping to meet the credit needs of the local communities in which it is located. BSPR’s current CRA rating is “Outstanding” and SBNA’s current CRA rating is "Satisfactory." The OCC 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.

Other Regulatory Matters

On April 1, 2014, the Bank received a civil investigative demand from the CFPB requesting information and documents in connection with the Bank’s marketing to consumers of overdraft coverage for automated teller machine ("ATM") and onetime debit card transactions through a third-party vendor. On July 14, 2016, the Bank entered into a consent order with the CFPB regarding these practices. Pursuant to the terms of the consent order, the Bank paid a civil money penalty (a “CMP”) of $10.0 million and agreed to validate the elections made by customers who opted in to overdraft coverage for ATM and onetime debit card transactions in connection with telemarketing by the third-party vendor. The Bank is also required to make certain changes to its third-party vendor oversight policy and its customer complaint policy.  The Bank is currently executing a remediation plan and working to meet the other consent order requirements. It is possible that additional litigation could be filed as a result of these issues.

On February 25, 2015, SC entered into a consent order with the Department of Justice (the "DOJ"), approved by the United States District Court for the Northern District of Texas, which resolves the DOJ’s claims against SC that certain of its repossession and collection activities during the period of time between January 2008 and February 2013 violated the Servicemembers’ Civil Relief Act (the “SCRA”). 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 requires us to undertake additional remedial measures. The consent order also subjects SC to monitoring by the DOJ for compliance with the SCRA for a period of five years.

On March 26, 2015, the Bank entered into a cease and desist order (the "SIP Consent Order") with the OCC regarding identified deficiencies in SBNA's billing practices with regard to SIP, an identity theft protection product from the Bank’s third-party vendor. Pursuant to the SIP Consent Order, the Bank paid a CMP of $6.0 million and agreed to remediate customers who paid for but may not have received certain benefits of the SIP. Prior to entering into the SIP Consent Order, the Bank made $37.3 million in remediation payments to customers, representing the total amount paid for product enrollment.

Subsequently, the Bank commenced a further review in order to remediate checking account customers who may have been charged an overdraft fee and credit card customers who may have been charged an over limit fee and/or finance charge related to SIP product fees. The Bank is currently implementing plans to reimburse customers.

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

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

On March 21, 2017, SC and the Company 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 the Company is required to enhance its oversight of SC's management and operations.

In July 2015, the CFPB notified SC that it had referred to the DOJ certain alleged violations by SC of the Equal Credit Opportunity Act (the “ECOA”) regarding (i) statistical disparities in mark-ups charged by automobile dealers to protected groups on loans originated by those dealers and purchased by SC and (ii) the treatment of certain types of income in SC's underwriting process. In September 2015, the DOJ notified SC that it had initiated an investigation under the ECOA of SC's pricing of automobile loans based on the referral from the CFPB. SC resolved the DOJ investigation pursuant to a confidential agreement with the CFPB.

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

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

The following activities are disclosed in response to Section 13(r) with respect to affiliates of SHUSA within the Santander Group. During the period covered by this quarterly report:

(a)    Santander UK plc (“Santander UK”) holds two savings accounts and one current account for two customers resident in the UK who are currently designated by the U.S. under the Specially Designated Global Terrorist ("SDGT") sanctions program. Revenues and profits generated by Santander UK on these accounts through the first half of2018 were negligible relative to the overall profits of Santander.

(b)    Santander UK holds two frozen current accounts for two UK nationals who are designated by the U.S. under the SDGT sanctions program. The accounts held by each customer have been frozen since their designation and remained frozen through the first half of2018. The accounts are in arrears (£1,844.73 in debit combined) and are currently being managed by Santander UK's Collections & Recoveries Department. No revenues or profits were generated by Santander UK on this account through the first half of2018.

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

In the aggregate, all of the transactions described above resulted in gross revenues and net profits through the first half of2018, which were negligible relative to the overall revenues and profits of Santander. Santander has undertaken significant steps to withdraw from the Iranian market, such as closing its representative office in Iran and ceasing all banking activities therein, including correspondent relationships, deposit- taking from Iranian entities and issuing export letters of credit, except for the legacy transactions described above. Santander is not contractually permitted to cancel these arrangements without either (i) paying the guaranteed amount (in the case of the performance guarantees), or (ii) forfeiting the outstanding amounts due to it (in the case of the export credits). As such, Santander intends to continue to provide the guarantees and hold these assets in accordance with company policy and applicable laws.

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

RESULTS OF OPERATIONS

RESULTS OF OPERATIONS FOR THE THREE-MONTH AND SIX-MONTH PERIODS ENDED JUNE 30, 2018 AND 2017

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,						QTD Change					YTD Change
(dollars in thousands)	2018			2017			2018			2017			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
Net interest income	$	1,537,616		$	1,641,749		$	3,033,558		$	3,244,313		$	(104,133	)	(6.3	)%	$	(210,755	)	(6.5	)%
Provision for credit losses	(379,834		)	(604,768		)	(882,368		)	(1,340,214		)	(224,934		)	(37.2	)%	(457,846		)	(34.2	)%
Total non-interest income	819,173			729,809			1,620,380			1,455,884			89,364			12.2	%	164,496			11.3	%
General and administrative expenses	(1,416,948		)	(1,341,636		)	(2,822,608		)	(2,651,475		)	75,312			5.6	%	171,133			6.5	%
Other expenses	(32,801		)	(45,408		)	(68,499		)	(86,116		)	(12,607		)	(27.8	)%	(17,617		)	(20.5	)%
Income before income taxes	527,206			379,746			880,463			622,392			147,460			38.8	%	258,071			41.5	%
Income tax provision	(168,035		)	(91,983		)	(263,356		)	(170,920		)	76,052			82.7	%	92,436			54.1	%
Net income	$	359,171		$	287,763		617,107			451,472			$	71,408		24.8	%	$	165,635		36.7	%
Net income attributable to NCI	$	104,018		$	104,724		178,416			155,352			$	(706	)	(0.7	)%	$	23,064		14.8	%
Net income attributable to SHUSA	$	255,153		$	183,039		$	438,691		$	296,120		$	72,114		39.4	%	$	142,571		48.1	%

The Company reported pre-tax income of $527.2 million and $880.5 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to pre-tax income of $379.7 million and $622.4 million for the three-month and six-month periods endedJune 30, 2017, respectively. Factors contributing to these changes were as follows:

• Net interest income decreased $104.1 million and $210.8 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. This decrease was primarily due to a decrease in interest income earned on loans due to a decrease in the average loan portfolio and declining yields on RIC loans. Interest expense on deposit customer accounts increased due to yield increases and promotional rates offered to customers to attract new customers and grow the existing customer base.

• The provision for credit losses decreased $224.9 million and $457.8 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. This decrease was primarily due to decreases in the overall loan portfolio resulting in a decreased ALLL and a decline in originations, stabilizing credit performance for non-troubled debt restructuring ("TDR") loans, and recovery rates for the RIC and auto loan portfolio.

• Total non-interest income increased $89.4 million and $164.5 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. This increase was primarily due to lease income associated with the continued growth of the lease portfolio and an increase in gain on sale of assets coming off lease.These were offset by a decrease in consumer and commercial loan fees primarily related to SC for the three-month and six-month periods endedJune 30, 2018.

• Total general and administrative expenses increased $75.3 million and $171.1 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. This increase was primarily due to an increase in lease depreciation expense due to the growth of the Company's leased vehicle portfolio and increases in operational risk and other miscellaneous expenses. These increases were offset by a decrease in compensation and benefits expense for the three-month and six-month periods endedJune 30, 2018.

• Other expenses decreased $12.6 million and $17.6 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. This was primarily due to a decrease in expenses associated with restructuring charges and loss on debt repurchases.

• The income tax provision increased $76.1 million and $92.4 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. There was an increase in the income tax provision as a result of the increase in income before income tax provisionand due to the tax benefit recognized during the

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

three-month period ended June 30,2017 upon the assertion that undistributed earnings of a Puerto Rico subsidiary would be indefinitely reinvested outside the U.S., partially offset by a decrease in the effective tax rate for the three-month and six-month periods endedJune 30, 2018 due to the reduction in the Federal corporate income tax rate provided for by the TCJA.

CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
	THREE-MONTH PERIODS ENDED June 30, 2018 AND 2017
	2018 (1)							2017 (1)							Interest			Change due to
	Average Balance			Interest		Yield/  Rate(2)		Average Balance			Interest		Yield/ Rate(2)		Increase/(Decrease)			Volume			Rate
	(dollars in thousands)
EARNING ASSETS
INVESTMENTS AND INTEREST EARNING DEPOSITS	$	21,992,405		$	132,750	2.41	%	$	26,612,518		$	130,527	1.96	%	$	2,223		$	(6,893	)	$	9,116
LOANS(3):
Commercial loans	30,545,599			323,748		4.24	%	33,236,428			307,791		3.70	%	15,957			(19,879		)	35,836
Multifamily	8,145,794			82,385		4.05	%	8,337,231			81,807		3.92	%	578			(1,301		)	1,879
Total commercial loans	38,691,393			406,133		4.20	%	41,573,659			389,598		3.75	%	16,535			(21,180		)	37,715
Consumer loans:
Residential mortgages	9,599,348			96,997		4.04	%	8,123,344			81,519		4.01	%	15,478			14,867			611
Home equity loans and lines of credit	5,654,406			65,482		4.63	%	5,929,744			57,417		3.87	%	8,065			(2,498		)	10,563
Total consumer loans secured by real estate	15,253,754			162,479		4.26	%	14,053,088			138,936		3.95	%	23,543			12,369			11,174
RICs and auto loans	27,265,842			1,084,002		15.90	%	27,007,022			1,169,140		17.32	%	(85,138		)	11,272			(96,410		)
Personal unsecured	2,286,103			151,484		26.51	%	2,427,266			155,043		25.55	%	(3,559		)	(10,056		)	6,497
Other consumer(4)	545,404			9,755		7.15	%	716,140			16,201		9.05	%	(6,446		)	(3,427		)	(3,019		)
Total consumer	45,351,103			1,407,720		12.42	%	44,203,516			1,479,320		13.39	%	(71,600		)	10,158			(81,758		)
Total loans	84,042,496			1,813,853		8.63	%	85,777,175			1,868,918		8.72	%	(55,065		)	(11,022		)	(44,043		)
Intercompany investments	4,640			47		4.05	%	14,640			232		6.34	%	(185		)	(121		)	(64		)
TOTAL EARNING ASSETS	106,039,541			1,946,650		7.34	%	112,404,333			1,999,677		7.12	%	(53,027		)	(18,036		)	(34,991		)
Allowance for loan losses (5)	(3,840,811		)					(3,937,680		)
Other assets(6)	27,745,607							26,096,475
TOTAL ASSETS	$	129,944,337						$	134,563,128
INTEREST BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest-bearing demand deposits	$	8,918,715		$	7,863	0.35	%	$	10,121,592		$	4,846	0.19	%	$	3,017		$	(496	)	$	3,513
Savings	5,917,881			2,933		0.20	%	6,025,607			2,815		0.19	%	118			(61		)	179
Money market	25,441,565			62,135		0.98	%	25,789,677			31,675		0.49	%	30,460			(417		)	30,877
CDs	5,663,216			19,402		1.37	%	7,003,835			19,488		1.11	%	(86		)	(434		)	348
TOTAL INTEREST-BEARING DEPOSITS	45,941,377			92,333		0.80	%	48,940,711			58,824		0.48	%	33,509			(1,408		)	34,917
BORROWED FUNDS:
FHLB advances, federal funds, and repurchase agreements	989,011			6,894		2.79	%	4,292,308			17,637		1.64	%	(10,743		)	(120,933		)	110,190
Other borrowings	37,895,935			309,760		3.27	%	37,780,229			281,235		2.98	%	28,525			870			27,655
TOTAL BORROWED FUNDS (7)	38,884,946			316,654		3.26	%	42,072,537			298,872		2.84	%	17,782			(120,063		)	137,845
TOTAL INTEREST-BEARING FUNDING LIABILITIES	84,826,323			408,987		1.93	%	91,013,248			357,696		1.57	%	51,291			(121,471		)	172,762
Noninterest bearing demand deposits	15,315,727							15,572,982
Other liabilities(8)	5,503,143							4,960,554
TOTAL LIABILITIES	105,645,193							111,546,784
STOCKHOLDER’S EQUITY	24,299,144							23,016,344
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	129,944,337						$	134,563,128
NET INTEREST SPREAD (9)						5.41	%						5.55	%
NET INTEREST MARGIN (10)						5.80	%						5.84	%
NET INTEREST INCOME (11)				$	1,537,616						$	1,641,749

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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
	SIX-MONTH PERIODS ENDED JUNE 30, 2018 AND 2017
	2018 (1)							2017 (1)										Change due to
(dollars in thousands)	Average Balance			Interest		Yield/ Rate(2)		Average Balance			Interest		Yield/ Rate(2)		Increase/(Decrease)			Volume			Rate
EARNING ASSETS
INVESTMENTS AND INTEREST EARNING DEPOSITS	$	22,315,370		$	261,081	2.34	%	$	27,258,866		$	247,182	1.81	%	$	13,899		$	(22,614	)	$	36,513
LOANS(3):
Commercial loans	30,507,771			629,146		4.12	%	33,936,472			605,400		3.57	%	23,746			(45,241		)	68,987
Multifamily	8,155,884			161,618		3.96	%	8,441,496			158,005		3.74	%	3,613			(4,892		)	8,505
Total commercial loans	38,663,655			790,764		4.09	%	42,377,968			763,405		3.60	%	27,359			(50,133		)	77,492
Consumer loans:
Residential mortgages	9,440,060			189,564		4.02	%	8,141,769			162,254		3.99	%	27,310			26,081			1,229
Home equity loans and lines of credit	5,711,733			126,773		4.44	%	5,949,926			111,898		3.76	%	14,875			(4,229		)	19,104
Total consumer loans secured by real estate	15,151,793			316,337		4.18	%	14,091,695			274,152		3.89	%	42,185			21,852			20,333
RICs and auto loans	26,692,304			2,122,887		15.91	%	26,957,954			2,318,294		17.20	%	(195,407		)	(22,687		)	(172,720		)
Personal unsecured	2,317,612			311,321		26.87	%	2,360,993			318,566		26.99	%	(7,245		)	(5,834		)	(1,411		)
Other consumer(4)	570,764			20,270		7.10	%	743,321			33,439		9.00	%	(13,169		)	(6,897		)	(6,272		)
Total consumer	44,732,473			2,770,815		12.39	%	44,153,963			2,944,451		13.34	%	(173,636		)	(13,566		)	(160,070		)
Total loans	83,396,128			3,561,579		8.54	%	86,531,931			3,707,856		8.57	%	(146,277		)	(63,699		)	(82,578		)
Intercompany investments	4,640			90		3.88	%	14,640			464		6.34	%	(374		)	(238		)	(136		)
TOTAL EARNING ASSETS	105,716,138			3,822,750		7.23	%	113,805,437			3,955,502		6.95	%	(132,752		)	(86,551		)	(46,201		)
Allowance for loan losses(5)	(3,871,012		)					(3,887,986		)
Other assets(6)	27,824,679							26,067,158
TOTAL ASSETS	$	129,669,805						$	135,984,609
INTEREST-BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest-bearing demand deposits	$	9,101,849		$	15,205	0.33	%	$	10,482,158		$	10,072	0.19	%	$	5,133		$	(1,117	)	$	6,250
Savings	5,873,931			5,556		0.19	%	6,014,245			5,719		0.19	%	(163		)	(163		)	—
Money market	25,384,655			109,886		0.87	%	25,880,004			64,084		0.50	%	45,802			(1,218		)	47,020
Certificates of deposit ("CDs")	5,581,930			37,111		1.33	%	7,699,288			40,943		1.06	%	(3,832		)	(51,938		)	48,106
TOTAL INTEREST-BEARING DEPOSITS	45,942,365			167,758		0.73	%	50,075,695			120,818		0.48	%	46,940			(54,436		)	101,376
BORROWED FUNDS:
Federal Home Loan Bank ("FHLB") advances, federal funds, and repurchase agreements	1,349,724			16,475		2.44	%	4,707,459			34,055		1.45	%	(17,580		)	(410,846		)	393,266
Other borrowings	37,603,320			604,869		3.22	%	37,958,104			555,852		2.93	%	49,017			(5,112		)	54,129
TOTAL BORROWED FUNDS (7)	38,953,044			621,344		3.19	%	42,665,563			589,907		2.77	%	31,437			(415,958		)	447,395
TOTAL INTEREST-BEARING FUNDING LIABILITIES	84,895,409			789,102		1.86	%	92,741,258			710,725		1.53	%	78,377			(470,394		)	548,771
Noninterest bearing demand deposits	15,326,602							15,504,562
Other liabilities(8)	5,337,348							4,889,538
TOTAL LIABILITIES	105,559,359							113,135,358
STOCKHOLDER’S EQUITY	24,110,446							22,849,251
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	129,669,805						$	135,984,609
NET INTEREST SPREAD (9)						5.37	%						5.42	%
NET INTEREST MARGIN (10)						5.74	%						5.70	%
NET INTEREST INCOME (11)				$	3,033,558						$	3,244,313

(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.

(6) Other assets primarily includes goodwill and intangibles, premise and equipment, net deferred tax assets, equity method investments, BOLI, accrued interest receivable, derivative assets, miscellaneous receivables, prepaid expenses and mortgage servicing rights ("MSRs"). Refer to Note 8 to the Condensed Consolidated Financial Statements for further discussion.

(7) Refer to Note 10 to the Condensed Consolidated Financial Statements for further discussion.

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

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

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

(11) Intercompany investment income is eliminated from this line item.

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

NET INTEREST INCOME

	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,				QTD Change					YTD Change
(dollars in thousands)	2018		2017		2018		2017		Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
INTEREST INCOME:
Interest-earning deposits	$	33,939	$	20,476	$	66,452	$	38,910	$	13,463		65.8	%	$	27,542		70.8	%
Investments available-for-sale ("AFS")	77,031		95,015		150,536		176,441		(17,984		)	(18.9	)%	(25,905		)	(14.7	)%
Investments held-to-maturity ("HTM")	17,181		10,011		34,245		20,643		7,170			71.6	%	13,602			65.9	%
Other investments	4,599		5,025		9,848		11,188		(426		)	(8.5	)%	(1,340		)	(12.0	)%
Total interest income on investment securities and interest-earning deposits	132,750		130,527		261,081		247,182		2,223			1.7	%	13,899			5.6	%
Interest on loans	1,813,853		1,868,918		3,561,579		3,707,856		(55,065		)	(2.9	)%	(146,277		)	(3.9	)%
Total interest income	1,946,603		1,999,445		3,822,660		3,955,038		(52,842		)	(2.6	)%	(132,378		)	(3.3	)%
INTEREST EXPENSE:
Deposits and customer accounts	92,333		58,824		167,758		120,818		33,509			57.0	%	46,940			38.9	%
Borrowings and other debt obligations	316,654		298,872		621,344		589,907		17,782			5.9	%	31,437			5.3	%
Total interest expense	408,987		357,696		789,102		710,725		51,291			14.3	%	78,377			11.0	%
NET INTEREST INCOME	$	1,537,616	$	1,641,749	$	3,033,558	$	3,244,313	$	(104,133	)	(6.3	)%	$	(210,755	)	(6.5	)%

Net interest income decreased $104.1 million and $210.8 million for the three-month and six-month periods endedJune 30, 2018 compared to the corresponding periods in 2017. These decreases were primarily due to a decrease in yield on interest income earned on loans, an increase on interest expense on deposits and customer accounts due to higher interest rates overall and rate promotions offered during the periods, and an increase in interest expense on borrowings due to higher borrowing rate.

Interest Income on Investment Securities and Interest-Earning Deposits

Interest income on investment securities and interest-earning deposits increased $2.2 million and $13.9 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. The average balances of investment securities and interest-earning deposits for the three-month and six-month periods endedJune 30, 2018 were $22.0 billion and $22.3 billion with average yields of 2.41% and 2.34%, respectively, compared to an average balance of $26.6 billion and $27.3 billion and average yields of 1.96% and 1.81% for the three-month and six-month periods endedJune 30, 2017. The increase in interest income on investment securities and interest-earning deposits for the three-month and six-month periods endedJune 30, 2018 was primarily due to an increase in the average yield on interest-earning deposits.

Interest Income on Loans

Interest income on loans decreased $55.1 million and $146.3 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017, primarily due to a decline in the average outstanding loan balance during the periods and declines in rates for RICs, which comprised $85.1 million and $195.4 million of the decrease during the three-month and six-month periods endedJune 30, 2018, respectively. Starting in the second half of 2017, the Company, lowered rates on RIC loans to improve pricing as well as dealer and customer experience, which will increase the competitive position in the market. The average balances of total loans were $84.0 billion and $83.4 billion with average yields of 8.63% and 8.54% for the three-month and six-month periods endedJune 30, 2018, respectively, compared to $85.8 billion and $86.5 billion with average yields of 8.72% and 8.57% for the three-month and six-month periods endedJune 30, 2017. The decrease in the average balance of total loans of $3.1 billion was primarily due to a decline in the balance of the commercial loan portfolio. The average balances of commercial loans were $38.7 billion and $38.7 billion with average yields of 4.20% and 4.09% for the three-month and six-month periods endedJune 30, 2018, respectively, compared to $41.6 billion and $42.4 billion with average yields of 3.75% and 3.60% for the three-month and six-month periods endedJune 30, 2017. The decrease in the average balance of the commercial loan portfolio was due to the

93

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

Company's exit from the Commercial Mortgage Warehouse portfolio during the second quarter of 2018, and to reduce risk exposure in the loan portfolio.

Interest Expense on Deposits and Related Customer Accounts

Interest expense on deposits and related customer accounts increased $33.5 million and $46.9 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017, primarily due to an increase in interest rates overall and higher promotional rates offered to customers during the period. Higher rates were offered to customers on various deposit products in order to attract and grow the customer base during the periods. The average balances of total interest-bearing deposits were $45.9 billion and $45.9 billion with average costs of 0.80% and 0.73% for the three-month and six-month periods endedJune 30, 2018, respectively, compared to average balances of $48.9 billion and $50.1 billion with average costs of 0.48% and 0.48% for the three-month and six-month periods endedJune 30, 2017.

Interest Expense on Borrowed Funds

Interest expense on borrowed funds increased $17.8 million and $31.4 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. The increase in interest expense on borrowed funds was due to interest paid at higher rate during the three-month and six-month periods endedJune 30, 2018. The average balances of total borrowings were $38.9 billion and $39.0 billion with average costs of 3.26% and 3.19% for the three-month and six-month periods endedJune 30, 2018, respectively, compared to an average balance of $42.1 billion and $42.7 billion with average costs of 2.84% and 2.77% for the three-month and six-month periods endedJune 30, 2017. The average balance of borrowed funds decreased from June 30, 2017 to June 30, 2018, primarily due to the decrease in FHLB advances as a result of maturities and terminations.

PROVISION FOR CREDIT LOSSES

The provision for credit losses is based on credit loss experience, growth or contraction of specific segments of the loan portfolio, and the estimate of losses inherent in the portfolio. The provision for credit losses for the three-month and six-month periods endedJune 30, 2018 was $379.8 million and $882.4 million, respectively, compared to $604.8 million and $1.3 billion for the corresponding periods in 2017. The decrease for the three-month and six-month periods endedJune 30, 2018 was primarily due to stabilizing credit performance for non-troubled debt restructuring ("TDR") loans, and recovery rates for the RIC and auto loan portfolio.

94

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

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,						QTD Change					YTD Change
(in thousands)	2018			2017			2018			2017			Dollar			Percentage		Dollar			Percentage
ALLL, beginning of period	$	3,853,209		$	3,922,863		$	3,911,575		$	3,814,464		$	(69,654	)	(1.8	)%	$	97,111		2.5	%
Charge-offs:
Commercial	(16,665		)	(60,514		)	(49,625		)	(86,687		)	43,849			(72.5	)%	37,062			(42.8	)%
Consumer	(1,036,520		)	(1,128,919		)	(2,255,456		)	(2,366,199		)	92,399			(8.2	)%	110,743			(4.7	)%
Total charge-offs	(1,053,185		)	(1,189,433		)	(2,305,081		)	(2,452,886		)	136,248			(11.5	)%	147,805			(6.0	)%
Recoveries:
Commercial	14,624			9,056			24,629			19,635			5,568			61.5	%	4,994			25.4	%
Consumer	613,359			599,437			1,275,105			1,223,374			13,922			2.3	%	51,731			4.2	%
Total recoveries	627,983			608,493			1,299,734			1,243,009			19,490			3.2	%	56,725			4.6	%
Charge-offs, net of recoveries	(425,202		)	(580,940		)	(1,005,347		)	(1,209,877		)	155,738			(26.8	)%	204,530			(16.9	)%
Provision for loan and lease losses (1)	382,727			611,685			904,506			1,349,021			(228,958		)	(37.4	)%	(444,515		)	(33.0	)%
ALLL, end of period	$	3,810,734		$	3,953,608		$	3,810,734		$	3,953,608		$	(142,874	)	(3.6	)%	$	(142,874	)	(3.6	)%
Reserve for unfunded lending commitments, beginning of period	$	89,866		$	120,396		$	109,111		$	122,419		$	(30,530	)	(25.4	)%	$	(13,308	)	(10.9	)%
Release of reserves for unfunded lending commitments (1)	(2,893		)	(6,917		)	(22,138		)	(8,807		)	4,024			(58.2	)%	(13,331		)	151.4	%
Loss on unfunded lending commitments	—			(1,668		)	—			(1,801		)	1,668			(100.0	)%	1,801			(100.0	)%
Reserve for unfunded lending commitments, end of period	86,973			111,811			86,973			111,811			(24,838		)	(22.2	)%	(24,838		)	(22.2	)%
Total allowance for credit losses ("ACL"), end of period	$	3,897,707		$	4,065,419		$	3,897,707		$	4,065,419		$	(167,712	)	(4.1	)%	$	(167,712	)	(4.1	)%

(1) The provision for credit losses in the Condensed Consolidated Statement of Operations is the sum of the total provision for loan and lease losses and the provision for unfunded lending commitments.

The Company's net charge-offs decreased$155.7 million for the three-month period endedJune 30, 2018 and $204.5 million for the six-month period endedJune 30, 2018 compared to the corresponding periods in 2017.

Consumer charge-offs decreased$92.4 million and $110.7 million for the three-month and six-month periods endedJune 30, 2018, respectively compared to the corresponding periods in 2017. The three-month decrease was primarily comprised of a $92.3 million decrease in consumer RIC and auto loan charge-offs and a $1.0 million decrease in consumer loan charge-offs in Puerto Rico. The six-month decrease was comprised of a $107.6 million decrease in RIC and consumer auto loan charge-offs and a $6.2 million decrease in consumer loan charge-offs in Puerto Rico, partially offset by a $2.7 million increase in Consumer credit card charge-offs.

Consumer recoveries increased$13.9 million and $51.7 million for the three-month and six-month periods endedJune 30, 2018, respectively compared to the corresponding periods in 2017. The three month increase was comprised of a $16.4 million increase in consumer RIC and auto loan recoveries, offset by a $2.2 million decrease in other consumer loan recoveries. The six month increase was comprised of $55.1 million increase in RIC and consumer auto loan recoveries, partially offset by a $3.4 million decrease in other consumer loan recoveries.

Consumer net charge-offs as a percentage of average consumer loans were 0.9% and 2.2% for the three-month and six-month periods endedJune 30, 2018, respectively, compared to 1.2% and 2.6% for the corresponding periods in 2017.

Commercial charge-offs decreased$43.8 million and $37.1 million for the three-month and six-month periods endedJune 30, 2018, respectively compared to corresponding period in 2017. The three month decrease was comprised of a $30.6 million decrease in Commercial Banking charge-offs, a $1.8 million decrease in commercial fleet charge-offs, a $1.1 million decrease in Middle Market Commercial Real Estate charge-offs, and a $9.2 million decrease in charge-offs for commercial loans in Puerto Rico. The six month decrease was comprised of a $15.9 million decrease in Commercial Banking charge-offs, a $5.2 million decrease in commercial fleet

95

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

charge-offs, a $4.7 million decrease in Middle Market Commercial Real Estate charge-offs, and a $10.8 million decrease in charge-offs for commercial loans in Puerto Rico.

Commercial recoveries increased$5.6 million and $5.0 million for the three-month and six-month periods endedJune 30, 2018, respectively compared to the corresponding period in 2017. The three month increase was comprised of a $6.5 million increase in Corporate Banking, partially offset by a $0.9 million decrease in commercial fleet recoveries. The six month increase was comprised of $8.7 million increase in Corporate Banking recoveries, partially offset by a $2.2 million decrease in commercial fleet recoveries and a $1.2 million decrease in continuing care retirement communities recoveries.

Commercial loan net charge-offs as a percentage of average commercial loans, including multifamily loans, was less than 0.01%0.06% for the three-month and six-month periods endedJune 30, 2018, respectively, compared to 0.12% and 0.16% for the three-month and six-month periods endedJune 30, 2017.

NON-INTEREST INCOME

	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,					QTD Change					YTD Change
(dollars in thousands)	2018		2017		2018			2017		Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
Consumer fees	$	96,846	$	120,047	$	199,745		$	232,113	$	(23,201	)	(19.3	)%	$	(32,368	)	(13.9	)%
Commercial fees	39,319		42,287		76,592			84,589		(2,968		)	(7.0	)%	(7,997		)	(9.5	)%
Lease income	569,306		489,043		1,110,202			985,087		80,263			16.4	%	125,115			12.7	%
Miscellaneous income	113,283		69,383		234,085			144,526		43,900			63.3	%	89,559			62.0	%
Net (losses)/gains recognized in earnings	419		9,049		(244		)	9,569		(8,630		)	(95.4	)%	(9,813		)	(102.5	)%
Total non-interest income	$	819,173	$	729,809	$	1,620,380		$	1,455,884	$	89,364		12.2	%	$	164,496		11.3	%

Total non-interest income increased $89.4 million and $164.5 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. The increases for the three-month and six-month periods endedJune 30, 2018 were primarily due to increases 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 and commercial loan fees due to the reduction of loans serviced by the Company for the three-month and six-month periods endedJune 30, 2018.

Consumer fees

Consumer fees decreased $23.2 million and $32.4 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. The decreases were primarily due to decreases in loan fee income, which was attributable to a reduction in loans serviced by the Company due to loan sales and payoffs in 2018. These losses were partially offset by consumer insurance related fees.

Commercial fees

Commercial fees consists of deposit overdraft fees, deposit ATM fees, cash management fees, letter of credit fees, and loan syndication fees for commercial accounts. Commercial fees decreased $3.0 million and $8.0 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. These decreases were primarily due to lower commercial deposit fee income.

Lease income

Lease income increased $80.3 million and $125.1 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. The increases were the result of the growth in the Company's lease portfolio, with an average balance of $11.2 billion for the six-month period endedJune 30, 2018, compared to $9.8 billion at June 30, 2017.

96

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

Miscellaneous Income/(loss)

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,						QTD Change					YTD Change
(dollars in thousands)	2018			2017			2018			2017			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
Mortgage banking income, net	2,933			15,092			19,278			28,266			(12,159		)	(80.6	)%	(8,988		)	(31.8	)%
BOLI	14,816			14,052			29,384			31,351			764			5.4	%	(1,967		)	(6.3	)%
Capital market revenue	41,083			39,771			97,696			85,587			1,312			3.3	%	12,109			14.1	%
Net gain on sale of operating leases	65,742			39,810			118,941			62,525			25,932			65.1	%	56,416			90.2	%
Asset and wealth management fees	43,922			39,438			87,259			75,939			4,484			11.4	%	11,320			14.9	%
Loss on sale of non-mortgage loans	(74,872		)	(87,837		)	(118,782		)	(157,604		)	12,965			(14.8	)%	38,822			(24.6	)%
Other miscellaneous income, net	19,659			9,057			309			18,462			10,602			117.1	%	(18,153		)	(98.3	)%
Total miscellaneous income/(loss)	$	113,283		$	69,383		$	234,085		$	144,526		$	43,900		63.3	%	$	89,559		62.0	%

Miscellaneous income increased $43.9 million and $89.6 million for the three-month and six-month periods endedJune 30, 2018 compared to the corresponding periods in 2017, primarily due to an increase in net gain on sale of operating leases and a decrease in losses on the sale of non-mortgage loans.

Mortgage Banking Revenue

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,						QTD Change					YTD Change
(dollars in thousands)	2018			2017			2018			2017			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
Mortgage and multifamily servicing fees	$	9,769		$	10,452		$	19,963		$	21,076		$	(683	)	(6.5	)%	$	(1,113	)	(5.3	)%
Net gains on sales of residential mortgage loans and related securities	2,329			1,324			8,553			5,676			1,005			75.9	%	2,877			50.7	%
Net gains on sales of multifamily mortgage loans	(2,712		)	900			(2,312		)	1,200			(3,612		)	(401.3	)%	(3,512		)	(292.7	)%
Net gains/(losses) on hedging activities	(1,739		)	8,900			(13,367		)	9,946			(10,639		)	(119.5	)%	(23,313		)	(234.4	)%
Net gains/(losses) from changes in MSR fair value	(1,274		)	(1,193		)	13,769			263			(81		)	6.8	%	13,506			5,135.4	%
MSR principal reductions	(3,440		)	(5,291		)	(7,328		)	(9,895		)	1,851			(35.0	)%	2,567			(25.9	)%
Total mortgage banking income, net	$	2,933		$	15,092		$	19,278		$	28,266		$	(12,159	)	(80.6	)%	$	(8,988	)	(31.8	)%

Mortgage banking income consisted of fees associated with servicing loans not held by the Company, as well as originations, amortization, and changes in the fair value of MSRs and recourse reserves. Mortgage banking income also included gains or losses on the sale of mortgage loans, home equity loans, home equity lines of credit, and mortgage-backed securities ("MBS"). Gains or losses on mortgage banking derivative and hedging transactions are also included in Mortgage banking income.

Mortgage banking revenue decreased $12.2 million and $9.0 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. The decreases in revenue for 2018 were primarily attributable to a decrease in net gains on hedging activities of $10.6 million and $23.3 million, respectively. The six-month period ended June 30, 2018 is partially offset with an increase in net gains from changes in MSR valuation of $13.5 million when compared to the corresponding period in 2017.

97

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

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

	30-Year Fixed		15-Year Fixed
December 31, 2016	4.38	%	3.63	%
March 31, 2017	4.25	%	3.50	%
June 30, 2017	4.13	%	3.38	%
September 30, 2017	3.99	%	3.25	%
December 31, 2017	4.13	%	3.63	%
March 31, 2018	4.50	%	3.99	%
June 30, 2018	4.63	%	4.13	%

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

Mortgage and multifamily loan servicing fees decreased $0.7 million and $1.1 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. At June 30, 2018 and 2017, the Company serviced mortgage and multifamily real estate loans for the benefit of others with a principal balance totaling $147.6 million and $414.2 million, respectively. The decrease in loans serviced for others was primarily due to pay-downs received during the remainder of 2017 and 2018.

Net gains on sales of residential mortgage loans and related securities increased $1.0 million and $2.9 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. For the three-month and six-month periods endedJune 30, 2018, the Company sold $307.9 million and $617.8 million of mortgage loans for gains of $2.3 million and $8.6 million, respectively, compared to $305.6 million and $940.0 million of loans sold for gains of $1.3 million and $5.7 million in the corresponding periods in 2017.

The Company periodically sells qualifying mortgage loans to the Federal Home Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage Association ("GNMA") and the Federal National Mortgage Association ("FNMA") in return for cash or 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 Company previously sold multifamily loans in the secondary market to FNMA while retaining servicing. In September 2009, the Bank elected to stop selling multifamily loans to FNMA and, since that time, has retained all production for the multifamily loan portfolio. Under the terms of the multifamily sales program with FNMA, the Company retained a portion of the credit risk associated with those loans. As a result of that agreement, the Company retains a 100% first loss position on each multifamily loan sold to FNMA under the program until the earlier to occur of (i) the aggregate approved losses on the multifamily loans sold to FNMA reaching the maximum loss exposure for the portfolio as a whole or (ii) all of the loans sold to FNMA under the program are fully paid off.

At June 30, 2018, the Company serviced loans with a principal balance of $52.4 million for FNMA, compared to $136.0 million at December 31, 2017. These loans had a credit loss exposure of $12.2 million as of June 30, 2018 and December 31, 2017. Losses, if any, resulting from representation and warranty defaults would be in addition to the Company's credit loss exposure. The servicing asset for these loans is fully amortized.

The Company has established a liability related to the fair value of the retained credit exposure for multifamily loans sold to FNMA. This liability represents the amount the Company estimates it would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of the estimated losses the portfolio is projected to incur based upon specific internal information and an industry-based default curve with a range of estimated losses. As of June 30, 2018 and December 31, 2017, the Company had a liability of zero and $1.3 million, respectively, related to the fair value of the retained credit exposure for multifamily loans sold to the FNMA under this program.

Net losses from hedging activities for the three-month and six-month periods endedJune 30, 2018 were $1.7 million and $13.4 million, respectively, compared to gains of $8.9 million and $9.9 million in the corresponding periods in 2017. The decreases were primarily due to the decrease in the mortgage loan pipeline valuation and the Company's hedging strategy in the current mortgage rate environment.

98

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

Net gains/losses from changes in MSR fair value was a loss of $1.3 million and a net gain of $13.8 million for the three-month and six-month periods endedJune 30, 2018, respectively, as compared to a loss of $1.2 million and $0.3 million for the corresponding periods in 2017. The value of the related MSRs carried at fair value at June 30, 2018 and December 31, 2017 were $158.5 million and $146.0 million, respectively. The MSR asset fair value changes for the three-month and six-month periods endedJune 30, 2018 was the result of fluctuations in interest rates.

The Company recognized $3.4 million and $7.3 million of principal reductions for the three-month and six-month periods endedJune 30, 2018, respectively, compared to $5.3 million and $9.9 million for the corresponding periods in 2017. Principal reduction activity is impacted by changes in the level of prepayments and mortgage refinancing.

GENERAL AND ADMINISTRATIVE EXPENSES

	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,				QTD Change					YTD Change
(dollars in thousands)	2018		2017		2018		2017		Dollar increase/(decrease)			Percentage		Dollar			Percentage
Compensation and benefits	$	427,728	$	455,616	$	896,505	$	907,857	$	(27,888	)	(6.1	)%	$	(11,352	)	(1.3	)%
Occupancy and equipment expenses	163,171		163,553		322,511		326,264		(382		)	(0.2	)%	(3,753		)	(1.2	)%
Technology, outside services, and marketing expense	156,010		162,259		308,292		297,771		(6,249		)	(3.9	)%	10,521			3.5	%
Loan expense	97,679		95,872		194,493		194,217		1,807			1.9	%	276			0.1	%
Lease expense	436,795		369,240		861,061		728,032		67,555			18.3	%	133,029			18.3	%
Other administrative expenses	135,565		95,096		239,746		197,334		40,469			42.6	%	42,412			21.5	%
Total general and administrative expenses	$	1,416,948	$	1,341,636	$	2,822,608	$	2,651,475	$	75,312		5.6	%	$	171,133		6.5	%

Total general and administrative expenses increased $75.3 million and $171.1 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. Factors contributing to this increase were as follows:

• Compensation and benefits expense decreased $27.9 million and $11.4 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. These decreases were primarily the result of bonus expense decreasing $20.9 million and $12.5 million and other compensation and benefits decreasing $11.5 million and $31.5 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. These decreases were offset by increases in salary expense of $12.0 million and $30.0 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. The decrease in bonus and other compensation and benefits expense relates to decreases in bonus true-ups and a reduction in capitalized software development costs during the comparative periods. The increase in salary expense primarily relates to merit increases and an increase in employees.

• Occupancy and equipment expenses decreased $0.4 million and $3.8 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. This was primarily due to a decrease in depreciation expense of $6.9 million and $9.3 million for the three-month and six-month periods ended June 30, 2018, respectively. The decrease in depreciation expense primarily related to depreciation on capitalized software assets, due to more disposals in the prior corresponding periods and minimal additions for the three-month and six-month periods endedJune 30, 2018. These decreases were offset by an increase of $4.0 million and $5.8 million in maintenance and repair expense for the three-month and six-month periods endedJune 30, 2018 compared to the corresponding periods in 2017.

99

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

• Technology, outside services, and marketing expenses decreased $6.2 million and increased $10.5 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. Technology service expenses increased $7.2 million and $25.0 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. The increase relates to higher costs to IT vendors related to various initiatives. This was offset by decreases of $13.9 million and $15.0 million in marketing expenses for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. These decreases were primarily due to decreases in expenses such as direct mail, advertising and outside marketing associated with corporate marketing campaigns.

• Loan expense increased $1.8 million and $0.3 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. These increases were primarily due to increases of $6.4 millionand $4.5 million in loan servicing expenses and $3.0 million and $3.4 million in loan origination expenses for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. The increases were offset by decreases in collection expense of $5.0 million and $3.0 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017.

• Lease expense increased $67.6 million and $133.0 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods2017. These increases were primarily due to the continued growth of the Company's leased vehicle portfolio and depreciation associated with that portfolio.

• Other administrative expenses increased $40.5 million and $42.4 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. This increase was primarily attributable to an increase in operational risk expenses of $17.6 million and $25.7 million and miscellaneous expenses of $15.6 million and $17.4 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. These increases were offset by a decrease in legal expense of $4.3 million and $9.4 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017

OTHER EXPENSES

	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,				QTD Change					YTD Change
(dollars in thousands)	2018		2017		2018		2017		Dollar (decrease)/increase			Percentage		Dollar (decrease)/increase			Percentage
Amortization of intangibles	$	15,288	$	15,424	$	30,576	$	30,915	$	(136	)	(0.9	)%	$	(339	)	(1.1	)%
Deposit insurance premiums and other expenses	14,804		17,596		31,564		35,426		(2,792		)	(15.9	)%	(3,862		)	(10.9	)%
Loss on debt extinguishment	1,201		3,991		3,413		10,740		(2,790		)	(69.9	)%	(7,327		)	(68.2	)%
Other miscellaneous expenses	1,508		8,397		2,946		9,035		(6,889		)	(82.0	)%	(6,089		)	(67.4	)%
Total other expenses	$	32,801	$	45,408	$	68,499	$	86,116	$	(12,607	)	(27.8	)%	$	(17,617	)	(20.5	)%

Total other expenses decreased $12.6 million and $17.6 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. The primary factors contributing to these decreases were:

• Amortization of intangibles decreased $0.1 million and $0.3 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017.

• Deposit insurance premiums and other expenses decreased $2.8 million and $3.9 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. This decrease was primarily attributable to decreases in FDIC assessment rates as well as a decrease in the FDIC assessment base.

• Losses on debt extinguishment decreased $2.8 million and $7.3 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. The Company recorded loss on debt extinguishment related to tender offers on Bank debt of $1.2 million and $3.4 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to $4.0 million and $10.7 million, for the three-month and six-month periods endedJune 30, 2017. Non-recurring activity of a $4 million charge on the buy-back of real estate investment trust preferred stock for the three-month ended and a tender offer on bank debt resulted in a charge of $6.7 million during the six-month period ended June 30, 2017.

• Other miscellaneous expenses decreased $6.9 million and $6.1 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. These decreases were primarily related to restructuring charges during the comparative periods.

100

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

INCOME TAX PROVISION

Income tax provisions of $168.0 million and $263.4 million were recorded for the three-month and six-month periods endedJune 30, 2018, respectively, compared to income tax provisions of $92.0 million and $170.9 million for the corresponding periods in 2017. This resulted in an effective tax rate ("ETR") of 31.9% and 29.9% for the three-month and six-month periods endedJune 30, 2018, respectively, compared to 24.2% and 27.5% for the corresponding periods in 2017.

Refer to Note 13 to the Condensed Consolidated Financial Statements for an explanation of the changes in the ETR.

LINE OF BUSINESS RESULTS

General

The Company's segments at June 30, 2018 consisted of Consumer and Business Banking, Commercial Banking, Corporate and Investment Banking (CIB) which was formerly known as Global Corporate Banking, and SC. For additional information with respect to the Company's reporting segments and changes to the segments beginning in the first quarter of 2018, see Note 18 to the Condensed Consolidated Financial Statements.

Results Summary

Consumer and Business Banking

	Three-Month Period Ended June 30,					Six-Month Period Ended June 30,						QTD Change					YTD Change
(dollars in thousands)	2018		2017			2018			2017			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
Net interest income	$	316,223	$	277,069		$	621,045		$	539,800		$	39,154		14.1	%	$	81,245		15.1	%
Total non-interest income	69,647		94,285			152,465			176,819			(24,638		)	(26.1	)%	(24,354		)	(13.8	)%
Provision for credit losses	18,283		21,410			56,672			43,861			(3,127		)	(14.6	)%	12,811			29.2	%
Total expenses	367,235		381,844			738,303			756,864			(14,609		)	(3.8	)%	(18,561		)	(2.5	)%
Income/(loss) before income taxes	352		(31,900		)	(21,465		)	(84,106		)	32,252			101.1	%	62,641			74.5	%
Intersegment revenue	521		329			1,198			1,206			192			58.4	%	(8		)	(0.7	)%
Total assets	19,088,997		18,077,481			19,088,997			18,077,481			1,011,516			5.6	%	1,011,516			5.6	%

Consumer and Business Banking reported income before income taxes of $0.4 million and a loss before income taxes of $21.5 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to losses before income taxes of $31.9 million and $84.1 million for the three-month and six-month periods endedJune 30, 2017. Factors contributing to this change were as follows:

• Net interest income increased$39.2 million and $81.2 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. These increases were primarily driven by deposit product margin due to interest rate increases partially offset by increased cost of deposits.

• Total non-interest income decreased$24.6 million and $24.4 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017 driven by a change made in the second quarter of 2017 in the shared services agreement between the Bank and SSLLC, and also by non-recurring gains on sale from the of branches in Brooklyn, NY in 2017.

• The provision for credit losses decreased$3.1 million and increased$12.8 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. The decrease for the three-month period reflects the reserve releases related to TDR portfolio in the month of June 2018. However, the increase of the provision for credit losses in the six-month period was driven by reserve releases in 2017 for home equity offset by reserve increases in 2018 for consumer loan portfolios to reflect the current upward trend of delinquencies.

101

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

Commercial Banking

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,					QTD Change					YTD Change
(dollars in thousands)	2018			2017			2018			2017		Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
Net interest income	$	160,824		$	162,953		$	315,759		$	315,259	$	(2,129	)	(1.3	)%	$	500		0.2	%
Total non-interest income	16,120			18,858			49,708			33,781		(2,738		)	(14.5	)%	15,927			47.1	%
(Release of) /provision for credit losses	(13,001		)	(1,089		)	(22,742		)	4,297		(11,912		)	(1,093.8	)%	(27,039		)	(629.3	)%
Total expenses	84,769			78,753			167,407			157,092		6,016			7.6	%	10,315			6.6	%
Income before income taxes	105,176			104,147			220,802			187,651		1,029			1.0	%	33,151			17.7	%
Intersegment revenue	2,562			1,750			4,093			3,052		812			46.4	%	1,041			34.1	%
Total assets	25,124,793			25,776,884			25,124,793			25,776,884		(652,091		)	(2.5	)%	(652,091		)	(2.5	)%

Commercial Banking reported income before income taxes of $105.2 million and $220.8 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to income before income taxes of $104.1 million and $187.7 million for the three-month and six-month periods endedJune 30, 2017, respectively. Factors contributing to this change were as follows:

• Net interest income decreased$2.1 million and increased$0.5 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. Total average gross loans were $24.6 billion and $24.8 billion for the three-month and six-month periods endedJune 30, 2018, respectively, compared to $25.8 billion and $25.9 billion for the corresponding periods in 2017. The decline in average gross loans is primarily related to the sale of the Mortgage Warehouse portfolio in March and decreases in the Real Estate and Energy Lending portfolios, partially offset by an increase in the C&I portfolio.

• The provision for credit losses decreased$11.9 million and decreased$27.0 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. The decrease in provision for the three-month and six-month periods endedJune 30, 2018 was due to releases totaling $6.2 million for the Mortgage Warehouse portfolio, $11.3 million in Energy Lending, $8.1 million in Asset Based Lending, as well as other general releases.

CIB

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,						QTD Change					YTD Change
(dollars in thousands)	2018			2017			2018			2017			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
Net interest income	$	30,901		$	40,860		$	63,591		$	83,088		$	(9,959	)	(24.4	)%	$	(19,497	)	(23.5	)%
Total non-interest income	64,740			42,375			115,378			93,711			22,365			52.8	%	21,667			23.1	%
(Release of) /provision for credit losses	3,764			13,635			1,709			12,271			(9,871		)	(72.4	)%	(10,562		)	(86.1	)%
Total expenses	58,507			59,454			116,574			106,062			(947		)	(1.6	)%	10,512			9.9	%
Income before income taxes	33,370			10,146			60,686			58,466			23,224			228.9	%	2,220			3.8	%
Intersegment expense	(3,527		)	(2,089		)	(5,808		)	(4,486		)	(1,438		)	(68.8	)%	(1,322		)	(29.5	)%
Total assets	7,832,197			8,949,566			7,832,197			8,949,566			(1,117,369		)	(12.5	)%	(1,117,369		)	(12.5	)%

CIB reported income before income taxes of $33.4 million and $60.7 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to income before income taxes of $10.1 million and $58.5 million for the three-month and six-month periods endedJune 30, 2017. Factors contributing to this change were as follows:

• Net interest income decreased$10.0 million and $19.5 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. The average balance of this segment's gross loans was $4.9 billion and $4.7 billion for the three-month and six-month periods endedJune 30, 2018, respectively,

102

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

compared to $6.2 billion and $6.8 billion for the corresponding periods in 2017. The average balance of deposits was $1.7 billion and $1.8 billion for the three-month and six-month periods endedJune 30, 2018, respectively, compared to $2.2 billion and $2.3 billion for the corresponding periods in 2017. The decrease in loan balances is attributed to the strategic goal of building aless capital-intensive U.S. franchise, which was attained by exiting less profitable relationships across all sectors, and by pro-actively reducing exposures related to the commodities and oil and gas sectors.

• Total non-interest income increased$22.4 million and $21.7 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017.

• The provision for credit losses decreased$9.9 million and $10.6 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. The provision decreased for the six-month period endedJune 30, 2018 due to higher reserves required for oil and gas clients and higher reserves on a renewable energy investment that was substantially damaged by Hurricane Maria in 2017.

• Total expenses decreased$0.9 million and increased$10.5 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017, driven by higher support and personnel expenses.

Other

	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,						QTD Change					YTD Change
(dollars in thousands)	2018			2017			2018			2017			Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
Net interest income	$	66,267		$	65,273		$	129,070		$	122,000		$	994		1.5	%	$	7,070		5.8	%
Total non-interest income	110,271			155,855			221,540			304,619			(45,584		)	(29.2	)%	(83,079		)	(27.3	)%
Provision for credit losses	8,621			16,051			14,958			31,663			(7,430		)	(46.3	)%	(16,705		)	(52.8	)%
Total expenses	217,368			244,249			442,975			467,939			(26,881		)	(11.0	)%	(24,964		)	(5.3	)%
Loss before income taxes	(49,451		)	(39,172		)	(107,323		)	(72,983		)	(10,279		)	(26.2	)%	(34,340		)	(47.1	)%
Intersegment revenue/(expense)	444			10			517			228			434			4,340.0	%	289			126.8	%
Total assets	36,919,571			42,444,282			36,919,571			42,444,282			(5,524,711		)	(13.0	)%	(5,524,711		)	(13.0	)%

The Other category reported losses before income taxes of $49.5 million and $107.3 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to losses before income taxes of $39.2 million and $73.0 million for the three-month and six-month periods endedJune 30, 2017. Factors contributing to this change were as follows:

• Net interest income increased$1.0 million and $7.1 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017.

• Total non-interest income decreased$45.6 million and $83.1 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017.

• The provision for credit losses decreased$7.4 million and $16.7 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017.

• Total expenses decreased$26.9 million and $25.0 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017.

103

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

SC

	Three-Month Period Ended June 30,				Six-Month Period Ended June 30,				QTD Change					YTD Change
(dollars in thousands)	2018		2017		2018		2017		Dollar increase/(decrease)			Percentage		Dollar increase/(decrease)			Percentage
Net interest income	$	946,572	$	1,053,673	$	1,868,311	$	2,096,600	$	(107,101	)	(10.2	)%	$	(228,289	)	(10.9	)%
Total non-interest income	567,693		432,373		1,099,429		867,221		135,320			31.3	%	232,208			26.8	%
Provision for credit losses	352,575		520,555		811,570		1,155,568		(167,980		)	(32.3	)%	(343,998		)	(29.8	)%
Total expenses	713,045		617,383		1,407,915		1,238,717		95,662			15.5	%	169,198			13.7	%
Income before income taxes	448,645		348,108		748,255		569,536		100,537			28.9	%	178,719			31.4	%
Intersegment revenue	—		—		—		—		—			0%		—			0.0%
Total assets	41,173,136		39,507,482		41,173,136		39,507,482		1,665,654			4.2	%	1,665,654			4.2	%

SC reported income before income taxes of $448.6 million and $748.3 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to income before income taxes of $348.1 million and $569.5 million for the three-month and six-month periods endedJune 30, 2017. Factors contributing to this change were as follows:

• Net interest income decreased$107.1 million and $228.3 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. These decreases were primarily related to an increase in interest expense during the periods. SC's cost of funds increased during the three- and six-month periods ended June 30, 2018 compared to the corresponding periods in 2017 due to higher market rates and increased spreads. In addition, net interest income decreased due a decline in the average outstanding balance of the RIC portfolio in 2018 compared to 2017.

• Total non-interest income increased$135.3 million and $232.2 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017, due to the continued growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.

• The provision for credit losses decreased$168.0 million and $344.0 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017. This decrease was primarily due to lower net charge offs during the three-month and six-month periods endedJune 30, 2018 compared to the corresponding periods in 2017.

• Total expenses increased$95.7 million and $169.2 million for the three-month and six-month periods endedJune 30, 2018, respectively, compared to the corresponding periods in 2017, primarily due to the continued growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.

104

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

FINANCIAL CONDITION

LOAN PORTFOLIO

The Company's loans held for investment ("LHFI") portfolioconsisted of the following at the dates indicated:

	June 30, 2018				December 31, 2017				June 30, 2017
(dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent
Commercial LHFI:
Commercial real estate loans	$	9,053,402	10.9	%	$	9,279,225	11.5	%	$	9,799,724	11.8	%
Commercial and industrial loans	14,695,706		17.7	%	14,438,311		17.9	%	16,129,649		19.4	%
Multifamily	8,323,925		10.0	%	8,274,435		10.1	%	8,240,516		9.9	%
Other commercial	7,466,771		9.0	%	7,174,739		8.9	%	6,902,989		8.4	%
Total Commercial Loans (1)	39,539,804		47.6	%	39,166,710		48.4	%	41,072,878		49.5	%
Consumer loans secured by real estate:
Residential mortgages	9,464,713		11.4	%	8,846,765		11.0	%	8,040,363		9.7	%
Home equity loans and lines of credit	5,682,230		6.8	%	5,907,733		7.3	%	5,903,913		7.1	%
Total consumer loans secured by real estate	15,146,943		18.2	%	14,754,498		18.3	%	13,944,276		16.8	%
Consumer loans not secured by real estate:
RICs and auto loans - originated	25,404,300		30.6	%	23,081,424		28.6	%	23,466,768		28.3	%
RICs and auto loans - purchased	1,246,606		1.5	%	1,834,868		2.3	%	2,554,220		3.1	%
Total RICs and auto loans	26,650,906		32.1	%	24,916,292		30.9	%	26,020,988		31.4	%
Personal unsecured loans	1,277,301		1.5	%	1,285,677		1.6	%	1,229,497		1.5	%
Other consumer	521,950		0.6	%	617,675		0.8	%	689,140		0.8	%
Total consumer loans	43,597,100		52.4	%	41,574,142		51.6	%	41,883,901		50.5	%
Total LHFI	$	83,136,904	100.0	%	$	80,740,852	100.0	%	$	82,956,779	100.0	%
Total LHFI with:
Fixed	$	52,903,597	63.6	%	$	50,653,790	62.7	%	$	50,623,536	61.0	%
Variable	30,233,307		36.4	%	30,087,062		37.3	%	32,333,243		39.0	%
Total LHFI	$	83,136,904	100.0	%	$	80,740,852	100.0	%	$	82,956,779	100.0	%

(1) As of June 30, 2018, the Company had $272.6 million of commercial loans that were denominated in a currency other than the U.S. dollar.

Commercial

Commercial loans increased approximately $373.1 million, or 1.0%, from December 31, 2017 to June 30, 2018. This increase was comprised of an increase in commercial and industrial loans of $257.4 million, and an increase in other commercial loans of $292.0 million, partially offset by a decrease in CRE loans of $225.8 million, as the Company switches its focus from CRE loans to place emphasis on core commercial business.

Commercial loans decreased approximately $1.5 billion, or 3.7%, from June 30, 2017 to June 30, 2018. This increase was primarily due to a decrease in commercial and industrial loans of $1.4 billion, due mainly to a decrease in CIB loans driven by strategy to reduce exposure to higher risk loans. Additionally, there was a increase in multifamily loans of $83.4 million as the Company switches its focus from CRE loans to place emphasis on core commercial business. CRE loans decreased$746.3 million.

105

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

	At June 30, 2018, Maturing
(in thousands)	In One Year Or Less		One to Five Years		After Five Years		Total(1)
CRE loans	$	2,284,651	$	5,299,622	$	1,469,129	$	9,053,402
Commercial and industrial loans and other	9,107,096		11,236,436		1,884,473		22,228,005
Multifamily loans	728,804		6,284,777		1,310,344		8,323,925
Total	$	12,120,551	$	22,820,835	$	4,663,946	$	39,605,332
Loans with:
Fixed rates	$	3,382,812	$	11,315,772	$	2,423,417	$	17,122,001
Variable rates	8,737,739		11,505,063		2,240,529		22,483,331
Total	$	12,120,551	$	22,820,835	$	4,663,946	$	39,605,332

(1) Includes LHFS.

Consumer Loans Secured By Real Estate

Consumer loans secured by real estate increased$392.4 million, or 2.7%, from December 31, 2017 to June 30, 2018. This increase was comprised of an increase in the residential mortgage portfolio of $617.9 million due to an increase in new loan originations, offset by a decrease in the home equity loans and lines of credit portfolio of $225.5 million.

Consumer loans secured by real estate increased$1.2 billion, or 8.6%, from June 30, 2017 to June 30, 2018. This increase was comprised of an increase in the residential mortgage portfolio of $1.4 billion due to an increase in new loan originations, offset by a decrease in the home equity loans and lines of credit portfolio of $221.7 million.

Consumer Loans Not Secured By Real Estate

RICs and auto loans

RICs and auto loans increased$1.7 billion, or 7.0%, from December 31, 2017 to June 30, 2018. The increase in the RIC and auto loan portfolio was primarily due to an increase in net originations of $2.3 billion, which was partially offset by a $588.3 milliondecrease in the RIC and auto loan portfolio-purchased. The decrease in the RIC and auto loan portfolio-purchased was due to run-off of the portfolio from normal paydown and chargeoff activity.

RICs increased$629.9 million, or 2.4%, from June 30, 2017 to June 30, 2018. The increase in the RIC and auto loan portfolio was primarily due to an $1.9 billionincrease in net origination activity, partially offset by a decrease in the RIC and auto loan portfolio-purchased of $1.3 billion. The decrease in the RIC and auto loan portfolio-purchased was due to run-off of the portfolio from normal paydown and chargeoff activity.

Personal unsecured and other consumer loans

Personal unsecured and other consumer loans decreased from December 31, 2017 to June 30, 2018, by $104.1 million and from June 30, 2017 to June 30, 2018 by $119.4 million.

As of June 30, 2018, 83.0% (excluding purchase accounting) of the Company's RIC and auto loan portfolio was comprised of nonprime loans (defined by the Company as customers with a Fair Isaac Corporation ("FICO^®) score of below 640) with customers who did not qualify for conventional consumer finance products as a result of, among other things, a lack of or adverse credit history, low income levels and/or the inability to provide adequate down payments. While underwriting guidelines were designed to establish that the customer would be a reasonable credit risk, nonprime loans will nonetheless experience higher default rates than a portfolio of obligations of prime customers. Additionally, higher unemployment rates, higher gasoline prices, unstable real estate values, re-sets of adjustable rate mortgages to higher interest rates, the general availability of consumer credit, and other factors that impact consumer confidence or disposable income could lead to an increase in delinquencies, defaults, and repossessions, as well as decrease consumer demand for used automobiles and other consumer products, weaken collateral values and increase losses in the event of default. Because SC's historical focus for such credit has been predominantly on nonprime consumers, the actual rates of delinquencies, defaults, repossessions, and losses on these loans could be more dramatically affected by a general economic downturn.

106

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

The Company's automated originations process for these credits reflects a disciplined approach to credit risk management to mitigate the risks of nonprime customers. The Company's robust historical data on both organically originated and acquired loans provides it with the ability to perform advanced loss forecasting. Each applicant is automatically assigned a proprietary custom score using information such as FICO scores, debt-to-income ("DTI") ratios, loan-to-value ("LTV") ratios, and over 30 other predictive factors, placing the applicant in one of 100 pricing tiers. The pricing in each tier is continuously monitored and adjusted to reflect market and risk trends. In addition to the Company's automated process, it maintains a team of underwriters for manual review, consideration of exceptions, and review of deal structures with dealers.

At June 30, 2018, a typical RIC was originated with an average annual percentage rate of 16.8% and was purchased from the dealer at a discount of 0.004%. All of the Company's RICs and auto loans are fixed-rate loans.

Nonprime RICs and personal unsecured loans have a higher inherent risk of loss than prime loans. The Company records an ALLL to cover its estimate of inherent losses on its RICs incurred as of the balance sheet date. As of June 30, 2018, SC's personal unsecured portfolio was held for sale and thus does not have a related allowance.

As a result of the strategic evaluation of SC's personal lending portfolio, in the third quarter of 2015, SC began reviewing strategic alternatives for exiting its personal loan portfolios. In connection with this review, on October 9, 2015, SC delivered a 90-day notice of termination of its loan purchase agreement with LendingClub. On February 1, 2016, SC completed the sale of substantially all of its LendingClub loans to a third-party buyer at an immaterial premium to par value. On April 14, 2017, SC sold the remaining portfolio, comprised of personal installment loans, to a third-party buyer.

SC's other significant personal lending relationship is with Bluestem. SC continues to perform in accordance with the terms and operative provisions of the agreements under which it is obligated to purchase personal revolving loans originated by Bluestem for a term ending in 2020, or 2022 if extended at Bluestem's option. The Bluestem loan portfolio is carried as held for sale in our Condensed Consolidated Financial Statements. Accordingly, the Company has recorded lower-of-cost-or-market adjustments on this portfolio, and there may be further such adjustments required in future periods' financial statements. Management is currently evaluating alternatives for the Bluestem portfolio.

CREDIT RISK MANAGEMENT

Extending credit to customers exposes the Company to credit risk, which is the risk that contractual principal and interest due on loans will not be collected due to the inability or unwillingness of the borrower to repay the loan. The Company manages credit risk in its loan portfolio through adherence to consistent standards, guidelines, and limitations established by the Company’s Board of Directors as set forth in its Board-approved Risk Appetite Statement. Written loan policies establish underwriting standards, lending limits, and other standards or limits deemed necessary and prudent. Various approval levels based on the amount of the loan and other key credit attributes have also been established. To ensure credit quality, 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 liquidity and value of the collateral, economic conditions, or other factors. Loan credit quality is subject to scrutiny by business unit management, credit risk professionals, and Internal Audit.

The following discussion summarizes the underwriting policies and procedures for the major categories within the loan portfolio and addresses SHUSA’s strategies for managing the related credit risk. Additional credit risk management related considerations are discussed further in the "Allowance for Loan and Lease Losses" section of this MD&A.

107

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

Commercial Loans

Commercial loans principally represent commercial real estate loans (including multifamily loans), loans to commercial and industrial customers, and automotive dealer floor plan loans. Credit risk associated with commercial loans is primarily influenced by prevailing and expected economic conditions and the level of underwriting risk SHUSA is willing to assume. To manage credit risk when extending commercial credit, the Company focuses on assessing the borrower’s capacity and willingness to repay and obtaining sufficient collateral. Commercial and industrial loans are generally secured by the borrower’s assets and by personal guarantees. Commercial real estate loans are originated primarily within the Mid-Atlantic, New York, and New England market areas and are secured by real estate at specified LTV ratios and often by a guarantee of the borrower.

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 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.

108

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 Ended						Change
(dollars in thousands)	June 30, 2018			December 31, 2017			Dollar			Percentage
Non-accrual loans:
Commercial:
CRE	$	123,305		$	139,236		$	(15,931	)	(11.4	)%
Commercial and industrial loans	162,134			230,481			(68,347		)	(29.7	)%
Multifamily	28,501			11,348			17,153			151.2	%
Other commercial	77,052			83,468			(6,416		)	(7.7	)%
Total commercial loans	390,992			464,533			(73,541		)	(15.8	)%
Consumer loans secured by real estate:
Residential mortgages	241,886			265,436			(23,550		)	(8.9	)%
Home equity loans and lines of credit	125,834			134,162			(8,328		)	(6.2	)%
Consumer loans not secured by real estate:
RICs and auto loans - originated	1,924,294			1,816,226			108,068			6.0	%
RICs - purchased	203,346			256,617			(53,271		)	(20.8	)%
Total RICs and Auto loans	2,127,640			2,072,843			54,797			2.6	%
Personal unsecured loans	7,035			2,366			4,669			197.3	%
Other consumer	8,570			10,657			(2,087		)	(19.6	)%
Total consumer loans	2,510,965			2,485,464			25,501			1.0	%
Total non-accrual loans	2,901,957			2,949,997			(48,040		)	(1.6	)%
Other real estate owned	118,502			130,777			(12,275		)	(9.4	)%
Repossessed vehicles	147,430			210,692			(63,262		)	(30.0	)%
Other repossessed assets	1,212			2,190			(978		)	(44.7	)%
Total other real estate owned ("OREO") and other repossessed assets	267,144			343,659			(76,515		)	(22.3	)%
Total non-performing assets	$	3,169,101		$	3,293,656		$	(124,555	)	(3.8	)%
Past due 90 days or more as to interest or principal and accruing interest	$	88,162		$	96,461		n/a			n/a
Annualized net loan charge-offs to average loans (1)	2.4		%	3.0		%	n/a			n/a
Non-performing assets as a percentage of total assets	2.4		%	2.6		%	n/a			n/a
NPLs as a percentage of total loans	3.4		%	3.5		%	n/a			n/a
ALLL as a percentage of total NPLs	131.3		%	132.6		%	n/a			n/a

(1) Annualized net loan charge-offs to average loans is calculated as annualized net loan charge-offs divided by the average loan balance for the year-to-date period ended June 30, 2018.

Potential problem loans are loans not currently classified as NPLs for which management has doubts about the borrowers’ ability to comply with the present repayment terms. These assets are principally loans delinquent more than 30 days but less than 90 days. Potential problem commercial loans totaled approximately $110.7 million and $112.3 million at June 30, 2018 and December 31, 2017, respectively. Potential problem consumer loans amounted to $3.7 billion and $4.2 billion at June 30, 2018 and December 31, 2017, respectively. Management has included these loans in its evaluation and reserved for them during the respective periods.

Non-performing assets decreased during the period to $3.2 billion, or 2.4% of total assets, at June 30, 2018, compared to $3.3 billion, or 2.6% of total assets, at December 31, 2017, primarily attributable to an decrease in NPLs in the commercial and industrial and RIC and auto loan portfolios.

109

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

The increase in RIC non-accrual loans as of June 30, 2018 was the result of the Company classifying $1.0 billion of RIC TDR loans that were less than 60 days past due, but for which repayment was not reasonably assured, as non-accrual. Until repayment is reasonably assured, the Company is applying the cost recovery method to this RIC portfolio, which accelerated the reduction of the outstanding RIC balance and correspondingly reduced the required allowance and decreased the allowance for loan losses as a percentage of the NPL ratio. In addition, the purchased RIC ALLL balance as a percentage of NPL portfolio decreased primarily due to a $0.6 billion, or 32.1%, decline in the portfolio since December 31, 2017 as it is in run-off.

General

Non-performing assets consist of NPLs, which represent loans and leases no longer accruing interest, OREO properties, and other repossessed assets. When interest accruals are suspended, accrued but uncollected interest income is reversed, with accruals charged against earnings. The Company generally places all commercial loans and consumer loans secured by real estate on non-performing status at 90 days past due for interest, principal or maturity, or earlier if it is determined that the collection of principal or interest on the loan is in doubt. For certain individual portfolios, including the RIC portfolio, non-performing status will begin when the RICs are more than 60 days past due. Personal unsecured loans, including credit cards, generally continue to accrue interest until they are 180 days delinquent, at which point they are charged-off and all accrued but uncollected interest is removed from interest income. 

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$73.5 million from December 31, 2017 to June 30, 2018. Commercial NPLs accounted for 1.0% and 1.2% of commercial LHFI at June 30, 2018 and December 31, 2017, respectively. The decrease in commercial NPLs was comprised of a $74.8 million decrease in commercial and industrial NPLs, and a $15.9 million decrease in the CRE portfolio, partially offset by a $17.2 million increase in the Multifamily portfolio.

Consumer Loans Not Secured by Real Estate

RICs and amortizing personal loans are classified as non-performing when they are greater than 60 days past due (i.e., 61 days past due) with respect to principal or interest. Except for loans accounted for using the FVO, at the time a loan is placed on non-performing status, previously accrued and uncollected interest is reversed against interest income. When an account is 60 days or less past due, it is returned to performing status and the Company returns to accruing interest on the loan. The accrual of interest on revolving personal loans continues until the loan is charged off.

RIC TDRs are placed on non-accrual status when the Company believes repayment under the revised terms is not reasonably assured and, at the latest, when the account becomes past due more than 60 days. For loans on non-accrual status, interest income is recognized on a cash basis; however, the Company continues to assess the recognition of cash received on those loans in order to identify whether certain of those loans should also be placed on a cost recovery basis. For TDR loans on non-accrual status, the accrual of interest is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due. However, for TDR loans placed on cost recovery basis, the Company returns to accrual when a sustained period of repayment performance has been achieved. Based on deteriorating TDR vintage performance, beginning January 1, 2017, the Company believes repayment under the revised terms is not reasonably assured for a RIC that is already on non-accrual status (i.e., more than 60 days past due) and has received a modification or deferment that qualifies as a TDR event. In addition, any TDR that subsequently receives a third deferral is placed on non-accrual status. Further, the Company has determined that certain of these loans should also be placed on a cost recovery basis.

Interest is accrued when earned in accordance with the terms of the RIC. For reporting of past due loans, with respect to RICs originated through our "Chrysler Capital" channel, the required minimum payment is 90% of the scheduled payment. With respect to RICs originated by the Company or acquired from an unaffiliated third-party originator on or after January 1, 2017, the required minimum payment is 90% of the scheduled payment, whereas previous to January 1, 2017, the required minimum payment for certain RICs was 50% of the scheduled payment. The Company aggregates partial payments in determining whether a full payment has been missed in computing past due status.

110

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

NPLs in the RIC and auto loan portfolio increased$54.8 million from December 31, 2017 to June 30, 2018. At June 30, 2018, non-performing RICs and auto loans accounted for 8.0% of total RIC and auto LHFI, compared to 8.3% of total RICs and auto loans at December 31, 2017.

NPLs in the personal unsecured and other consumer loan portfolio increased$2.6 million from December 31, 2017 to June 30, 2018. At June 30, 2018 and December 31, 2017, non-performing personal unsecured and other consumer loans accounted for 0.9% and 0.7% of total unsecured and other consumer loans, respectively.

Consumer Loans Secured by Real Estate

The following table shows NPLs compared to total loans outstanding for the residential mortgage and home equity portfolios as of June 30, 2018 and December 31, 2017, respectively:

	June 30, 2018						December 31, 2017
(dollars in thousands)	Residential mortgages			Home equity loans and lines of credit			Residential mortgages			Home equity loans and lines of credit
NPLs	$	241,886		$	125,834		$	265,436		$	134,162
Total LHFI	9,464,713			5,682,230			8,846,765			5,907,733
NPLs as a percentage of total LHFI	2.6		%	2.2		%	3.0		%	2.3		%
NPLs in foreclosure status	43.2		%	51.5		%	48.8		%	52.2		%

The NPL ratio is higher for the Company's residential mortgage loan portfolio compared to its consumer loans secured by real estate portfolio due to a number of factors, including the prolonged workout and foreclosure resolution processes for residential mortgage loans, differences in risk profiles, and mortgage loans located outside the Northeast and Mid-Atlantic United States.

Foreclosure Activity

In recent years, select states and territories within the Bank’s footprint have experienced delays in the foreclosure process, which has impacted NPL volume. Counties in New Jersey have historically displayed significant delays in foreclosure sale timelines and New York has been experiencing similar court delays, which impacts foreclosure inventory outflow.

Puerto Rico’s economy remains in an economic and fiscal crisis that has already extended for 11 years. The island’s economy continues experiencing adjustments related to the aftermath of the housing market crisis, the banking industry consolidation in 2010 and multiple rounds of austerity measures implemented in recent years in an attempt to stabilize the public sector. These circumstances have eroded confidence and prolonged the contraction in economic activity prior to the impact of 2017's hurricanes. Refer to the "Economic and Business Environment" section of this MD&A for additional information on the impact of Hurricane Maria on Puerto Rico.

The following table represents the concentration of foreclosures by state and U.S. territory for the Company as a percentage of total foreclosures at June 30, 2018 and December 31, 2017, respectively:

	June 30, 2018	December 31, 2017
Puerto Rico	58.0%	53.5%
New Jersey	10.2%	13.7%
New York	8.8%	6.4%
Pennsylvania	4.9%	10.9%
Massachusetts	8.3%	5.8%
All other states(1)	9.8%	9.7%

(1) States included in this category individually represent less than 10% of total foreclosures.

111

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

The foreclosure closings issue has a greater impact on the residential mortgage portfolio than the consumer real estate secured portfolio due to the larger volume of loans in first lien position in that portfolio which have equity upon which to foreclose. Exclusive of Chapter 7 bankruptcy NPL accounts, approximately 98.7% of the 90+ day delinquent loan balances in the residential mortgage portfolio are secured by a first lien, while only 51.5% of the 90+ day delinquent loan balances in the consumer real estate secured portfolio are secured by a first lien. Consumer real estate secured NPLs may get charged off more quickly due to the lack of equity to foreclose from a second lien position.

Alt-A Loans

The Alt-A segment consists of loans with limited documentation requirements, a portion of which were originated through independent parties ("Brokers") outside the Bank's geographic footprint. At June 30, 2018 and December 31, 2017, the residential mortgage portfolio included the following Alt-A loans:

(dollars in thousands)	June 30, 2018			December 31, 2017
Alt-A loans	$	349,054		$	386,412
Alt-A loans as a percentage of the residential mortgage portfolio(1)	3.6		%	4.3		%
Alt-A loans in NPL status	$	24,421		$	33,534
Alt-A loans in NPL status as a percentage of residential mortgage NPLs	10.1		%	12.6		%

(1) Includes residential mortgage held for sale.

The performance of the Alt-A segment has remained poor, averaging an 7.0% NPL ratio in 2018. Alt-A mortgage originations were discontinued in 2008. Alt-A NPL balances represented 64.6% of the total residential mortgage loan portfolio NPL balance at the end of the first quarter of 2009, when the portfolio was placed in run-off, compared to 10.1% at June 30, 2018. As the Alt-A segment runs off and higher quality residential mortgages are added to the portfolio, the shift in product mix is expected to lower NPL balances as a percentage of the residential mortgage portfolio.

Delinquencies

At June 30, 2018 and December 31, 2017, the Company's delinquencies consisted of the following:

	June 30, 2018					December 31, 2017
(dollars in thousands)	Consumer Loans Secured by Real Estate	RICs and auto loans	Personal unsecured and Other Consumer Loans	Commercial Loans	Total	Consumer Loans Secured by Real Estate	RICs and auto loans	Personal unsecured and Other Consumer Loans	Commercial Loans	Total
Total delinquencies	$509,364	$3,590,357	$216,637	$285,219	$4,601,577	$571,229	$4,225,517	$229,547	$295,138	$5,321,431
Total loans(1)	$15,404,646	$26,931,019	$2,755,706	$39,605,332	$84,696,703	$14,964,668	$26,017,340	$2,965,442	$39,315,888	$83,263,338
Delinquencies as a % of loans	3.3%	13.3%	7.9%	0.7%	5.4%	3.8%	16.2%	7.7%	0.8%	6.4%

(1) Includes LHFS.

Overall, total delinquencies decreased by $719.9 million, or 13.5%, from December 31, 2017 to June 30, 2018 primarily driven by RICs and auto loan delinquencies, which decreased$635.2 million. Delinquencies may vary from period to period based upon the average age or seasoning of the portfolio, seasonality within the calendar year, and economic factors. Historically, the Company's delinquencies have been highest in the period from November through January due to consumers’ holiday spending. Commercial loan delinquencies decreased by $9.9 million from December 31, 2017 to June 30, 2018, primarily related to commercial and industrial loans located in Puerto Rico due to overall economic conditions on the island.

112

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

TDRs

TDRs are loans that have been modified as the Company has agreed to make certain concessions to both meet the needs of the customers and maximize its ultimate recovery on the loans. TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified with terms that would otherwise not be granted to the borrower. The types of concessions granted are generally interest rate reductions, limitations on accrued interest charged, term extensions, and deferments of principal.

TDRs are generally placed in nonaccrual status upon modification, unless the loan was performing immediately prior to modification. For most portfolios, TDRs may return to accrual status after demonstrating at least six consecutive months of sustained payments following modification, as long as the Company believes the principal and interest of the restructured loan will be paid in full. RIC TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured, and considered for return to accrual when a sustained period of repayment performance has been achieved. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on the operation of the collateral, the loan may be returned to accrual status based on the foregoing parameters. To the extent the TDR is determined to be collateral-dependent and the source of repayment depends on disposal of the collateral, the loan may not be returned to accrual status.

The following table summarizes TDRs at the dates indicated:

	As of June 30, 2018
(in thousands)	Commercial			%		Consumer loans secured by real estate			%		RICs and auto loans			%		Other consumer			%		Total TDRs
Performing	$	149,934		51.8	%	$	275,411		71.2	%	$	5,261,972		91.1	%	$	121,983		75.5	%	$	5,809,300
Non-performing	139,702			48.2	%	111,333			28.8	%	513,330			8.9	%	39,641			24.5	%	804,006
Total	$	289,636		100.0	%	$	386,744		100.0	%	$	5,775,302		100.0	%	$	161,624		100.0	%	$	6,613,306
% of loan portfolio	0.7		%	n/a		2.5		%	n/a		21.4		%	n/a		5.9		%	n/a		7.8		%
(1) Includes LHFS
	As of December 31, 2017
(in thousands)	Commercial			%		Consumer loans secured by real estate			%		RICs and auto loans			%		Other consumer			%		Total TDRs
Performing	$	146,808		54.4	%	$	292,634		70.8	%	$	5,270,507		88.3	%	$	114,355		74.7	%	$	5,824,304
Non-performing	123,266			45.6	%	120,458			29.2	%	700,461			11.7	%	38,683			25.3	%	982,868
Total	$	270,074		100.0	%	$	413,092		100.0	%	$	5,970,968		100.0	%	$	153,038		100.0	%	$	6,807,172
% of loan portfolio	0.7		%	n/a		2.8		%	n/a		22.9		%	n/a		5.2		%	n/a		8.2		%

(1) Includes LHFS

The following table provides a summary of TDR activity:

	Six-Month Period Ended June 30, 2018						Six-Month Period Ended June 30, 2017
(in thousands)	RICs and auto loans			All other loans			RICs and auto loans			All other loans(1)
TDRs, beginning of period	$	5,975,512		$	831,660		$	5,161,935		$	944,981
New TDRs(1)	283,688			82,000			2,062,608			163,156
Charged-Off TDRs	(311,758		)	(7,088		)	(1,091,066		)	(132,541		)
Sold TDRs	—			—			—			(7,252		)
Payments on TDRs	(172,140		)	(68,568		)	(556,121		)	(24,222		)
TDRs, end of period	$	5,775,302		$	838,004		$	5,577,356		$	944,122

(1) New TDRs includes drawdowns on lines of credit that have previously been classified as TDRs.

In accordance with its policies and guidelines, the Company at times offers payment deferrals to borrowers on its RICs, under which the consumer is allowed to move up to three delinquent payments to the end of the loan. More than 90% of deferrals granted are for two months. The policies and guidelines limit the number and frequency of deferrals that may be granted to one deferral every six months and eight months over the life of a loan, while some marine and RV contracts have a maximum of twelve months in extensions to reflect their longer term. Additionally, the Company generally limits the granting of deferrals on new accounts until a requisite number of payments has been received. During the deferral period, the Company continues to accrue and collect interest on the loan in accordance with the terms of the deferral agreement.

113

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

At the time a deferral is granted, all delinquent amounts may be deferred or paid, resulting in the classification of the loan as current and therefore not considered delinquent. Thereafter, the account is aged based on the timely payment of future installments in the same manner as any other account. TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured, and considered for return to accrual when a sustained period of repayment performance has been achieved.

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

Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts used in the determination of the adequacy of the ALLL for loans classified as TDRs are also impacted. Increased use of deferrals may result in a lengthening of the loss confirmation period, which would increase expectations of credit losses inherent in the portfolio and therefore increase the ALLL and related provision for loan and lease losses. Changes in these ratios and periods are considered in determining the appropriate level of the ALLL and related provision for loan and lease losses. For loans that are classified as TDRs, the Company generally compares the present value of expected cash flows to the outstanding recorded investment of TDRs to determine the amount of allowance and related provision for credit losses that should be recorded. For loans that are considered collateral-dependent, such as certain bankruptcy modifications, impairment is measured based on the fair value of the collateral, less its estimated costs to sell.

ACL

The ACL is maintained at levels management considers adequate to provide for losses based upon an evaluation of known and inherent risks in the loan portfolio. Management's evaluation takes into consideration the risks inherent in the portfolio, past loan and lease loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, the level of originations, credit quality metrics such as FICOscores and CLTV, internal risk ratings, economic conditions and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the ACL may be necessary if conditions differ substantially from the assumptions used in making the evaluations.

The following table presents the allocation of the ALLL and the percentage of each loan type to total LHFI at the dates indicated:

	June 30, 2018				December 31, 2017
(dollars in thousands)	Amount		% of Loans to Total LHFI		Amount		% of Loans to Total LHFI
Allocated allowance:
Commercial loans	$	426,820	47.6	%	$	443,796	48.4	%
Consumer loans	3,336,891		52.4	%	3,420,756		51.6	%
Unallocated allowance	47,023		n/a		47,023		n/a
Total ALLL	3,810,734		100.0	%	3,911,575		100.0	%
Reserve for unfunded lending commitments	86,973				109,111
Total ACL	$	3,897,707			$	4,020,686

General

The ACL decreased $123.0 million from December 31, 2017 to June 30, 2018. The change in the overall ACL was primarily attributable to the decreased amount of TDRs within SC's RIC and auto loan portfolio.

Management regularly monitors the condition of the Company's portfolio, considering factors such as historical loss experience, trends in delinquencies and NPLs, changes in risk composition and underwriting standards, the experience and ability of staff, and regional and national economic conditions and trends.

114

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

Generally, the Company’s LHFI are carried at amortized cost, net of ALLL, which includes the estimate of any related net discounts that are expected at the time of charge-off. In the case of loans purchased in a bulk purchase or business combination, the entire discount on the loan portfolio is considered as available to absorb the credit losses when determining the ALLL. For these loans, the Company records provisions for credit losses when incurred losses exceed the unaccreted purchase discount.

The risk factors inherent in the ACL are continuously reviewed and revised by management when conditions indicate that the estimates initially applied are different from actual results. The Company also performs a comprehensive analysis of the ACL on a quarterly basis. In addition, the Company performs a review each quarter of allowance levels and trends by major portfolio against the levels of peer banking institutions to benchmark our allowance and industry norms.

Commercial

For the commercial loan portfolio excluding small business loans (businesses with annual sales of up to $3.0 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.

A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay (e.g., less than 90 days) or insignificant shortfall in the amount of payments does not necessarily result in the loan being identified as impaired. Impaired commercial loans are comprised of all TDRs plus non-accrual loans in excess of $1 million that are not TDRs. In addition, the Company may perform a specific reserve analysis on loans that fail to meet this threshold if the nature of the collateral or business conditions warrant. The Company performs a specific reserve analysis on certain loans regardless of loan size. If a loan is identified as impaired and is collateral-dependent, an initial appraisal is obtained to provide a baseline to determine the property’s fair market value. The frequency of appraisals depends on the type of collateral being appraised. If the collateral value is subject to significant volatility (due to location of the asset, obsolescence, etc.), an appraisal is obtained more frequently. At a minimum, updated appraisals for impaired loans are obtained within a 12-month period if the loan remains outstanding for that period of time.

If a loan is identified as impaired and is not collateral-dependent, impairment is measured based on a DCF methodology.

When the Company determines that the value of an impaired loan is less than its carrying amount, the Company recognizes impairment through a provision estimate or a charge-off to the allowance. Management performs these assessments on at least a quarterly basis. For commercial loans, a charge-off is recorded when a loan, or a portion thereof, is considered uncollectible and of such little value that its continuance on the Company’s books as an asset is not warranted. Charge-offs are recorded on a monthly basis, and partially charged-off loans continue to be evaluated on at least a quarterly basis, with additional charge-offs or loan and lease loss provisions taken on the remaining loan balance, if warranted, utilizing the same criteria.

The portion of the ALLL related to the commercial portfolio was $426.8 million at June 30, 2018 (1.1% of commercial LHFI) and $443.8 million at December 31, 2017 (1.1% of commercial LHFI). The primary factor resulting in the decreased ACL allocated to the commercial portfolio is, in part, due to a decline in the overall balance of the commercial real estate loan portfolio.

115

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

Consumer

The consumer loan and small business loan portfolios are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, LTV ratios, and internal and external credit scores. Management evaluates the consumer portfolios throughout their life cycles on a portfolio basis. When problem loans are identified that are secured with collateral, management examines the loan files to evaluate the nature and type of collateral. Management documents the collateral type, the date of the most recent valuation, and whether any liens exist to determine the value to compare against the committed loan amount.

Residential mortgages not adequately secured by collateral are generally charged-off to fair value less cost to sell when deemed to be uncollectible or are delinquent 180 days or more, whichever comes first, unless it can be clearly demonstrated that repayment will occur regardless of the delinquency status. Examples that would demonstrate repayment likelihood include a loan that is secured by collateral and is in the process of collection, a loan supported by a valid guarantee or insurance, or a loan supported by a valid claim against a solvent estate.

For residential mortgage loans, loss severity assumptions are incorporated into the loan and lease loss reserve models to estimate loan balances that will ultimately charge-off. These assumptions are based on recent loss experience within various CLTV bands in these portfolios. CLTVs are refreshed quarterly by applying Federal Housing Finance Agency Home Price Index changes at a state-by-state level to the last known appraised value of the property to estimate the current CLTV. The Company's ALLL incorporates the refreshed CLTV information to update the distribution of defaulted loans by CLTV as well as the associated loss given default for each CLTV band. Reappraisals at the individual property level are not considered cost-effective or necessary on a recurring basis; however, reappraisals are performed on certain higher risk accounts to support line management activities and default servicing decisions, or when other situations arise for which the Company believes the additional expense is warranted.

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 25.3% of its junior lien home equity principal balances. Of the junior lien home equity loan and line of credit balances that are current, 1.1% have a senior lien that is one or more payments past due. When the senior lien is delinquent but the junior lien is current, allowance levels are adjusted to reflect loss estimates consistent with the delinquency status of the senior lien. The Company also extrapolates these impacts to the junior lien portfolio when the senior lien is serviced by another investor and the delinquency status of that senior lien is unknown.

Depository and lending institutions in the U.S. generally are expected to experience a significant volume of home equity lines of credit that will be approaching the end of their draw periods over the next several years, following the growth in home equity lending experienced during 2003 through 2007. As a result, many of these home equity lines of credit will either convert to amortizing loans or have principal due as balloon payments. The Company's home equity lines of credit generated after 2007 are generally open-ended, revolving loans with fixed-rate lock options and draw periods of up to 10 years, along with amortizing repayment periods of up to 20 years. The Company currently monitors delinquency rates for amortizing and non-amortizing lines, as well as other credit quality metrics, including FICO credit scoring model scores and LTV ratios. The Company's home equity lines of credit are generally underwritten considering fully drawn and fully amortizing levels. As a result, the Company currently does not anticipate a significant deterioration in credit quality when these home equity lines of credit begin to amortize.

116

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

For RICs and personal unsecured loans at SC, the Company maintains an ALLL for the Company's held-for-investment portfolio not classified as TDRs at a level estimated to be adequate to absorb credit losses of the recorded investment inherent in the portfolio, based on a holistic assessment, including both quantitative and qualitative considerations. For TDR loans, the allowance is comprised of impairment measured using a DCF model. RICs and personal unsecured loans are considered separately in assessing the required ALLL using product-specific allowance methodologies applied on a pooled basis.

The quantitative framework is supported by credit models that consider several credit quality indicators including, but not limited to, historical loss experience and current portfolio trends. The transition-based Markov model provides data on a granular and disaggregated/segment basis as it utilizes recently observed loan transition rates from various loan statuses to forecast future losses. Transition matrices in the Markov model are categorized based on account characteristics such as delinquency status, TDR type (e.g., deferment, modification, etc.), internal credit risk, origination channel, months on book, thin/thick file and time since TDR event. The credit models utilized differ among the Company's RIC and personal loan portfolios. The credit models are adjusted by management through qualitative reserves to incorporate information reflective of the current business environment.

Auto loans are charged off when an account becomes 120 days delinquent if the Company has not repossessed the vehicle. The Company writes the vehicle down to the estimated recovery amount of the collateral when the automobile is repossessed and legally available for disposition.

The allowance for consumer loans was $3.3 billion and $3.4 billion at June 30, 2018 and December 31, 2017, respectively. The allowance as a percentage of held-for-investment consumer loans was 7.7% at June 30, 2018 and 8.2% at December 31, 2017. The increase in the allowance for consumer loans was primarily attributable to SC's RIC and auto loan portfolio growth.

The Company's allowance models and reserve levels are back-tested on a quarterly basis to ensure that both remain within appropriate ranges. As a result, management believes that the current ALLL is maintained at a level sufficient to absorb inherent losses in the consumer portfolios.

Unallocated

The Company reserves for certain inherent but undetected losses that are probable within the loan and lease portfolios. This is considered to be reasonably sufficient to absorb imprecisions of models and to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolios. These imprecisions may include loss factors inherent in the loan portfolio that may not have been discreetly contemplated in the general and specific components of the allowance, as well as potential variability in estimates. Period-to-period changes in the Company's historical unallocated ALLL positions are considered in light of these factors. The unallocated ALLL was $47.0 million at both June 30, 2018 and December 31, 2017.

Reserve for Unfunded Lending Commitments

In addition to the ALLL, the Company estimates probable losses related to unfunded lending commitments. The reserve for unfunded lending commitments consists of two elements: (i) an allocated reserve, which is determined by an analysis of historical loss experience and risk factors, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information, and (ii) an unallocated reserve to account for a level of imprecision in management's estimation process. Additions to the reserve for unfunded lending commitments are made by charges to the provision for credit losses, and this reserve is classified within Other liabilities on the Company's Condensed Consolidated Balance Sheets. Once an unfunded lending commitment becomes funded and is carried as a loan, the corresponding reserves are transferred to the ALLL.

The reserve for unfunded lending commitments decreased from $109.1 million at December 31, 2017 to $87.0 million at June 30, 2018. During the six-month period endedJune 30, 2018, the reserve for unfunded commitments decreased by approximately $22 million primarily due to the funding of a letter of credit. At the time of funding, the letter of credit had an associated reserve of $14.5 million which was transferred to the ALLL. The remaining decrease of the unfunded reserve is primarily related to the Company strategically reducing its exposure to certain business relationships and industries. The net impact of the change in the reserve for unfunded lending commitments to the overall ACL was immaterial.

INVESTMENT SECURITIES

Investment securities consist primarily of U.S. Treasuries, MBS, ABS and stock in the FHLB and FRB. MBS consist of pass-through, collateralized mortgage obligations (“CMOs"), and adjustable rate mortgages issued by federal agencies. The Company’s MBS are either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by S&P and Moody’s Investor Service at the

117

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

date of issuance. The Company’s AFS investment strategy is to purchase liquid fixed-rate and floating-rate investments to manage the Company's liquidity position and interest rate risk adequately.

Total investment securities AFS decreased$1.3 billion to $13.1 billion at June 30, 2018, compared to $14.4 billion at December 31, 2017. During the six-month period endedJune 30, 2018, the composition of the Company's investment portfolio changed due to a decrease in MBS and ABS, offset by an increase in U.S Treasury securities. MBS decreased by $1.9 billion primarily due to a transfer to HTM for $1.2 billion and $1.0 billion of principal paydowns and maturities, partially offset by purchases of $359.1 million. U.S. Treasuries increased by $619.7 million primarily due to investment purchases of $593.0 million. For additional information with respect to the Company’s investment securities, see Note 3 to the Condensed Consolidated Financial Statements.

Debt securities for which the Company has the positive intent and ability to hold the securities until maturity are classified as HTM securities. HTM securities are reported at cost and adjusted for amortization of premium and accretion of discount. Total investment securities HTM were $2.9 billion at June 30, 2018. The Company had 71 investment securities classified as HTM as of June 30, 2018.

Total gross unrealized losses on investment securities AFS increased by $174.0 million during the six-month period endedJune 30, 2018. The increase was comprised of an increase in unrealized losses of $166.0 million on MBS, primarily due to rising interest rates.

Other investments, which consists primarily of FHLB stock and FRB stock, increased from $658.9 million at December 31, 2017 to $700.9 million at June 30, 2018, primarily due to an increase in CDs greater than 90 days to maturity and Low Income Housing Tax Credit ("LIHTC") investments of $30.0 million and $27.8 million, respectively. In addition, the Company purchased $34.1 million of FHLB stock at par during the six-month period endedJune 30, 2018, which was offset by the redemption of $63.0 million of FHLB stock at par during the same period. There was no gain or loss associated with these redemptions. During the six-month period endedJune 30, 2018, the Company did not purchase any FRB stock.

The average life of the AFS investment portfolio (excluding certain ABS) at June 30, 2018 was approximately 4.71 years. The average effective duration of the investment portfolio (excluding certain ABS) at June 30, 2018 was approximately 3.51 years. The actual maturities of MBS AFS will differ from contractual maturities because borrowers 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:

(in thousands)	June 30, 2018		December 31, 2017
Investment securities AFS:
U.S. Treasury securities and government agencies	$	6,176,533	$	7,042,828
FNMA and FHLMC securities	6,404,390		6,840,696
State and municipal securities	20		23
Other securities (1)	483,930		529,636
Total investment securities AFS	13,064,873		14,413,183
Investment securities HTM:
U.S. government agencies	2,920,087		1,799,808
Total investment securities HTM(2)	2,920,087		1,799,808
Trading securities	—		—
Other investments	700,858		658,864
Total investment portfolio	$	16,685,818	$	16,871,855

(1) Other securities primarily include corporate debt securities and ABS.

(2) HTM securities are measured and presented at amortized cost.

The following table presents the securities of single issuers (other than obligations of the United States and its political subdivisions, agencies, and corporations) having an aggregate book value in excess of 10% of the Company's stockholder's equity that were held by the Company at June 30, 2018:

118

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

	June 30, 2018
(in thousands)	Amortized Cost		Fair Value
FNMA	$	3,627,256	$	3,498,765
FHLMC	3,035,095		2,905,625
GNMA (1)	7,605,004		7,385,230
Government - Treasuries	1,632,805		1,617,802
Total	$	15,900,160	$	15,407,422

(1) Includes U.S. government agency MBS.

GOODWILL

The Company records the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired less the fair value of liabilities assumed as goodwill. Consistent with ASC 350, the Company does not amortize goodwill, and reviews the goodwill recorded for impairment on an annual basis or more frequently when events or changes in circumstances indicate the potential for goodwill impairment. At June 30, 2018, goodwill totaled $4.4 billion and represented 3.4% of total assets and 18.4% of total stockholder's equity. The following table shows goodwill by reporting units at June 30, 2018:

(in thousands)	Consumer and Business Banking		Commercial Banking		CIB		SC		Total
Goodwill	$	1,880,304	$	1,412,995	$	131,130	$	1,019,960	$	4,444,389

During the first quarter of 2018, the reportable segments (and reporting units) formerly known as Commercial Banking and CRE were combined and presented as Commercial Banking. Refer to Note 18 for further discussion on the change in reportable segments. There were no additions or removals of underlying lines of business in connection with this reporting change. As a result, goodwill assigned to these former reporting units of $542.6 million and $870.4 million, for Commercial Banking and CRE, respectively, have been combined. There were no additions or impairments of goodwill for the three-month and six-month periods endedJune 30, 2018.

During the second quarter of 2018, Santander renamed its Global and Corporate Banking business to CIB to more accurately reflect its business strategy and business proposition to clients, and to align with the name used by a majority of its competitors in the industry. There were no changes to composition of the reportable segment or reporting unit as a result of this change.

The Company conducted its annual goodwill impairment tests as of October 1, 2017 using generally accepted valuation methods. The Company completes a quarterly review for impairment indicators over each of its reporting units, which includes consideration of economic and organizational factors that could impact the fair value of the Company's reporting units. At the completion of the second quarter review, the Company did not identify any indicators which resulted in the Company's conclusion that an interim impairment test would be required to be completed. As discussed further in the section of this MD&A above captioned “Executive Summary,” SC and FCA are in exploratory discussions regarding the Chrysler Agreement that could have a future impact on the Company's goodwill.

OFF-BALANCE SHEET ARRANGEMENTS

See further discussion of the Company's off-balance sheet arrangements in Note 6 and Note 16 to the Condensed Consolidated Financial Statements, and the Liquidity and Capital Resources section of this MD&A.

For a discussion of the status of litigation with which the Company is involved with the Internal Revenue Service, please refer to Note 13 to the Condensed Consolidated Financial Statements.

BANK REGULATORY CAPITAL

The Company's capital priorities are to support client growth and business investment while maintaining appropriate capital in light of economic uncertainty and the Basel III framework. The Company continues to improve its capital levels and ratios through the retention of quarterly earnings and RWA optimization.

119

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

The Company is subject to the regulations of certain federal, state, and foreign agencies and undergoes periodic examinations by those regulatory authorities. At June 30, 2018 and December 31, 2017, based on the Bank’s capital calculations, the Bank was considered well-capitalized under the applicable capital framework. In addition, the Company's capital levels as of June 30, 2018 and December 31, 2017, based on the Company’s capital calculations, exceeded the required capital ratios for BHCs.

For a discussion of Basel III, which became effective for SHUSA and the Bank on January 1, 2015, including the standardized approach and related future changes to the minimum U.S. regulatory capital ratios, see the section captioned "Regulatory Matters" in this MD&A.

Federal banking laws, regulations and policies also limit the Bank's ability to pay dividends and make other distributions to the Company. The Bank must obtain prior OCC approval to declare a dividend or make any other capital distribution if, after such dividend or distribution: (1) the Bank's total distributions to SHUSA within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years; (2) the Bank would not meet capital levels imposed by the OCC in connection with any order; or (3) the Bank is not adequately capitalized at the time. The OCC's prior approval would also be required if the Bank were notified by the OCC that it is a problem institution or in troubled condition.

Any dividend declared and paid or return of capital has the effect of reducing capital ratios. During the three-month and six-month periods ended June 30, 2018, the Company paid cash dividends of $5.0 million and $10.0 million, respectively, to its common stock shareholder and cash dividends to preferred shareholders of $3.65 million and $7.3 million, respectively.

The following schedule summarizes the actual capital balances of SHUSA and the Bank at June 30, 2018:

	SHUSA
	June 30, 2018		Well-capitalized Requirement(1)		Minimum Requirement(1)
CET1 capital ratio	16.28	%	6.50	%	4.50	%
Tier 1 capital ratio	17.89	%	8.00	%	6.00	%
Total capital ratio	19.55	%	10.00	%	8.00	%
Leverage ratio	14.57	%	5.00	%	4.00	%

(1) As defined by Federal Reserve regulations. The Company's ratios are presented under a Basel III phasing in basis.

	BANK
	June 30, 2018		Well-capitalized Requirement(2)		Minimum Requirement(2)
CET1 capital ratio	18.17	%	6.50	%	4.50	%
Tier 1 capital ratio	18.17	%	8.00	%	6.00	%
Total capital ratio	19.30	%	10.00	%	8.00	%
Leverage ratio	14.43	%	5.00	%	4.00	%

(2) As defined by OCC regulations. The Bank's ratios are presented under a Basel III phasing in basis.

In June 2018, the Company announced that the Federal Reserve did not object to the planned capital actions described in the Company’s capital plan submitted as part of the CCAR process. That capital plan included planned capital distributions across the following categories: (1) common stock dividends from SHUSA to Santander, (2) common stock dividends from SC, (3) common stock buyback by SC, (4) redemption of SHUSA's Capital Trust IX preferred securities, (5) redemption of SHUSA’s preferred stock, and (6) dividends on the Company’s preferred stock and payments on its trust preferred securities until they are redeemed.

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

LIQUIDITY AND CAPITAL RESOURCES

Overall

The Company continues to maintain strong liquidity positions. Liquidity represents the ability of the Company to obtain cost-effective funding to meet the needs of customers as well as the Company's financial obligations. Factors that impact the liquidity position of the Company include loan origination volumes, loan prepayment rates, the maturity structure of existing loans, core deposit growth levels, CD maturity structure and retention, the Company's credit ratings, investment portfolio cash flows, the maturity structure of the Company's wholesale funding, and other factors. These risks are monitored and managed centrally. The Company's Asset/Liability Committee reviews and approves the Company's liquidity policy and guidelines on a regular basis. This process includes reviewing all available wholesale liquidity sources. The Company also forecasts future liquidity needs and develops strategies to ensure adequate liquidity is available at all times. SHUSA conducts monthly liquidity stress test analyses to manage its liquidity under a variety of scenarios, all of which demonstrate that the Company has ample liquidity to meet its short-term and long-term cash requirements.

Further changes to the credit ratings of SHUSA, Santander and its affiliates or the Kingdom of Spain could have a material adverse effect on SHUSA's business, including its liquidity and capital resources. The credit ratings of SHUSA have changed in the past and may change in the future, which could impact its cost of and access to sources of financing and liquidity. Any reductions in the long-term or short-term credit ratings of SHUSA would increase its borrowing costs and require it to replace funding lost due to the downgrade, which may include the loss of customer deposits, limit its access to capital and money markets and trigger additional

collateral requirements in derivatives contracts and other secured funding arrangements. See further discussion on the impacts of credit ratings actions in the Economic and Business Environment section of this MD&A.

Sources of Liquidity

Company and Bank

The Company and the Bank have several sources of funding to meet liquidity requirements, including the Bank's core deposit base, liquid investment securities portfolio, ability to acquire large deposits, FHLB borrowings, wholesale deposit purchases, and federal funds purchased, as well as through securitizations in the ABS market and committed credit lines from third-party banks and Santander. The Company has the following major sources of funding to meet its liquidity requirements: dividends and returns of investments from its subsidiaries, short-term investments held by non-bank affiliates, and access to the capital markets.

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

SC

SC requires a significant amount of liquidity to originate and acquire loans and leases and to service debt. SC funds its operations through its lending relationships with 13 third-party banks, SHUSA and Santander, as well as through securitizations in the ABS market and large flow agreements. SC seeks to issue debt that appropriately matches the cash flows of the assets that it originates.

SC has more than $7.0 billion of stockholders’ equity that supports its access to the securitization markets, credit facilities, and flow agreements.

During the six-month period endedJune 30, 2018, SC completed on-balance sheet funding transactions totaling approximately $9.2 billion, including:

• three securitization on its Santander Drive Auto Receivables Trust ("SDART") platform for approximately $3.3 billion;

• two securitization on its Drive Auto Receivables Trust (“DRIVE"), deeper subprime platform for approximately $2.1 billion;

• one private lease securitization for approximately $1.2 billion;

• one lease securitization on its Santander Retail Auto Lease Trust platform for approximately $1.0 billion;

• one private amortizing lease facility for approximately $1.0 billion;

• issuance of retained bonds on its SDART platform for approximately $304.0 million; and

• issuance of retained bonds on its DRIVE platform for $191.0 million.

SC also completed $2.6 billion in asset sales to Santander.

For information regarding SC's debt, see Note 10 to the Condensed Consolidated Financial Statements.

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

IHC

On June 6, 2017, SIS entered into a revolving subordinated loan agreement with SHUSA not to exceed $290.0 million for a two-year term to mature in 2019. On September 13, 2017, the revolving subordinated loan agreement with SHUSA was increased to $350.0 million and, on October 6, 2017, it was increased to $495.0 million.

As needed, SIS will draw down from another subordinated loan with Santander in order to enable SIS to underwrite certain large transactions in excess of the foregoing subordinated loan. At June 30, 2018, 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 June 30, 2018, the Bank had approximately $21.0 billion in committed liquidity from the FHLB and the FRB. Of this amount, $19.1 billion was unused and therefore provides additional borrowing capacity and liquidity for the Company. At June 30, 2018 and December 31, 2017, liquid assets (cash and cash equivalents and LHFS), and securities AFS exclusive of securities pledged as collateral) totaled approximately $16.6 billion and $18.4 billion, respectively. These amounts represented 26.9% and 30.3% of total deposits at June 30, 2018 and December 31, 2017, respectively. As of June 30, 2018, the Bank, BSI and BSPR had $1.1 billion, $1.6 billion, and $1.2 billion, respectively, in cash held at the FRB. Management believes that the Company has ample liquidity to fund its operations.

BSPR has $737.4 million in committed liquidity from the FHLB, all of which was unused as of June 30, 2018, as well as $543.3 million in liquid assets aside from cash unused as of June 30, 2018.

Cash, cash equivalents, and restricted cash

As of January 1, 2018, the classification of restricted cash within the Company's SCF has changed. Refer to Note 1 to the Condensed Consolidated Financial Statements for additional details.

	Six-Month Period Ended June 30,
(in thousands)	2018			2017
Net cash flows from operating activities	$	3,909,460		$	2,505,613
Net cash flows from investing activities	(5,486,642		)	(304,670		)
Net cash flows from financing activities	489,220			(4,433,072		)

Cash flows from operating activities

Net cash flow from operating activities was $3.9 billion for the six-month period endedJune 30, 2018, which was primarily comprised of net income of $617.1 million, $3.3 billion in proceeds from sales of LHFS, $889.2 million in depreciation, amortization and accretion, and $882.4 million of provision for credit losses, partially offset by $2.4 billion of originations of LHFS, net of repayments.

Net cash flow from operating activities was $2.5 billion for the six-month period endedJune 30, 2017, which was comprised of net income of $451.5 million, $2.5 billion in proceeds from sales of LHFS, $724.0 million in depreciation, amortization and accretion, and $1.3 billion of provisions for credit losses, partially offset by $2.4 billion of originations of LHFS, net of repayments.

122

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

Cash flows from investing activities

For the six-month period endedJune 30, 2018, net cash flow from investing activities was $(5.5) billion, primarily due to $3.5 billion in normal loan activity, $1.2 billion of purchases of investment securities AFS, and $4.8 billion in operating lease purchases and originations, partially offset by $1.2 billion of AFS investment securities sales, maturities and prepayments, $826.1 million in proceeds from sales of LHFI, and $2.2 billion in proceeds from sales and terminations of operating leases.

For the six-month period endedJune 30, 2017, net cash flow from investing activities was $(304.7) million, primarily due to $5.1 billion of purchases of investment securities AFS and $3.1 billion in operating lease purchases and originations, partially offset by $3.5 billion of AFS investment securities sales, maturities and prepayments, $1.7 billion in normal loan activity, $1.8 billion in proceeds from sales and terminations of operating leases, and $551.1 million in manufacturer incentives.

Cash flows from financing activities

For the six-month period endedJune 30, 2018, net cash flow from financing activities was $489.2 million, which was primarily due to a $725.4 millionincrease in deposits, partially offset by a decrease in net borrowing activity of $249.3 million.

Net cash flow from financing activities for the six-month period endedJune 30, 2017 was $(4.4) billion, which was primarily due to a decrease in net borrowing activity of $168.0 million and a $4.3 billiondecrease in deposits.

See the SCF for further details on the Company's sources and uses of cash.

Credit Facilities

Third-Party Revolving Credit Facilities

Warehouse Facilities

SC uses warehouse lines to fund its originations. Each line specifies the required collateral characteristics, collateral concentrations, credit enhancement, and advance rates. SC's warehouse lines generally are backed by auto RICs and, in some cases, leases or personal loans. These credit lines generally have one- or two-year commitments, staggered maturities and floating interest rates. SC maintains daily funding forecasts for originations, acquisitions, and other large outflows such as tax payments in order to balance the desire to minimize funding costs with its liquidity needs.

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 two credit facilities with seven banks providing an aggregate commitment of $4.2 billion for the exclusive use of supplying short-term liquidity needs to support Chrysler Capital retail financing. As of June 30, 2018 and December 31, 2017, there were outstanding balances on these facilities of $1.9 billion and $2.0 billion, respectively. Both facilities require reduced advance rates in the event of delinquency, credit loss, or residual loss ratios exceeding specified thresholds.

Repurchase Facilities

SC also obtains financing through four investment management agreements under which it pledges retained subordinated bonds on its own securitizations as collateral for repurchase agreements with various borrowers and at renewable terms ranging up to 365 days. As of June 30, 2018 and December 31, 2017, there were outstanding balances of $456.1 million and $744.5 million, respectively, under these repurchase facilities.

123

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

Santander Credit Facilities

Santander historically has provided, and continues to provide, SC's business with significant funding support in the form of committed credit facilities. Through Santander’s New York branch ("Santander NY"), Santander provides SC with $1.8 billion of long-term committed revolving credit facilities. In July 2018, $1.0 billion of the $1.8 billion of credit facilities was terminated and replaced with a $500 million line of credit with SHUSA as discussed below.

The facilities offered through Santander NY are structured as three- and five-year floating rate facilities, with a current maturity date of December 31, 2018. These facilities currently permit unsecured borrowing, but generally are collateralized by RICs as well as securitization notes payable and residuals owned by SC. Any secured balances outstanding under the facilities at the time of their maturity will amortize to match the maturities and expected cash flows of the corresponding collateral.

Santander also serves as the counterparty for many of SC's derivative financial instruments, with outstanding notional amounts of $1.3 billion and $3.7 billion at June 30, 2018 and December 31, 2017, respectively.

Under an agreement with Santander, SC pays Santander a fee of 12.5 basis points per annum on certain warehouse facilities as they renew, for which Santander provides a guarantee of SC's servicing obligations. For revolving commitments, the guarantee fee will be paid on the total committed amount and, for amortizing commitments, the guarantee fee is paid against each month's ending balance. The guarantee fee only applies to additional facilities upon the execution of the counter-guaranty agreement related to a new facility or if reaffirmation is required on existing revolving or amortizing commitments as evidenced by a duly executed counter-guaranty agreement. SC recognized guarantee fee expense of $3.6 million and $2.9 million for the six-month periods endedJune 30, 2018 and 2017, respectively.

SHUSA lending to SC

The Company also provides SC with $3.0 billion in committed revolving credit that can be drawn on an unsecured basis maturing in March 2019. The Company also provides SC with $3.0 billion in various term loans with maturities ranging from March 2019 to December 2022. These loans eliminate in the consolidation of SHUSA.

In July 2018, the Company entered into a $500 million line of credit with SC. This loan will eliminate in the consolidation of SHUSA.

Secured Structured Financings

SC's secured structured financings primarily consist of public, SEC-registered securitizations. SC also executes private securitizations under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”), and privately issues amortizing notes. SC has completed six securitizations year-to-date in 2018, and currently has 44 securitizations outstanding in the market with a cumulative ABS balance of approximately $13.0 billion.

Flow Agreements

In addition to SC's credit facilities and secured structured financings, SC has a flow agreement in place with a third party for charged-off assets.

Loans and leases sold under these flow agreements are not on SC's balance sheet but provide a stable stream of servicing fee income and may also provide a gain or loss on sale. SC continues to actively seek additional such flow agreements.

Off-Balance Sheet Financing

Beginning in March 2017, SC has had the option to sell a contractually determined amount of eligible prime loans to Santander through securitization platforms. As all of the notes and residual interests in the securitizations are acquired by Santander, SC recorded these transactions as true sales of the RICs securitized, and removed the sold assets from its Condensed Consolidated Balance Sheets.

SC also continues to periodically execute Chrysler Capital-branded securitizations under Rule 144A of the Securities Act. Upon transferring all of the notes and residual interests in these securitizations to third parties, SC records these transactions as true sales of the RICs securitized, and removes the sold assets from its Condensed Consolidated Balance Sheets.

124

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

Uses of Liquidity

The Company uses liquidity for debt service and repayment of borrowings, as well as for funding loan commitments and satisfying deposit withdrawal requests.

SIS uses liquidity primarily to support underwriting transactions.

The primary use of liquidity for BSI is to meet customer liquidity requirements, such as loan financing, maturing deposits, investment activities, fund transfers, and payment of its operating expenses.

BSPR uses liquidity for funding loan commitments, satisfying deposit withdrawal requests, and repayments of borrowings.

Dividends and Stock Issuances

At June 30, 2018, the Company's liquidity to meet debt payments, debt service and debt maturities was in excess of 12 months.

As of June 30, 2018, the Company had 530,391,043 shares of common stock outstanding. During the three-month and six-month periods endedJune 30, 2018, the Company paid dividends of $5.0 million and $10.0 million, respectively, to its sole shareholder, Santander.

During the three-month and six-month periods endedJune 30, 2018, Santander made a cash contribution of zero and $5.7 million, respectively, to the Company.

SHUSA's Board of Directors has approved an ordinary dividend of $75 million and a special dividend of $250 million payable August 16, 2018 to shareholders of record as of the close of business on August 20, 2018.

During the three-month and six-month periods endedJune 30, 2018 the Company paid dividends of $3.7 million and $7.3 million, respectively, on its preferred stock.

On July 2, 2018, SHUSA’s Board of Directors declared a cash dividend on the Company’s preferred stock of $0.45625 per share, which is payable on August 15, 2018 to shareholders of record as of the close of business on August 1, 2018. In addition, SHUSA's Board of Directors has approved and SHUSA has called for the redemption of all outstanding shares of the Company's preferred stock, and all outstanding shares of the related depositary shares, each representing a 1/1000th ownership interest in a preferred share. The preferred stock will be redeemed on August 15, 2018.

SC paid a dividend of $0.05 per share in February 2018 and a dividend of $0.05 per share in May 2018. SC has also declared a cash dividend of $0.20 per share, to be paid on August 8, 2018 to share-holders of record as of the close of business on August 6, 2018. SC has paid a total of $36.1 million in dividends through June 30, 2018, of which, $11.5 million have been paid to non-controlling interests and $24.6 million to the Company which eliminates in the consolidated results of the Company.

During 2018, SHUSA's subsidiaries had the following capital activity which eliminated in consolidation:

• The Bank declared and paid $100.0 million in dividends to SHUSA;

• The Bank has declared an ordinary dividend of $75 million and a special dividend of $250 million payable on August 15, 2018;

• BSI declared and paid $10.0 million in dividends to SHUSA; and

• SHUSA contributed $40.0 million to SSLLC.

CONTRACTUAL OBLIGATIONS

The Company enters into contractual obligations in the normal course of business as a source of funds for its asset growth and asset/liability management and to meet required capital needs. These obligations require the Company to make cash payments over time as detailed in the table below.

125

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

	Payments Due by Period
(in thousands)	Total		Less than 1 year		Over 1 yr to 3 yrs		Over 3 yrs to 5 yrs		Over 5 yrs
FHLB advances (1)	$	1,319,560	$	1,017,339	$	302,221	$	—	$	—
Notes payable - revolving facilities	4,625,023		1,167,063		3,457,960		—		—
Notes payable - secured structured financings	24,361,841		1,524,792		7,986,566		10,263,313		4,587,170
Other debt obligations (1) (2)	13,377,474		2,266,784		3,712,148		3,454,952		3,943,590
Junior subordinated debentures due to capital trust entities (1) (2)	280,125		6,435		14,277		14,197		245,216
CDs (1)	6,067,615		3,310,846		2,356,778		392,314		7,677
Non-qualified pension and post-retirement benefits	131,197		13,918		26,123		26,330		64,826
Operating leases(3)	719,168		125,213		220,482		164,213		209,260
Total contractual cash obligations	$	50,882,003	$	9,432,390	$	18,076,555	$	14,315,319	$	9,057,739

(1) Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based on interest rates in effect at June 30, 2018. The contractual amounts to be paid on variable rate obligations are affected by changes in market interest rates. Future changes in market interest rates could materially affect the contractual amounts to be paid.

(2) Includes all carrying value adjustments, such as unamortized premiums and discounts and hedge basis adjustments.

(3) Does not include future expected sublease income.

Excluded from the above table are deposits of $55.8 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 12 and Note 16 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 was also obligated to make total return settlement payments to this third-party originator in 2017 if returns on the purchased loans were 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 April 14, 2017, SC sold another portfolio comprised of personal installment loans to a third-party buyer.

SC's other significant personal lending relationship is with Bluestem. SC continues to perform in accordance with the terms and operative provisions of agreements under which it is obligated to purchase personal revolving loans originated by Bluestem for a term ending in 2020, or 2022 if extended at Bluestem's option. The Bluestem portfolio is carried as held for sale in the Company's Condensed Consolidated Financial Statements, similar to SC. Accordingly, the Company recorded $134.7 million and $154.3 million during the six months ended June 30, 2018 and 2017, respectively, in lower of cost or market adjustments on this portfolio, and there may be further such adjustments required in future periods' financial statements. SC is currently evaluating alternatives for sale of the Bluestem portfolio, which had a carrying value of $1.0 billion at June 30, 2018.

ASSET AND LIABILITY MANAGEMENT

Interest Rate Risk

Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in market interest rates, and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. Interest rate risk is managed by the Company's Treasury group and measured by its Market Risk Department, with oversight by the Asset/Liability Committee. In managing interest rate risk, the Company seeks to minimize the variability of net interest income across various likely scenarios, while at the same time maximizing net interest income and the net interest margin. To achieve these objectives, the Treasury group works closely with each business line in the Company. The Treasury group also uses various other tools to manage interest rate risk, including wholesale funding maturity targeting, investment portfolio purchase strategies, asset securitizations/sales, and financial derivatives.

126

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

Interest rate risk focuses on managing four elements of risk associated with interest rates: basis risk, repricing risk, yield curve risk and option risk. Basis risk stems from rate index timing differences with rate changes, such as differences in the extent of changes in Federal funds rates compared with the three-month London Interbank Offered Rate ("LIBOR"). Repricing risk stems from the different timing of contractual repricing, such as one-month versus three-month reset dates, as well as the related maturities. Yield curve risk stems from the impact on earnings and market value resulting from different shapes and levels of yield curves. Option risk stems from prepayment or early withdrawal risk embedded in various products. These four elements of risk are analyzed through a combination of net interest income and balance sheet valuation simulations, shocks to those simulations, and scenario and market value analyses, and the subsequent results are reviewed by management. Numerous assumptions are made to produce these analyses, including assumptions about new business volumes, loan and investment prepayment rates, deposit flows, interest rate curves, economic conditions and competitor pricing.

Net Interest Income Simulation Analysis

The Company utilizes a variety of measurement techniques to evaluate the impact of interest rate risk, including simulating the impact of changing interest rates on expected future interest income and interest expense, to estimate the Company's net interest income sensitivity. This simulation is run monthly and includes various scenarios that help management understand the potential risks in the Company's net interest income sensitivity. These scenarios include both parallel and non-parallel rate shocks as well as other scenarios that are consistent with quantifying the four elements of risk described above. This information is used to develop proactive strategies to ensure that the Company’s risk position remains within SHUSA Board of Directors-approved limits so that future earnings are not significantly adversely affected by future interest rates.

The table below reflects the estimated sensitivity to the Company’s net interest income based on interest rate changes at June 30, 2018 and December 31, 2017:

	The following estimated percentage increase/(decrease) to net interest income would result
If interest rates changed in parallel by the amounts below	June 30, 2018		December 31, 2017
Down 100 basis points	(3.44	)%	(3.33	)%
Up 100 basis points	3.20	%	2.88	%
Up 200 basis points	6.22	%	5.48	%

Market Value of Equity ("MVE") Analysis

The Company also evaluates the impact of interest rate risk by utilizing MVE modeling. This analysis measures the present value of all estimated future cash flows of the Company over the estimated remaining life of the balance sheet. MVE is calculated as the difference between the market value of assets and liabilities. The MVE calculation utilizes only the current balance sheet, and therefore does not factor in any future changes in balance sheet size, balance sheet mix, yield curve relationships or product spreads, which may mitigate the impact of any interest rate changes.

Management examines the effect of interest rate changes on MVE. The sensitivity of MVE to changes in interest rates is a measure of longer-term interest rate risk, and highlights the potential capital at risk due to adverse changes in market interest rates. The following table discloses the estimated sensitivity to the Company’s MVE at June 30, 2018 and December 31, 2017.

	The following estimated percentage increase/(decrease) to MVE would result
If interest rates changed in parallel by the amounts below	June 30, 2018		December 31, 2017
Down 100 basis points	(1.01	)%	(2.55	)%
Up 100 basis points	(1.39	)%	(0.04	)%
Up 200 basis points	(3.60	)%	(1.62	)%

As of June 30, 2018, the Company’s MVE profile showed a decrease of 1.01% for downward parallel interest rate shocks of 100 basis points and a decrease of 1.39% 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")).

127

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

In downward parallel interest rate shocks, mortgage-related products’ prepayments increase, their duration decreases and their market value appreciation is therefore limited. At the same time, with deposit rates remaining at comparatively low levels, the Company cannot effectively transfer interest rate declines to its NMD customers. For upward parallel interest rate shocks, extension risk weighs on a sizable portion of the Company’s mortgage-related products, which are predominantly long-term and fixed-rate; and for larger shocks, the loss in market value is not offset by the change in NMD.

Limitations of Interest Rate Risk Analyses

Since the assumptions used are inherently uncertain, the Company cannot predict precisely the effect of higher or lower interest rates on net interest income or MVE. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, the difference between actual experience and the assumed volume, characteristics of new business, behavior of existing positions, and changes in market conditions and management strategies, among other factors.

Uses of Derivatives to Manage Interest Rate and Other Risks

To mitigate interest rate risk and, to a lesser extent, foreign exchange, equity and credit risks, the Company uses derivative financial instruments to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows.

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

Management uses derivative instruments to mitigate the impact of interest rate movements on the fair value of certain liabilities, assets and highly probable forecasted cash flows. These instruments primarily include interest rate swaps that have underlying interest rates based on key benchmark indices and forward sale or purchase commitments. The nature and volume of the derivative instruments used to manage interest rate risk depend on the level and type of assets and liabilities on the balance sheet and the risk management strategies for the current and anticipated interest rate environments.

The Company's derivatives portfolio includes mortgage banking interest rate lock commitments, forward sale commitments and interest rate swaps. As part of its overall business strategy, the Bank originates residential mortgages. It sells a portion of this production to the FHLMC, the FNMA, and private investors. The Company uses forward sales as a means of hedging against the economic impact of changes in interest rates on the mortgages that are originated for sale and on interest rate lock commitments.

The Company typically retains the servicing rights related to residential mortgage loans that are sold. The majority of the Company's residential MSRs are accounted for at fair value. As deemed appropriate, the Company economically hedges MSRs, using interest rate swaps and forward contracts to purchase MBS. For additional information on MSRs, see Note 8 to the Condensed Consolidated Financial Statements.

The Company uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. Foreign exchange contracts, which include spot and forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Exposure to gains and losses on these contracts increase or decrease over their respective lives as currency exchange and interest rates fluctuate.

The Company also utilizes forward contracts to manage market risk associated with certain expected investment securities sales and equity options, which manage its market risk associated with certain customer deposit products.

For additional information on foreign exchange contracts, derivatives and hedging activities, see Note 12 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 — "Asset and Liability Management" above.

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls

Our management, with the participation of our Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), has evaluated the effectiveness of our disclosure controls and procedures as defined in Rules 13a- 15(e) and 15d- 15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, our CEO and CFO have concluded that, as of June 30, 2018, we did not maintain effective disclosure controls and procedures because of the material weaknesses in internal control over financial reporting described below. Notwithstanding these material weaknesses, based on the additional analysis and other post-closing procedures performed, management believes that the Condensed Consolidated Financial Statements included in this report fairly present in all material respects our financial position, results of operations, capital position, and cash flows for the periods presented, in conformity with GAAP.

A material weakness (as defined in Rule 12b-2 under the Exchange Act) is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement in our annual or interim financial statements will not be prevented or detected on a timely basis. We have identified the following material weaknesses:

1. Control Environment

The Company's financial reporting involves complex accounting matters emanating from our majority-owned subsidiary SC. We determined there was a material weakness in the design and operating effectiveness of the controls pertaining to our oversight of SC's accounting for transactions that are significant to the Company’s internal control over financial reporting. These deficiencies included (a) ineffective oversight to ensure accountability at SC for the performance of internal controls over financial reporting and to ensure corrective actions, where necessary, were appropriately prioritized and implemented in a timely manner; and (b) inadequate resources and technical expertise at SHUSA to perform effective oversight of the application of accounting and financial reporting activities that are significant to the Company’s consolidated financial statements.

We have identified 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.

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• 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.

This material weakness in control environment contributes to each of the following identified material weaknesses emanating from SC:

3. Development, Approval, and Monitoring of Models Used to Estimate the Credit Loss Allowance

Various deficiencies were identified in the credit loss allowance process related to review, monitoring and approval processes over models and model changes that aggregated to a material weakness. The following controls did not operate effectively:

• Review controls over completeness and accuracy of data, inputs and assumptions in models and spreadsheets used for estimating credit loss allowance and related model changes were not effective and management did not adequately challenge significant assumptions.

• Review and approval controls over the development of new models to estimate credit loss allowance and related model changes were ineffective.

• Adequate and comprehensive performance monitoring over related model output results was not performed and we did not maintain adequate model documentation.

This material weakness relates to the following financial statement line items: the allowance for loan and lease losses, provision for credit losses, and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.

4. Identification, Governance, and Monitoring of Models Used to Estimate Accretion

Various deficiencies were identified in the accretion process related to review, monitoring and governance processes over models that aggregated to a material weakness. The following controls did not operate effectively:

• Review controls over completeness and accuracy of data, inputs, calculation and assumptions in models and spreadsheets used for estimating accretion were not effective and management did not adequately challenge significant assumptions.

• Review and approval controls over the development of new models to estimate accretion and related model changes were ineffective.

• Adequate and comprehensive performance monitoring over related model output results was not performed and we did not maintain adequate model documentation.

This material weakness relates to the following financial statement line items: loans held for investment, loans held for sale, the allowance for loan and lease losses, interest income - loans, provision for credit losses, miscellaneous (loss)/income, net and the related disclosures within Note 4 - Loans and Allowance for Credit Losses.

In addition to the above items emanating from SC, the following material weakness was identified at the SHUSA level:

5. Review of Statement of Cash Flows and Footnotes

Management identified a material weakness in internal control over the Company's process to prepare and review the Statement of Cash Flows ("SCF") and Notes to the Consolidated Financial Statements. Specifically, the Company concluded that it did not have adequate controls designed and in place over the preparation and review of such information.

Remediation Status of Reported Material Weaknesses

The Company is currently working to remediate the material weaknesses described above, including assessing the need for additional remediation steps and implementing additional measures to remediate the underlying causes that gave rise to the material weaknesses. The Company is committed to maintaining a strong internal control environment and to ensure that a proper, consistent tone is communicated throughout the organization, including the expectation that previously existing deficiencies will be remediated through implementation of processes and controls to ensure strict compliance with GAAP.

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To address the material weakness in the control environment (material weakness 1, noted above), the Company is in the process of strengthening its processes and controls as follows:

• Established regular working group meetings, with appropriate oversight by management, to review and challenge complex accounting matters and strengthen accountability for performance of internal control over financial reporting responsibilities and prioritization of corrective actions.

• Appointed a Head of Internal Controls with significant public company financial reporting experience and the requisite skillsets in areas important to financial reporting.

• Developed a plan to enhance its risk assessment processes, control procedures and documentation, including the implementation of a Company-wide comprehensive risk assessment to identify the processes and financial statement areas with higher risks of misstatement.

• Established policies and procedures for the oversight of subsidiaries that includes accountability for each subsidiary for maintenance of accounting policies, evaluation of significant and unusual transactions, material estimates, and regular reporting and review of changes in the control environment and related accounting processes.

• Reallocated additional Company resources to improve the oversight of subsidiary operations and to ensure sufficient staffing to conduct enhanced financial reporting reviews.

• Collaborated with other departments, such as Accounting Policy and Legal, to ensure entity information/data is shared and reviewed accordingly.

To address the material weakness in SC’s control environment, risk assessment, control activities and monitoring (material weakness 2, noted above), the Company 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.

• Reallocated additional Company resources to improve the oversight for certain financial models.

• Increased accounting resources with qualified permanent resources to ensure sufficient staffing to conduct enhanced financial reporting procedures and to continue the remediation efforts.

• Improved management documentation, review controls and oversight of accounting and financial reporting activities to ensure accounting practices conform to the Company’s policies and GAAP.

• Increased accounting participation in critical governance activities to ensure an adequate assessment of risk activities which may impact financial reporting or the related internal controls.

• Completed a comprehensive review and update of all accounting policies, process descriptions and control activities.

• Developed and implemented additional documentation, controls and governance for the credit loss allowance and accretion processes.

To address the material weaknesses related to the development, approval, and monitoring of models used to estimate the credit loss allowance (material weakness 3, noted above), the Company has taken the following measures:

• Completed a comprehensive design effectiveness review and augmentation of the controls to ensure all critical risks are addressed.

• Implemented a more comprehensive monitoring plan for the credit loss allowance with a specific focus on model inputs, changes in model assumptions and model outputs to ensure an effective execution of the Company’s risk strategy.

• Implemented improved controls over the development of new models or changes to models used to estimate credit loss allowance.

• Implemented enhanced on-going performance monitoring procedures.

• Developed comprehensive model documentation.

• Enhanced the Company’s communication on related issues with its senior leadership team and the Board, including the Risk Committee and the Audit Committee.

• Increased resources dedicated to the analysis, review and documentation to ensure compliance with GAAP and the Company’s policies.

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To address the material weaknesses related to the identification, governance and monitoring of models used to estimate accretion (material weakness 4, noted above), the Company has taken the following measures:

• Developed a comprehensive accretion model documentation manual and implemented on-going performance monitoring to ensure compliance with required standards.

• Automated the process for the application of the effective interest rate method for accreting discounts, subvention payments from manufacturers and other origination costs on individually acquired RICs.

• Implemented comprehensive review controls over data, inputs and assumptions used in the models.

• Strengthened review controls and change management procedures over the models used to estimate accretion.

• Increased accounting resources with qualified, permanent resources to ensure an adequate level of review and execution of control activities.

To address the material weaknesses in the review of statement of cash flows and footnotes (material weakness 5, noted above), the Company is in the process of strengthening its controls as follows:

• Improved the review controls over financial statements and the related disclosures to include a more comprehensive disclosure checklist and improved review procedures from certain members of the management.

• Designed and implemented additional controls over the preparation and the review of the SCF and Notes to the Consolidated Financial Statements.

• Strengthening the review controls, reconciliations and supporting documentation related to the classification of cash flows between operating activities and investing activities in the SCF.

• Enhanced the risk assessment process to identify higher risk data provisioning processes.

• Implementing additional completeness and accuracy reviews at a detailed level at the statement preparation and data provider levels.

While progress has been made to remediate all of these areas, as of June 30, 2018, we are still in the process of implementing the enhanced processes and procedures and testing the operating effectiveness of these improved controls. We believe our actions will be effective in remediating the material weaknesses, and we continue to devote significant time and attention to these efforts. In addition, the material weaknesses will not be considered remediated until the applicable remedial processes and procedures have been in place for a sufficient period of time and management has concluded, through testing, that these controls are effective. Accordingly, the material weaknesses are not remediated as of June 30, 2018.

Limitations on Effectiveness of Disclosure Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

Changes in Internal Control over Financial Reporting

There were no changes in the Company's internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(d) of the Exchange Act that occurred during the three months ended June 30, 2018 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1 - LEGAL PROCEEDINGS

Refer to Note 13 to the Condensed Consolidated Financial Statements for disclosure regarding the lawsuit filed by SHUSA against the Internal Revenue Service (“IRS”) and Note 16 to the Condensed Consolidated Financial Statements for SHUSA’s litigation 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 that are set forth under Part I, Item IA, Risk Factors, in the Company's Annual Report on Form 10-K for the year ended December 31, 2017. The information presented below should be read in conjunction with the risk factors disclosed in that Form 10-K.

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

In February 2013, SC entered into the Chrysler Agreement with FCA through which SC launched the Chrysler Capital brand on May 1, 2013. Under the Chrysler Agreement, SC provides private-label loans and leases to facilitate the purchase of FCA vehicles by consumers and FCA-franchised automotive dealers. The financing services SC provides under the Chrysler Agreement include providing (1) credit lines to finance FCA-franchised dealers’ acquisitions of vehicles and other products FCA sells or distributes, (2) automotive loans and leases to finance consumer acquisitions of new and used vehicles at FCA-franchised dealerships, (3) financing for commercial and fleet customers, and (4) ancillary services. In addition, SC may facilitate, for an affiliate, offerings to dealers for dealer loan financing, construction loans, real estate loans, working capital loans, and revolving lines of credit. In May 2013, in accordance with the terms of the Chrysler Agreement, SC paid FCA a $150 million upfront, nonrefundable payment, to be amortized over ten years. The unamortized portion would be recognized as expense immediately if the Chrysler Agreement were terminated in accordance with its term.

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

In connection with the Chrysler Agreement, SC and FCA entered into an option agreement pursuant to which FCA has the option to acquire, for fair market value, an equity participation in the business offering and providing the financial services contemplated by the Chrysler Agreement. FCA has announced its intention to establish a captive U.S. auto finance unit and indicated that acquiring Chrysler Capital is one option it will consider.

The equity option agreement does not specify the percentage of equity interests to be represented by the equity participation, but indicates that it can be greater than 80% and provides that FCA would specify the percentage to be purchased at the time of exercise of the option. The equity option agreement contains provisions that are designed to address a situation in which the parties disagree on the fair market value of an equity participation interest. There is a risk that SC may ultimately receive less than what SC believes to be the fair market value for that interest, and the loss of SC's associated revenue and profits may not be offset fully by the proceeds for such interest. There can be no assurance that SC would be able to redeploy the immediate proceeds for such interest in other businesses or investments that would provide comparable returns, thereby reducing SC's profitability. Further, the likelihood, timing and structure of any such transaction cannot reasonably be determined at this time. There can be no assurance that SHUSA or SC could successfully or timely implement any such transaction without significant disruption of its operations or restructuring, or without incurring additional liabilities, which could involve significant expense to SHUSA and SC and have a material adverse effect on SHUSA's or SC's business, financial condition and results of operations.

The Chrysler Agreement is subject to early termination in certain circumstances, including the failure by either party to comply with certain of their ongoing obligations under the Chrysler Agreement. SC's obligations include SC meeting specified obligations in

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relation to escalating penetration rates for the first five years of the agreement, subject to FCA treating SC in a manner consistent with other comparable OEMs' treatment of their captive finance providers. Additional termination rights in favor of FCA include, among other circumstances, (i) a person other than Santander and its affiliates owns 20% or more of SC’s common stock and Santander and its affiliates own fewer shares of common stock than such person, (ii) SC becomes, controls, or becomes controlled by, an OEM that competes with FCA or (iii) certain of SC’s credit facilities become impaired.

SC’s ability to realize the full strategic and financial benefits of its relationship with FCA depends in part on the successful continued development of its Chrysler Capital business, which requires a significant amount of management's time and effort as well as continued cooperation from FCA. If FCA exercises its equity option, if the Chrysler Agreement (or FCA's limited exclusivity obligations thereunder) were to terminate, if FCA seeks to significantly change its business relationship with SC, or if SC otherwise is unable to realize the expected benefits of its relationship with FCA, there could be a materially adverse impact to SHUSA's and SC’s business, financial condition, results of operations, profitability, loan and lease volume, the credit quality of SHUSA's and SC’s portfolio, liquidity, funding and growth, and SHUSA's and SC's ability to implement its business strategy could be materially adversely affected. The Company has $1.0 billion of goodwill assigned to the SC reporting unit from the 2014 Change in Control of SC. It is possible that changes to the Chrysler Agreement may trigger a goodwill impairment evaluation, which could require the goodwill to be written down if SC's financial condition is materially adversely affected. In addition, the Company has a $72.5 million Chrysler relationship intangible, which may require an impairment evaluation if there are adverse changes to the Chrysler Agreement.

On July 11, 2018, in order to facilitate discussions regarding the Chrysler Agreement, FCA and SC entered into a tolling agreement pursuant to which the parties agreed to preserve their respective rights, claims and defenses under the Chrysler Agreement as they existed on April 30, 2018 until 31 days after either party receives a written notice of termination from the other party under the Chrysler Agreement following December 31, 2018.

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

(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	)	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	)	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	)	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	)	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	)	Amended and Restated Bylaws of Santander Holdings USA, Inc. (Incorporated by reference to Exhibit 3.1 of Santander Holdings USA, Inc.’s Current Report on Form 8-K filed January 30, 2012) (Commission File Number 001-16581)
(4.1	)	Santander Holdings USA, Inc. has certain debt obligations outstanding. None of the instruments evidencing such debt authorizes an amount of securities in excess of 10% of the total assets of Santander Holdings USA, Inc. and its subsidiaries on a consolidated basis; therefore, copies of such instruments are not included as exhibits to this Annual Report on Form 10-K. Santander Holdings USA, Inc. agrees to furnish copies to the SEC on request.
(10.1	)	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)
(10.2	)	Written Agreement, dated as of July 2, 2015, by and between Santander Holdings USA, Inc. and the Federal Reserve Bank of Boston (Incorporated by reference to Exhibit 99.1 of Santander Holdings USA, Inc.’s Current Report on Form 8-K filed July 7, 2015) (Commission File Number 001-16581)
(10.3	)	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	)	Chief Executive Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
(31.2	)	Chief Financial Officer certification pursuant to Rule 13a-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
(32.1	)	Chief Executive Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
(32.2	)	Chief Financial Officer certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Filed herewith)
(101.INS)		XBRL Instance Document (Filed herewith)

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(101.SCH)	XBRL Taxonomy Extension Schema (Filed herewith)
(101.CAL)	XBRL Taxonomy Extension Calculation Linkbase (Filed herewith)
(101.DEF)	XBRL Taxonomy Extension Definition Linkbase (Filed herewith)
(101.LAB)	XBRL Taxonomy Extension Label Linkbase (Filed herewith)
(101.PRE)	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:	August 9, 2018	/s/ Madhukar Dayal
		Madhukar Dayal
		Chief Financial Officer and Senior Executive Vice President
Date:	August 9, 2018	/s/ David L. Cornish
		David L. Cornish
		Chief Accounting Officer, Controller and Executive Vice President

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