LOANS AND ALLOWANCE FOR CREDIT LOSSES

Overall

The Company's loans are reported at their outstanding principal balances net of any unearned income, cumulative charge-offs, unamortized deferred fees and costs on originated loans and unamortized premiums or discounts on purchased loans. The Company maintains an allowance for credit losses 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 $55.0 billion at June 30, 2014 and $36.2 billion at December 31, 2013. The increase is primarily driven by the consolidation of SCUSA in connection with the Change in Control.

The Company engages in direct and leveraged lease financing, which totaled $1.1 billion at June 30, 2014 and $1.0 billion at December 31, 2013. Direct financing leases are recorded as the aggregate of minimum lease payments receivable plus the estimated residual value of the leased property, less unearned income. Leveraged leases, a form of direct financing leases, are recorded net of related non-recourse debt. Financing leases are included within commercial and industrial loans.

Loans that the Company has the intent to sell are classified as LHFS. The LHFS portfolio balance at June 30, 2014 was $290.4 million, compared to $128.9 million at December 31, 2013. LHFS in the residential mortgage portfolio are reported at fair value. All other LHFS are accounted for at the lower of cost or market. For discussion on the valuation of LHFS at fair value, see Note 16 to the Condensed Consolidated Financial Statements.

Interest income on loans is accrued based on the contractual interest rate and the principal amount outstanding, except for those loans classified as non-accrual. At June 30, 2014 and December 31, 2013, accrued interest receivable on the Company's loans was $471.8 million and $135.3 million, respectively.

During the six months ended June 30, 2014, the Company purchased $816.5 million of performing multifamily loans.

On August 6, 2014, the Company transferred approximately $695.0 million of troubled debt restructurings and non-performing loans classified as held for investment to loans held for sale.

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Loan and Lease Portfolio Composition

The following table presents the composition of the gross loans held for investment by type of loan and by fixed and variable rates at the dates indicated:



	June 30, 2014				December 31, 2013
	Amount		Percent		Amount		Percent
	(dollars in thousands)
Commercial loans held for investment:
Commercial real estate loans	$	8,897,785	11.8	%	$	9,303,885	18.6	%
Commercial and industrial loans	14,954,380		19.8	%	12,820,417		25.7	%
Multi-family loans	9,229,611		12.2	%	8,237,029		16.5	%
Other commercial⁽²⁾	1,920,217		2.4	%	1,789,891		3.6	%
Total commercial loans held for investment	35,001,993		46.2	%	32,151,222		64.4	%
Consumer loans secured by real estate:
Residential mortgages	9,503,023		12.6	%	9,561,187		19.2	%
Home equity loans and lines of credit	6,190,475		8.2	%	6,311,694		12.6	%
Total consumer loans secured by real estate	15,693,498		20.8	%	15,872,881		31.8	%
Consumer loans not secured by real estate:
Retail installment contracts and auto loans	21,623,534		28.6	%	81,804		0.2	%
Personal unsecured loans	1,861,805		2.5	%	493,785		1.0	%
Other consumer⁽³⁾	1,457,058		1.9	%	1,321,985		2.6	%
Total consumer loans	40,635,895		53.8	%	17,770,455		35.6	%
Total loans held for investment⁽¹⁾	$	75,637,888	100.0	%	$	49,921,677	100.0	%
Total loans held for investment:
Fixed rate	$	47,478,105	62.8	%	$	23,431,663	46.9	%
Variable rate	28,159,783		37.2	%	26,490,014		53.1	%
Total loans held for investment⁽¹⁾	$	75,637,888	100.0	%	$	49,921,677	100.0	%

(1)Total loans held for investment includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. These items resulted in a net decrease in loan balances of $2.2 billion as of June 30, 2014 and a net increase in loan balances of $122.6 million as of December 31, 2013, respectively. The significant fluctuation between periods is due to the purchase accounting marks resulting from the Change in Control of SCUSA.

(2)Other commercial primarily includes commercial equipment vehicle funding ("CEVF") and loans.

(3)Other consumer primarily includes recreational vehicles and marine loans.

Portfolio segments and classes

GAAP requires that entities disclose information about the credit quality of their financing receivables at disaggregated levels, specifically defined as “portfolio segments” and “classes,” based on management’s systematic methodology for determining the allowance for credit losses. For this, compared to the financial statement categorization of loans, the Company utilizes an alternate categorization to model and calculate the allowance for credit losses 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.

During the first quarter of 2014, the Company re-evaluated its portfolio classes of financing receivables as a result of the Change in Control of SCUSA. In connection with this evaluation, the Company has updated the following financing receivables disclosures to provide a clear reconciliation of its financial statement categorization to its portfolio segments and classes.

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

The commercial segmentation reflects line of business distinctions. The three commercial real estate line of business distinctions include “Corporate banking” which includes commercial & industrial owner-occupied real estate, “Middle market commercial real estate” which represents the portfolio of specialized lending for investment real estate, including financing for continuing care retirement communities and “Santander real estate capital” which is the commercial real estate portfolio of the specialized lending group. "Commercial and industrial" loans includes non-real estate-related commercial and industrial loans. "Multifamily" represents loans for multi-family residential housing units. “Other commercial” primarily represents the CEVF business.

The following table reconciles the Company's recorded investment classified by its major loan classifications to its commercial loan classifications utilized in its determination of the allowance for loan losses and other credit quality disclosures at June 30, 2014 and December 31, 2013, respectively:



Commercial Portfolio Segment⁽²⁾
Major Loan Classifications⁽¹⁾	June 30, 2014		December 31, 2013
	(in thousands)
Commercial loans held for investment:
Commercial real estate:
Corporate Banking	$	3,412,053	$	3,767,869
Middle Markets Real Estate⁽³⁾	$	3,599,924	$	3,510,371
Santander Real Estate Capital	$	1,885,808	$	2,025,645
Total commercial real estate	$	8,897,785	9,303,885
Commercial and industrial loans⁽⁴⁾	14,954,380		12,820,417
Multi-family loans	9,229,611		8,237,029
Other commercial	1,920,217		1,789,891
Total commercial loans held for investment	$	35,001,993	$	32,151,222


(1)	These represent the Company's loan categories based on the SEC's Regulation S-X, Article 9.


(2)	These represent the Company's loan classes used to determine its allowance for loan and lease losses in accordance with ASC 310-10.


(3)	Middle markets commercial real estate excluded $11.2 million and $0.0 million of LHFS at June 30, 2014 and December 31, 2013, respectively.


(4)	Commercial and industrial loans excluded $41.1 million and $17.9 million of LHFS at June 30, 2014 and December 31, 2013, respectively.

The Company's portfolio segments are substantially the same as its financial statement categorization of loans for the consumer loan populations. “Residential mortgages” includes mortgages on residential property including single family and 1-4 family units. "Home equity loans and lines of credit” includes all organic home equity contracts and purchased home equity portfolios. "Retail installment contracts and auto loans" includes the Company's direct automobile loan portfolios, but excludes recreational vehicle (RV) and marine retail installment contracts. "Personal unsecured loans" includes personal revolving loans and credit cards. “Other consumer” includes an acquired portfolio of marine and RV contracts as well as indirect auto loans.



Consumer Portfolio Segment⁽²⁾
Major Loan Classifications⁽¹⁾	June 30, 2014		December 31, 2013
	(in thousands)
Consumer loans secured by real estate:
Residential mortgages⁽³⁾	9,503,023		9,561,187
Home equity loans and lines of credit	6,190,475		6,311,694
Total consumer loans secured by real estate	15,693,498		15,872,881
Consumer loans not secured by real estate:
Retail installment contracts and auto loans⁽⁴⁾	21,623,534		81,804
Personal unsecured loans	1,861,805		493,785
Other consumer	1,457,058		1,321,985
Total consumer loans held for investment	$	40,635,895	$	17,770,455


(1)	These represent the Company's loan categories based on the SEC's Regulation S-X, Article 9.


(2)	These represent the Company's loan classes used to determine its allowance for loan and lease losses in accordance with ASC 310-10.


(3)	Home mortgages excludes $148.7 million and $111.0 million of LHFS at June 30, 2014 and December 31, 2013, respectively.


(4)	Retail installment contracts and auto loans excludes $89.4 million and $0.0 million of LHFS at June 30, 2014 and December 31, 2013, respectively.

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Allowance for Credit Losses Rollforward by Portfolio Segment

The activity in the allowance for credit losses by portfolio segment for the three-month and six-month periods ended June 30, 2014 and 2013 was as follows:



	Three-Month Period Ended June 30, 2014
	Commercial			Consumer			Unallocated			Total
	(in thousands)
Allowance for loan and lease losses, beginning of period	$	434,160		$	631,942		$	44,490		$	1,110,592
(Recovery of)/Provision for loan losses	(55,784		)	752,307			(5,489		)	691,034
Charge-offs	(22,886		)	(614,818		)	—			(637,704		)
Recoveries	4,321			257,613			—			261,934
Charge-offs, net of recoveries	(18,565		)	(357,205		)	—			(375,770		)
Allowance for loan and lease losses, end of period	$	359,811		$	1,027,044		$	39,001		$	1,425,856

Reserve for unfunded lending commitments, beginning of period	$	180,000		$	—		$	—		$	180,000
Provision for unfunded lending commitments	(5,000		)	—			—			(5,000		)
Loss on unfunded lending commitments	(4,726		)	—			—			(4,726		)
Reserve for unfunded lending commitments, end of period	170,274			—			—			170,274
Total allowance for credit losses, end of period	$	530,085		$	1,027,044		$	39,001		$	1,596,130

	Six-Month Period Ended June 30, 2014
	Commercial			Consumer			Unallocated			Total
	(in thousands)
Allowance for loan losses, beginning of period	$	443,074		$	363,647		$	27,616		$	834,337
(Recovery of)/Provision for loan losses	(40,496		)	1,095,475			11,385			1,066,364
Charge-offs	(52,477		)	(762,567		)	—			(815,044		)
Recoveries	9,710			330,489			—			340,199
Charge-offs, net of recoveries	(42,767		)	(432,078		)	—			(474,845		)
Allowance for loan and lease losses, end of period	$	359,811		$	1,027,044		$	39,001		$	1,425,856

Reserve for unfunded lending commitments, beginning of period	$	220,000		$	—		$	—		$	220,000
Provision for unfunded lending commitments	(45,000		)	—			—			(45,000		)
Loss on unfunded lending commitments	(4,726		)	—			—			(4,726		)
Reserve for unfunded lending commitments, end of period	170,274			—			—			170,274
Total allowance for credit losses, end of period	$	530,085		$	1,027,044		$	39,001		$	1,596,130
Ending balance, individually evaluated for impairment⁽²⁾	$	75,973		$	129,633		$	—		$	205,606
Ending balance, collectively evaluated for impairment	$	283,838		$	897,411		$	39,001		$	1,220,250

Financing receivables:
Ending balance	$	35,054,313		$	40,873,982		$	—		$	75,928,295
Ending balance, evaluated under the fair value option or lower of cost or fair value⁽¹⁾	52,320			$	1,511,159		$	—		$	1,563,479
Ending balance, individually evaluated for impairment⁽²⁾	$	493,556		$	603,311		$	—		$	1,096,867
Ending balance, collectively evaluated for impairment	$	34,508,437		$	38,759,512		$	—		$	73,267,949


(1)	Represents LHFS and those loans for which the Company has elected the fair value option


(2)	Consumer loans individually evaluated for impairment consists of loans in TDR status

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)



	Three-Month Period Ended June 30, 2013
	Commercial			Consumer			Unallocated			Total
	(in thousands)
Allowance for loan and lease losses, beginning of period	$	538,116		$	385,893		$	47,083		$	971,092
(Recovery of)/Provision for loan losses	(1,954		)	15,570			(3,616		)	10,000
Charge-offs	(36,247		)	(42,528		)	—			(78,775		)
Recoveries	9,137			13,408			—			22,545
Charge-offs, net of recoveries	(27,110		)	(29,120		)	—			(56,230		)
Allowance for loan and lease losses, end of period	$	509,052		$	372,343		$	43,467		$	924,862

Reserve for unfunded lending commitments, beginning of period	$	210,000		$	—		$	—		$	210,000
Provision for unfunded lending commitments	—			—			—			—
Reserve for unfunded lending commitments, end of period	210,000			—			—			210,000
Total allowance for credit losses, end of period	$	719,052		$	372,343		$	43,467		$	1,134,862

	Six-Month Period Ended June 30, 2013
	Commercial			Consumer			Unallocated			Total
	(in thousands)
Allowance for loan losses, beginning of period	$	580,931		$	407,259		$	25,279		$	1,013,469
(Recovery of)/Provision for loan losses	(32,798		)	41,460			18,188			26,850
Charge-offs	(70,586		)	(99,222		)	—			(169,808		)
Recoveries	31,505			22,846			—			54,351
Charge-offs, net of recoveries	(39,081		)	(76,376		)	—			(115,457		)
Allowance for loan losses, end of period	$	509,052		$	372,343		$	43,467		$	924,862

Reserve for unfunded lending commitments, beginning of period	$	210,000		$	—		$	—		$	210,000
Provision for unfunded lending commitments	—			—			—			—
Reserve for unfunded lending commitments, end of period	210,000			—			—			210,000
Total allowance for credit losses, end of period	$	719,052		$	372,343		$	43,467		$	1,134,862
Ending balance, individually evaluated for impairment⁽²⁾	77,242			138,283			—			$	215,525
Ending balance, collectively evaluated for impairment	431,810			234,060			43,467			$	709,337

Financing receivables:
Ending balance	$	31,740,785		$	18,611,810		$	—		$	50,352,595
Ending balance, evaluated under the fair value option or lower of cost or fair value⁽¹⁾	—			454,262			—			$	454,262
Ending balance, individually evaluated for impairment⁽²⁾	501,837			761,492			—			$	1,263,329
Ending balance, collectively evaluated for impairment	31,238,948			17,396,056			—			$	48,635,004


(1)	Represents LHFS and those loans for which the Company has elected the fair value option


(2)	Consumer loans individually evaluated for impairment consists of loans in TDR status

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Non-accrual loans by Class of Financing Receivable

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



	June 30, 2014		December 31, 2013
	(in thousands)
Non-accrual loans:
Commercial:
Commercial real estate:
Corporate banking	$	99,023	$	93,100
Middle market commercial real estate	113,584		143,802
Santander real estate capital	3,847		13,171
Commercial and industrial	63,399		97,254
Multifamily	14,115		21,371
Other commercial	3,477		3,640
Total commercial loans	297,445		372,338
Consumer:
Residential mortgages	448,249		473,566
Home equity loans and lines of credit	143,787		141,961
Retail installment contracts and auto loans	816,984		1,205
Personal unsecured loans	32,585		—
Other consumer	8,933		9,339
Total consumer loans	1,450,538		626,071
Total non-accrual loans	$	1,747,983	$	998,409

Other real estate owned	85,458		88,603
Repossessed vehicles	141,305		—
Other repossessed assets	6,379		3,073
Total other real estate owned and other repossessed assets	233,142		91,676
Total non-performing assets	$	1,981,125	$	1,090,085

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Age Analysis of Past Due Loans

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



	As of June 30, 2014
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables⁽¹⁾		Recorded Investment > 90 Days and Accruing
	(in thousands)
Commercial:
Commercial real estate:
Corporate banking	$	14,694	$	5,122	$	52,470	$	72,286	$	3,339,767	$	3,412,053	$	—
Middle market commercial real estate	21,179		6,941		63,369		91,489		3,519,645		3,611,134		—
Santander real estate capital	—		—		—		—		1,885,808		1,885,808		—
Commercial and industrial	12,650		8,754		29,280		50,684		14,944,806		14,995,490		—
Multifamily	10,100		3,012		6,168		19,280		9,210,331		9,229,611		—
Other commercial	1,913		635		1,090		3,638		1,916,579		1,920,217		—
Consumer:
Residential mortgages	160,129		70,094		357,066		587,289		9,064,417		9,651,706		—
Home equity loans and lines of credit	23,034		9,079		81,281		113,394		6,077,081		6,190,475		—
Retail installment contracts and auto loans	1,941,432		617,470		200,918		2,759,820		18,953,118		21,712,938		—
Personal unsecured loans	49,845		12,516		28,544		90,905		1,770,900		1,861,805		88,777
Other consumer	21,733		13,077		29,005		63,815		1,393,243		1,457,058		—
Total	$	2,256,709	$	746,700	$	849,191	$	3,852,600	$	72,075,695	$	75,928,295	$	88,777


(1)	Financing receivables include LHFS.



	As of December 31, 2013
	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Financing Receivables⁽¹⁾		Recorded Investment > 90 Days and Accruing
	(in thousands)
Commercial:
Commercial real estate:
Corporate banking	$	12,758	$	5,751	$	57,503	$	76,012	$	3,691,858	$	3,767,870	$	—
Middle market commercial real estate	5,980		13,897		83,809		103,686		3,406,685		3,510,371		—
Santander real estate capital	4,177		9,705		—		13,882		2,011,762		2,025,644		—
Commercial and industrial	15,966		4,310		34,354		54,630		12,783,719		12,838,349		—
Multifamily	2,039		5,235		9,563		16,837		8,220,192		8,237,029		—
Other commercial	3,412		182		2,171		5,765		1,784,126		1,789,891		—
Consumer:
Residential mortgages	185,630		86,563		379,076		651,269		9,020,935		9,672,204		—
Home equity loans and lines of credit	32,017		15,567		80,551		128,135		6,183,559		6,311,694		—
Retail installment contracts and auto loans	7,900		2,988		1,205		12,093		69,711		81,804		—
Personal unsecured loans	4,289		1,693		4,536		10,518		483,267		493,785		2,545
Other consumer	29,641		11,835		31,091		72,567		1,249,418		1,321,985		—
Total	$	303,809	$	157,726	$	683,859	$	1,145,394	$	48,905,232	$	50,050,626	$	2,545


(1)	Financing receivables include LHFS.

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Impaired Loans by Class of Financing Receivable

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

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



	June 30, 2014
	Recorded Investment⁽¹⁾	Unpaid Principal Balance	Related Specific Reserves	Average Recorded Investment
	(in thousands)
With no related allowance recorded:
Commercial:
Commercial real estate:
Corporate banking	51,940	39,271	—	47,713
Middle market commercial real estate	110,774	58,764	—	105,956
Santander real estate capital	3,818	3,818	—	2,285
Commercial and industrial	4,988	4,988	—	9,060
Multifamily	25,262	25,262	—	26,147
Other commercial	154	154	—	77
Consumer:
Residential mortgages	84,622	84,622	—	88,383
Home equity loans and lines of credit	29,334	29,334	—	30,204
Retail installment contracts and auto loans	38,769	38,626	—	19,385
Personal unsecured loans	13,610	13,610	—	6,805
Other consumer	7,130	7,130	—	7,738
With an allowance recorded:
Commercial:
Commercial real estate:
Corporate banking	42,186	35,100	16,424	47,974
Middle market commercial real estate	77,000	55,541	17,012	97,923
Santander real estate capital	1,840	594	161	5,611



Commercial and industrial	100,027		84,044		39,503		100,126
Multifamily	5,857		4,724		1,442		8,638
Other commercial	1,484		1,090		1,431		831
Consumer:
Residential mortgages	553,442		495,440		120,211		550,386
Home equity loans and lines of credit	58,165		49,340		4,880		56,533
Retail installment contracts and auto loans	1,933,382		1,925,380		942		966,691
Personal unsecured loans	2,208		2,208		527		2,372
Other consumer	16,983		10,456		3,073		17,233
Total:
Commercial	$	425,330	$	313,350	$	75,973	$	452,344
Consumer	2,737,645		2,656,146		129,633		1,745,732
Total	$	3,162,975	$	2,969,496	$	205,606	2,198,076


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

The Company recognized interest income of $54.1 million for the six-month period ended June 30, 2014 on approximately $1.3 billion of TDRs that were returned to performing status as of June 30, 2014.

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)



	December 31, 2013
	Recorded Investment⁽¹⁾		Unpaid Principal Balance		Related Specific Reserves		Average Recorded Investment
	(in thousands)
With no related allowance recorded:
Commercial:
Commercial real estate:
Corporate banking	$	43,485	$	30,131	$	—	$	43,485
Middle market commercial real estate	101,137		128,874		—		101,137
Santander real estate capital	751		751		—		751
Commercial and industrial	13,131		42,512		—		13,131
Multifamily	27,031		27,031		—		27,031
Other commercial	—		—		—		—
Consumer:
Residential mortgages	92,143		92,143		—		92,143
Home equity loans and lines of credit	31,074		31,074		—		31,074
Retail installment contracts and auto loans	—		—		—		—
Personal unsecured loans	—		—		—		—
Other consumer	8,345		17,420		—		8,345
With an allowance recorded:
Commercial:
Corporate banking	53,762		52,100		10,298		53,762
Middle market commercial real estate	118,845		185,649		26,130		118,845
Santander real estate capital	9,382		8,136		1,701		9,382
Commercial and industrial	100,224		118,276		50,252		100,224
Multifamily	11,418		8,456		2,201		11,418
Other commercial	177		177		12		177
Consumer:
Residential mortgages	547,329		603,866		124,746		547,329
Home equity loans and lines of credit	54,900		63,975		5,479		54,900
Retail installment contracts and auto loans	—		—		—		—
Personal unsecured loans	2,535		2,535		677		2,535
Other consumer	17,483		17,482		4,300		17,483
Total:
Commercial	$	479,343	$	602,093	$	90,594	$	479,343
Consumer	753,809		828,495		135,202		753,809
Total	$	1,233,152	$	1,430,588	$	225,796	$	1,233,152


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

The Company recognized interest income of $42.0 million for the year ended December 31, 2013 on approximately $656.6 million of TDRs that were returned to performing status as of December 31, 2013.

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Commercial Lending Asset Quality Indicators

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

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

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

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

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

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

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



	Commercial Real Estate
June 30, 2014	Corporate banking		Middle market commercial real estate		Santander real estate capital		Commercial and industrial		Multifamily		Remaining commercial		Total⁽¹⁾
	(in thousands)
Regulatory Rating:
Pass	$	3,078,566	$	3,242,055	$	1,660,988	$	14,413,266	$	9,106,009	$	1,907,647	$	33,408,531
Special Mention	108,295		126,373		123,044		299,606		59,858		3,673		720,849
Substandard	191,152		188,143		101,002		260,582		63,215		8,280		812,374
Doubtful	34,040		54,563		774		22,036		529		617		112,559
Total commercial loans	$	3,412,053	$	3,611,134	$	1,885,808	$	14,995,490	$	9,229,611	$	1,920,217	$	35,054,313


(1)	Financing receivables include LHFS.



	Commercial Real Estate
December 31, 2013	Corporate banking		Middle market commercial real estate		Santander real estate capital		Commercial and industrial		Multifamily		Remaining commercial		Total⁽¹⁾
	(in thousands)
Regulatory Rating:
Pass	$	3,385,253	$	3,068,667	$	1,779,544	$	12,320,254	$	8,109,023	$	1,764,157	$	30,426,898
Special Mention	106,001		62,062		112,257		283,939		59,379		17,196		640,834
Substandard	260,122		310,318		132,999		202,347		63,284		8,361		977,431
Doubtful	16,494		69,325		844		31,808		5,343		177		123,991
Total commercial loans	$	3,767,870	$	3,510,372	$	2,025,644	$	12,838,348	$	8,237,029	$	1,789,891	$	32,169,154


(1)	Financing receivables include LHFS.

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Consumer Lending Asset Quality Indicators - Class of Financing Receivables

Consumer credit quality disaggregated by class of financing receivables is summarized as follows:



June 30, 2014	Residential mortgages		Home equity loans and lines of credit		Retail installment contracts and auto loans		Personal unsecured loans		Other consumer		Total⁽¹⁾
	(in thousands)
Performing	$	9,203,457	$	6,046,688	$	20,895,954	$	1,829,220	$	1,448,125	$	39,423,444
Non-performing	448,249		143,787		816,984		32,585		8,933		1,450,538
Total consumer loans	$	9,651,706	$	6,190,475	$	21,712,938	$	1,861,805	$	1,457,058	$	40,873,982


(1)	Financing receivables include LHFS.



December 31, 2013	Residential mortgages		Home equity loans and lines of credit		Retail installment contracts and auto loans		Personal unsecured loans		Other consumer		Total⁽¹⁾
	(in thousands)
Performing	$	9,198,639	$	6,203,419	$	79,936	$	493,785	$	1,279,622	$	17,255,401
Non-performing	473,565		108,275		1,868		—		42,363		626,071
Total consumer loans	$	9,672,204	$	6,311,694	$	81,804	$	493,785	$	1,321,985	$	17,881,472


(1)	Financing receivables include LHFS.

Consumer Lending Asset Quality Indicators-Credit Score

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



June 30, 2014
Credit Score Range⁽²⁾	Retail installment contracts and auto loans⁽³⁾		Percent		Personal unsecured loans balance		Percent		Home equity loans and lines of credit		Percent
	(dollars in thousands)
<600	$	11,442,318	52.7	%	$	361,930	19.4	%	$	321,601	5.2	%
600-639	3,937,751		18.1	%	328,960		17.7	%	279,906		4.5	%
640-679	2,016,931		9.3	%	439,984		23.6	%	528,394		8.5	%
680-719	1,077,126		5.0	%	222,728		12.0	%	853,451		13.8	%
720-759	426,480		2.0	%	106,736		5.7	%	1,183,513		19.1	%
>=760	489,538		2.3	%	76,979		4.1	%	2,787,403		44.9	%
N/A⁽¹⁾	2,322,794		10.6	%	324,488		17.5	%	236,207		4.0	%
Total	$	21,712,938	100.0	%	$	1,861,805	100.0	%	$	6,190,475	100.0	%


(1)	Consists primarily of loans serviced by third parties. Loans serviced by third parties do not receive refreshed FICO scores. Home equity loans and lines of credit "N/A" range includes the purchased home equity portfolio in run-off.


(2)	Credit scores updated quarterly.


(3)	Includes LHFS.

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)



December 31, 2013
Credit Score Range⁽²⁾	Personal unsecured loans balance		Percent		Home equity loans and lines of credit		Percent
	(dollars in thousands)
<600	$	10,221	2.1	%	$	336,713	5.3	%
600-639	6,152		1.2	%	281,186		4.5	%
640-679	24,855		5.0	%	524,937		8.3	%
680-719	53,842		11.0	%	869,460		13.8	%
720-759	55,546		11.2	%	1,223,179		19.4	%
>=760	60,002		12.2	%	2,775,970		44.0	%
N/A⁽¹⁾	283,167		57.3	%	300,249		4.7	%
Total	$	493,785	100.0	%	$	6,311,694	100.0	%


(1)	Consists primarily of loans serviced by third parties. Loans serviced by third parties do not receive refreshed FICO scores. Home equity loans and lines of credit "N/A" range includes the purchased home equity portfolio in run-off.


(2)	Credit scores updated quarterly.

Consumer Lending Asset Quality Indicators-Combined Loan to Value Range

Residential mortgage and home equity financing receivables by combined loan-to-value ("CLTV") range are summarized as follows:



June 30, 2014
	Residential mortgages⁽⁴⁾				Home equity loans and lines of credit
CLTV Range⁽¹⁾	Amount		Percent		Amount		Percent
	(dollars in thousands)
<=80%	$	7,638,124	79.1	%	$	4,807,983	77.7	%
80.01 - 90%	603,291		6.3	%	351,249		5.7	%
90.01 - 100%	464,951		4.8	%	218,471		3.5	%
100.01 - 120%	276,393		2.9	%	282,413		4.6	%
120.01 - 140%	114,636		1.2	%	106,662		1.7	%
>140%	134,741		1.4	%	84,424		1.4	%
N/A⁽²⁾⁽³⁾	419,570		4.3	%	339,273		5.4	%
Total	$	9,651,706	100.0	%	$	6,190,475	100.0	%



December 31, 2013
	Residential mortgages⁽⁴⁾				Home equity loans and lines of credit
CLTV Range⁽¹⁾	Amount		Percent		Amount		Percent
	(dollars in thousands)
<=80%	$	7,124,926	73.7	%	$	4,061,541	64.3	%
80.01 - 90%	665,806		6.9	%	946,933		15.0	%
90.01 - 100%	647,079		6.7	%	357,817		5.7	%
100.01 - 120%	451,833		4.7	%	338,194		5.4	%
120.01 - 140%	188,201		1.9	%	125,099		2.0	%
>140%	199,016		2.1	%	108,664		1.7	%
N/A⁽²⁾⁽³⁾	395,343		4.0	%	373,446		5.9	%
Total	$	9,672,204	100.0	%	$	6,311,694	100.0	%


(1)	CLTV is inclusive of senior lien balances and updated as deemed necessary. CLTV ranges represent the unpaid principal balance.


(2)	Residential mortgage "N/A" range represents the unpaid principal balance on loans that are in process and loans which are serviced by others, for which a current CLTV is unavailable, plus deferred loan origination costs, net of deferred loan fees and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments


(3)	Home equity loans and lines of credit "N/A" range represents the unpaid principal balance on loans which are serviced by others, for which a current CLTV is unavailable, plus the purchased home equity portfolio in run-off.


(4)	Includes LHFS.

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

For both residential and home equity loans, loss severity assumptions are incorporated in the loan loss reserve models to estimate loan balances that will ultimately charge-off. These assumptions are based on recent loss experience within various combined LTV ("CLTV") bands within these portfolios. CLTVs are refreshed quarterly by applying Federal Housing Finance Agency Home Price Index changes at a state-by-state level to the last known appraised value of the property to estimate the current CLTV. The Company's allowance for loan losses incorporates the refreshed CLTV information to update the distribution of defaulted loans by CLTV as well as the associated loss given default for each CLTV band. Reappraisals 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.

Troubled Debt Restructurings

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



	June 30, 2014		December 31, 2013
	(in thousands)
Performing	$	1,292,488	$	656,606
Non-performing	356,724		347,037
Total	$	1,649,212	$	1,003,643

Commercial Loan TDRs

All of the Company’s commercial loan modifications are based on the circumstances of the individual customer, including specific customers' complete relationship with the Company. Loan terms are modified to meet each borrower’s specific circumstances at a point in time. 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. As TDRs, they will be subject to analysis for specific reserves by either calculating the present value of expected future cash flows or, if collateral-dependent, calculating the fair value of the collateral less its estimated cost to sell. The TDR classification will remain on the loan until it is paid in full or liquidated.

Consumer Loan TDRs

The primary modification program for the Company’s residential mortgage and home equity portfolios is a proprietary program designed to keep customers in their homes and, when appropriate, prevent them from entering into foreclosure. The program is available to all customers facing a financial hardship regardless of their delinquency status. The main goal of the modification program is to review the customer’s entire financial condition to ensure that the proposed modified payment solution is affordable according to a specific debt-to-income ratio (“DTI”) range. The main modification benefits of the program allow for term extensions, interest rate reductions, 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, the terms of the modifications generally include one or a combination of the following: a reduction of the stated interest rate of the loan at a rate of interest lower than the current market rate for new debt with similar risk or an extension of the maturity date.

Consumer TDRs are generally placed on non-accrual status until the Company believes repayment under the revised terms is reasonably assured and a sustained period of repayment performance has been achieved (typically 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 enacted. Exceptions to this policy include retail installment contracts, which may begin accruing as soon as they are made current by the borrower. The TDR classification will remain on the loan until it is paid in full or liquidated for all portfolios

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

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

TDR Impact to Allowance for Loan Losses

The allowance for loan losses is established to recognize losses inherent in funded loans intended to be held for investment that are probable and can be reasonably estimated. Prior to loans being placed in TDR, 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, LTVs and credit scores.

Upon TDR modification, the Company generally measures impairment based on a present value of expected future cash flows methodology considering all available evidence using the effective interest rate or fair value of collateral. The amount of the required valuation allowance is equal to the difference between the loan’s impaired value and the recorded investment.

When a consumer TDR subsequently defaults, the Company generally measures impairment based on the fair value of the collateral, if applicable, less its estimated cost to sell.

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

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)

Financial Impact and TDRs by Concession Type

The following tables detail the activity of TDRs for the three-month and six-month periods ended June 30, 2014 and June 30, 2013, respectively:



	Three-Month Period Ended June 30, 2014
	Number of Contracts	Pre-Modification Outstanding Recorded Investment⁽¹⁾		Post-Modification Outstanding Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
Commercial real estate:
Corporate Banking	7	$	30,961	$	30,328
Middle market commercial real estate	3	9,939		6,828
Santander real estate capital	—	—		—
Commercial and industrial	—	—		—
Multifamily	—	—		—
Other commercial	2	549		527
Consumer:
Residential mortgages⁽³⁾	78	10,922		11,396
Home equity loans and lines of credit	28	2,893		2,893
Retail installment contracts and auto loans	56,059	911,882		853,530
Personal unsecured loans	24,247	14,847		14,754
Other consumer	4	371		371
Total	80,428	$	982,364	$	920,627

	Six-Month Period Ended June 30, 2014
	Number of Contracts	Pre-Modification Outstanding Recorded Investment⁽¹⁾		Post-Modification Outstanding Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
Commercial real estate:
Corporate Banking	21	$	53,278	$	52,041
Middle market commercial real estate	3	9,939		6,828
Santander real estate capital	—	—		—
Commercial and industrial	—	—		—
Multifamily	—	—		—
Other commercial	3	1,046		1,027
Consumer:
Residential mortgages⁽³⁾	157	28,733		29,066
Home equity loans and lines of credit	54	5,178		5,178
Retail installment contracts and auto loans	68,773	1,041,023		980,462
Personal unsecured loans	24,247	14,847		14,754
Other consumer	5	412		413
Total	93,263	$	1,154,456	$	1,089,769


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


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


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

NOTE 5. LOANS AND ALLOWANCE FOR CREDIT LOSSES (continued)



	Three-Month Period Ended June 30, 2013
	Number of Contracts	Pre-Modification Outstanding Recorded Investment⁽¹⁾		Post-Modification Outstanding Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
Commercial real estate:
Middle markets commercial real estate	1	$	7,820	$	7,820
Santander real estate capital	1	1,316		1,352
Other commercial	2	1,078		1,022
Consumer:
Residential mortgages⁽³⁾	90	16,060		16,475
Home equity loans and lines of credit	30	2,577		2,580
Total	124	$	28,851	$	29,249

	Six-Month Period Ended June 30, 2013
	Number of Contracts	Pre-Modification Outstanding Recorded Investment⁽¹⁾		Post-Modification Outstanding Recorded Investment⁽²⁾
	(dollars in thousands)
Commercial:
Commercial real estate:
Corporate banking	1	19,750		18,767
Middle markets commercial real estate	1	$	7,820	$	7,820
Santander real estate capital	2	4,040		3,540
Other commercial	7	2,790		2,718
Consumer:
Residential mortgages⁽³⁾	182	31,863		32,607
Home equity loans and lines of credit	109	8,787		8,795
Total	302	$	75,050	$	74,247


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


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


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

TDRs Which Have Subsequently Defaulted

A TDR is generally considered to have subsequently defaulted if it is 90 days past due after modification. For retail installment contracts, a TDR is considered to have subsequently defaulted at the earlier of the date of repossession or 120 days past due after becoming a TDR. The following table details TDRs that became TDRs during the past twelve-month period and have subsequently defaulted during the three-month and six-month periods ended June 30, 2014 and June 30, 2013, respectively.



	Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
	2014			2013			2014			2013
	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)
Consumer:
Residential mortgages	9	$	779	4	$	618	21	$	2,694	14	$	3,412
Home equity loans and lines of credit	2	312		5	397		2	312		7	773
Retail installment contracts and auto loans	788	9,379		—	—		788	9,379		—	—
Other consumer	1	27		—	—		1	27		—	—
Total	800	$	10,497	9	$	1,015	812	$	12,412	21	$	4,185


(1)	The recorded investment represents the period-end balance at June 30, 2014 and 2013. Does not include Chapter 7 bankruptcy TDRs.