UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2017

OR

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

For the transition period from to .

Commission File Number: 001-16581

SANTANDER HOLDINGS USA, INC.

(Exact name of registrant as specified in its charter)

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

(617) 346-7200

Registrant’s telephone number including area code

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    

Yes þ.   No o.

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act.    

Yes o.   No þ.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ. No o.

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation ST (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ. No o.

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See definition of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

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 February 28, 2018
Common Stock (no par value)	530,391,043 shares

INDEX

	Page
Forward-Looking Statements	1
PART I	4
Item 1. Business	4
Item 1A. Risk Factors	15
Item 1B. Unresolved Staff Comments	37
Item 2. Properties	38
Item 3. Legal Proceedings	38
Item 4. Mine Safety Disclosures	38
PART II	38
Item 5. Market for the Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	38
Item 6. Selected Financial Data	39
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations	40
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	112
Item 8. Financial Statements and Supplementary Data	113
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	222
Item 9A. Controls and Procedures	222
Item 9B. Other Information	228
PART III	229
Item 10. Directors, Executive Officers and Corporate Governance	229
Item 11. Executive Compensation	235
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	259
Item 13. Related Party Transactions	259
Item 14. Principal Accounting Fees and Services	266
PART IV	267
Item 15. Exhibits and Financial Statements Schedules	267
Item 16. Form 10-K Summary	268
SIGNATURES	269

3

FORWARD-LOOKING STATEMENTS

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

• 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 or losses 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;

• changes in customer spending or savings behavior;

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

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

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

• changes to income tax laws and regulations;

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

• the costs and effects of regulatory or judicial proceedings; and

• adverse publicity, and negative public opinion, whether specific to SHUSA or regarding other industry participants or industry-wide factors, or other reputational harm.

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 Consolidated Financial Statements and the Notes to Consolidated Financial Statements.

ABS: Asset-backed securities	DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act
ACL: Allowance for credit losses	DOJ: Department of Justice
AFS: Available-for-sale	DTI: Debt-to-income
ALLL: Allowance for loan and lease losses	ECOA: Equal Credit Opportunity Act
Alt-A: Loans originated through brokers outside the Bank's geographic footprint, often lacking full documentation	EPS: Enhanced Prudential Standards
AOD: Assurance of Discontinuance	ETR: Effective tax rate
APR: Annual percentage rate	Exchange Act: Securities Exchange Act of 1934, as amended
ASC: Accounting Standards Codification	FASB: Financial Accounting Standards Board
ASU: Accounting Standards Update	FBO: Foreign banking organization
ATM: Automated teller machine	FCA: Fiat Chrysler Automobiles US LLC
Bank: Santander Bank, National Association	FDIA: Federal Deposit Insurance Corporation Improvement Act
BEA: Bureau of Economic Analysis	FDIC: Federal Deposit Insurance Corporation
BHC: Bank holding company	Federal Reserve: Board of Governors of the Federal Reserve System
BOLI: Bank-owned life insurance	FHLB: Federal Home Loan Bank
BSI: Banco Santander International	FHLMC: Federal Home Loan Mortgage Corporation
CBP: Citizens Bank of Pennsylvania	FICO®: Fair Isaac Corporation credit scoring model
CCAR: Comprehensive Capital Analysis and Review	Final Rule: Rule implementing certain of the EPS mandated by Section 165 of the DFA
CD: Certificate(s) of deposit	FNMA: Federal National Mortgage Association
CEO: Chief Executive Officer	FRB: Federal Reserve Bank
CEVF: Commercial equipment vehicle financing	FTP: Funds transfer pricing
CET1: Common equity Tier 1	FVO: Fair value option
CFPB: Consumer Financial Protection Bureau	GAAP: Accounting principles generally accepted in the United States of America
Change in Control: First quarter 2014 change in control and consolidation of SC	GCB: Global Corporate Banking
Chrysler Agreement: Ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC, formerly Chrysler Group LLC, signed by SC	HQLA: High-quality liquid assets
Chrysler Capital: Trade name used in providing services under the Chrysler Agreement	IHC: U.S. intermediate holding company
CLTV: Combined loan-to-value	IPO: Initial public offering
CMO: Collateralized mortgage obligation	IRS: Internal Revenue Service
CMP: Civil monetary penalty	ISDA: International Swaps and Derivatives Association, Inc.
CODM: Chief Operating Decision Maker	IT: Information technology
Company: Santander Holdings USA, Inc.	LendingClub: LendingClub Corporation, a peer-to-peer personal lending platform company from which SC acquires loans under flow agreements
Consent Order: Consent order signed by the Bank with the CFPB on July 14, 2016 regarding the Bank’s overdraft coverage practices for ATM and one-time debit card transactions	LCR: Liquidity coverage ratio
Covered Fund: hedge fund or a private equity fund under the Volcker Rule	LHFI: Loans held-for-investment
CPR: Changes in anticipated loan prepayment rates	LHFS: Loans held-for-sale
CRA: Community Reinvestment Act	LIBOR: London Interbank Offered Rate
DCF: Discounted cash flow	LIHTC: Low Income Housing Tax Credit
DDFS: Dundon DFS LLC	LTD: Long-term debt

2

LTV: Loan-to-value	Santander NY: New York branch of Banco Santander, S.A.
MBS: Mortgage-backed securities	Santander UK: Santander UK plc
Massachusetts AG: Massachusetts Attorney General	SBNA: Santander Bank, National Association
MD&A: Management's Discussion and Analysis of Financial Condition and Results of Operations	SC: Santander Consumer USA Holdings Inc. and its subsidiaries
MSR: Mortgage servicing right	SC Common Stock: Common shares of SC
NCI: Non-controlling interest	SCF: Statement of cash flows
NMD: Non-maturity deposits	SDART: Santander Drive Auto Receivables Trust, a SC securitization platform
NPL: Non-performing loan	SDGT: Specially Designated Global Terrorist
NSFR: Net stable funding ratio	SEC: Securities and Exchange Commission
NYSE: New York Stock Exchange	Securities Act: Securities Act of 1933, as amended
OCC: Office of the Comptroller of the Currency	Separation Agreement: Agreement entered into by Thomas Dundon, the former Chief Executive Officer of SC, DDFS, SC and Santander on July 2, 2015
OEM: Original equipment manufacturer	SFS: Santander Financial Services, Inc.
OIS: Overnight indexed swap	SHUSA: Santander Holdings USA, Inc.
Order: OCC consent order signed by SBNA on January 26, 2012 which replaced a prior order signed by the Bank and other parties with the OTS	SIS: Santander Investment Securities Inc.
OREO: Other real estate owned	SPAIN: Santander Prime Auto Issuing Note Trust, a securitization platform
OTTI: Other-than-temporary impairment	SPE: Special purpose entity
Parent Company: the parent holding company of SBNA and other consolidated subsidiaries	Sponsor Holdings: Sponsor Auto Finance Holding Series LP
	SSLLC: Santander Securities, LLC
REIT: Real estate investment trust	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.
RIC: Retail installment contract	TDR: Troubled debt restructuring
RV: Recreational vehicle	TLAC: Total loss-absorbing capacity
RWA: Risk-weighted assets	Trusts: Securitization trusts
S&P: Standard & Poor's	UPB: Unpaid principal balance
Santander: Banco Santander, S.A.	VIE: Variable interest entity
Santander BanCorp: Santander BanCorp and its subsidiaries	VOE: Voting rights entity

3

PART I

ITEM 1 - BUSINESS

General

Santander Holdings USA, Inc. ("SHUSA" or the "Company") is the parent company of Santander Bank, National Association, (the "Bank" or "SBNA"), a national banking association, and owns a majority interest (approximately 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; Santander Securities, LLC (“SSLLC”), a broker-dealer headquartered in Boston; Banco Santander International (“BSI”), an Edge Act corporation located in Miami which 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. At December 31, 2017, the Bank had 647 branches and 2,046 automated teller machines ("ATMs") across its footprint. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios. The Bank earns interest income on its loan and investment portfolios. In addition, the Bank generates non-interest income from a number of sources, including deposit and loan services, sales of loans and investment securities, capital markets products and bank-owned life insurance ("BOLI"). The Bank's principal non-interest expenses include employee compensation and benefits, occupancy and facility-related costs, technology and other administrative expenses. The volumes, and accordingly the financial results, of the Bank are affected by the economic environment, including interest rates and consumer and business confidence and spending, as well as the competitive conditions within the Bank's geographic footprint.

SC's primary business is the indirect origination of retail installment contracts ("RICs"), principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers. SC also offers a full spectrum of auto financing products and services to Chrysler customers and dealers under the Chrysler Capital brand, the trade name used in providing services ("Chrysler Capital") under the ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC ("FCA"), formerly Chrysler Group LLC, signed by SC in 2013 (the "Chrysler Agreement"). These products and services include consumer 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 and recreational and marine vehicle portfolios for other lenders. Additionally, SC has several relationships through which it provides other consumer finance products. Common stock of SC ("SC Common Stock") is listed for trading on the New York Stock Exchange (the "NYSE") under the trading symbol "SC".

SC's Relationship with FCA

In February 2013, SC entered into the Chrysler Agreement, pursuant to which SC became the preferred provider for FCA’s consumer loans and leases and dealer loans effective May 1, 2013. Business generated under terms of the Chrysler Agreement is branded as Chrysler Capital. During 2017, SC originated more than $6.7 billion of Chrysler Capital retail installment contracts ("RICs") and more than $6.0 billion of Chrysler Capital vehicle leases.

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.

4

The Chrysler Agreement has a ten-year term, subject to early termination in certain circumstances, including the failure by either party to comply with certain of their ongoing obligations. These obligations include, for SC, meeting specified escalating penetration rates for the first five years, and, for FCA, treating SC in a manner consistent with comparable original equipment manufacturers' ("OEMs") treatment of their captive providers, primarily regarding sales support. In addition, FCA may also terminate the agreement if, among other circumstances, (i) a person other than Santander or its affiliates or its other stockholders owns 20% or more of its common stock and Santander and its affiliates own fewer shares of common stock than such person, (ii) the Company becomes, controls, or becomes controlled by, an OEM that competes with Chrysler, or (iii) certain of SC's credit facilities become impaired.

In connection with entering into the Chrysler Agreement, SC paid FCA a $150 million upfront, nonrefundable fee on May 1, 2013. This fee is considered payment for future profits generated from the Chrysler Agreement. Accordingly, the Company amortizes the Chrysler Agreement over the expected ten-year term as a component of net finance and other interest income. The Company has also executed an equity option agreement with FCA, whereby FCA may elect to purchase, at any time during the term of the Chrysler Agreement, at fair market value, an equity participation of any percentage in the Chrysler Capital portion of SC's business.

For a period of 20 business days after FCA's delivery to SC of a notice of intent to exercise its option, the Company is to discuss with FCA, in good faith, the structure and valuation of the proposed equity participation. If the parties are unable to agree on a structure and FCA still intends to exercise its option, SC will be required to create a new company into which the Chrysler Capital assets will be transferred and which will own and operate the Chrysler Capital business. If FCA and SC cannot agree on a fair market value during the 20-day negotiation period, each party will engage an investment bank and the appointed banks will mutually appoint a third independent investment bank to determine the value, with the cost of the valuation divided evenly between FCA and SC. Each party has the right to a one-time deferral of the independent valuation process for up to nine months. FCA will have a period of 90 days after a valuation has been determined, either by negotiation between the parties or by an investment bank, to deliver a binding notice of exercise. Following this notice, FCA's purchase is to be paid and settled within 10 business days, subject to a delay of up to 180 days if necessary to obtain any required consents from governmental authorities.

Any new company formed to affect FCA's exercise of its equity option will be a Delaware limited liability company unless otherwise agreed to by the parties. As long as each party owns at least 20% of the business, FCA and SC will have equal voting and governance rights without regard to ownership percentage. If either party has an ownership interest in the business of less than 20%, the party with less than 20% ownership will have the right to designate a number of directors proportionate to its ownership and will have other customary minority voting rights.

Because the equity option is exercisable at fair market value, SC could recognize a gain or loss upon exercise if the fair market value is determined to be different from book value. The Company believes that the fair market value of its Chrysler Capital financing business currently exceeds book value and therefore has not recorded a contingent liability for potential loss upon FCA's exercise.

Subsequent to the exercise of the equity option, SC's rights under the Chrysler Agreement would be assigned to the jointly-owned business. Exercise of the equity option would be considered a triggering event requiring re-evaluation of whether or not the remaining unamortized balance of the upfront fee the Company paid to FCA on May 1, 2013 should be impaired.

Until January 31, 2017, SC had a flow agreement with Bank of America whereby the Company was committed to sell a contractually determined amount of eligible Chrysler Capital loans to Bank of America on a monthly basis, depending on the amount and credit quality of eligible current month originations and prior month sales. This agreement originally extended through May 31, 2018. On July 27, 2016, the flow agreement was amended to reduce the maximum commitment to sell eligible loans each month to $300,000. On October 27, 2016, Bank of America notified the Company that it was terminating the flow agreement effective January 31, 2017 and, accordingly, the agreement is now terminated. For loans sold under the agreement, SC retains the servicing rights at contractually agreed-upon rates. The Company may also receive or pay a servicer performance payment based on an agreed-upon formula if performance on the sold loans is better or worse, respectively, than expected performance at the time of sale.

SC has sold loans to Citizens Bank of Pennsylvania ("CBP") under terms of a flow agreement and other predecessor sale agreements. SC retains servicing on the sold loans and will owe CBP a loss-sharing payment capped at 0.5% of the original pool balance if losses exceed a specified threshold, established on a pool-by-pool basis. On June 25, 2015, SC executed an amendment to the servicing agreement with CBP which increased the servicing fees. This amendment also amended the flow agreement between CBP and SC, effective August 1, 2015, to reduce CBP's committed purchases of Chrysler Capital prime loans from a maximum of $600 million and a minimum of $250 million per quarter to a maximum of $200 million and a minimum of $50 million per quarter. On February 13, 2017, the Company and CBP entered into a mutual agreement to terminate the flow agreement effective May 1, 2017.

5

Intermediate Holding Company ("IHC")

On July 1, 2016, due to both its global and U.S. non-branch total consolidated asset size, Santander became subject to both of the provisions of the Final Rule discussed below under the "Supervision and Regulation" section of Item 1 of this Form 10-K. As a result of this rule, ownership of several Santander subsidiaries, including Santander BanCorp, BSI, SIS and SSLLC, were transferred to the Company, which became a U.S. intermediate holding company (an "IHC"). On July 1, 2017, an additional Santander subsidiary, Santander Financial Services, Inc. (“SFS”), a finance company located in Puerto Rico, was transferred to SHUSA.

Segments

The Company's reportable segments are focused principally around the customers the Company serves. In 2017, the Company has identified the following reportable segments:

Consumer and Business Banking

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, home equity loans and lines of credit, and business loans such as commercial lines of credit and business credit cards. In addition, the Bank provides investment services to its retail customers, including annuities, mutual funds, and insurance products. Santander Universities, which provides grants and scholarships to universities and colleges as a way to foster education through research, innovation and entrepreneurship, is the last component of this segment.

Commercial Banking

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 loans to dealers and financing for equipment and commercial vehicles. This segment also provides financing and deposits for government entities and niche product financing for specific industries, including oil and gas and mortgage warehousing, among others.

Commercial Real Estate

The Commercial Real Estate segment offers commercial real estate loans and multifamily loans to customers.

Global Corporate Banking ("GCB")

The GCB segment serves the needs of global commercial and institutional customers by leveraging the international footprint of Santander to provide financing and banking services to corporations with over $500 million in annual revenues. GCB's offerings and strategy are based on Santander's local and global capabilities in wholesale banking.

SC

SC is a specialized consumer finance company focused on vehicle finance and third-party servicing. SC’s primary business is the indirect origination of RICs, principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers. In conjunction with 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. In the third quarter of 2015, SC announced that it would exit personal lending, and such assets were accordingly classified as held for sale. In February 2016, SC sold substantially all of the $869.3 million Lending Club portfolio and the remaining portfolio was sold in April 2017.

6

SC continues to hold the Bluestem portfolio, which had a carrying balance of approximately $1.1 billion as of December 31, 2017, and remain a party to agreements with Bluestem that includes obligations, among other things, to purchase new advances originated by Bluestem and existing balances on accounts with new advances, for an initial term ending in April 2020 and renewable through April 2022 at Bluestem’s option. Although a third party is being sought to assume this obligation, SC may not be successful in finding such a party, and Bluestem may not agree to the substitution. The Bluestem portfolio continues to be classified as held-for sale. Significant lower-of-cost-or-market adjustments have been recorded on this portfolio and may continue as long as SC holds the portfolio, particularly due to the purchase commitments.

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

The financial results for each of these reportable segments are included in Note 23 of the Notes to Consolidated Financial Statements and are discussed in Item 7, "Line of Business Results" within the Management's Discussion & Analysis of Financial Condition and Results of Operations ("MD&A") section of this Form 10-K. These results have been presented based on the Company's management structure and management accounting practices. The structure and accounting practices are specific to the Company and, as a result, the financial results of the Company's reportable segments are not necessarily comparable with similar information for other financial institutions.

Other

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

Subsidiaries

SHUSA has two principal consolidated majority-owned subsidiaries at December 31, 2017, the Bank and SC.

Employees

At December 31, 2017, the Company had approximately 17,000 employees among its subsidiaries. No Company employees are represented by a collective bargaining agreement.

Competition

The Bank is subject to substantial competition in attracting and retaining deposits and in lending funds. The primary factors in competing for deposits include the ability to offer attractive rates, the convenience of office locations, the availability of alternate channels of distribution, and servicing capabilities. Direct competition for deposits comes primarily from other national, regional, and state banks, thrift institutions, and broker dealers. Competition for deposits also comes from money market mutual funds, corporate and government securities, and credit unions. The primary factors driving competition for commercial and consumer loans are interest rates, loan origination fees, service levels and the range of products and services offered. Competition for originating loans normally comes from thrift institutions, national and state banks, mortgage bankers, mortgage brokers, finance companies, and insurance companies.

SC is also subject to substantial competition, particularly in the automobile finance industry. SC competes on the pricing it offers on its loans and leases as well as the customer service SC provides automobile dealer customers. SC, along with its competitors, provides pricing and other terms and conditions for loans and leases through web-based credit application aggregation platforms. When dealers submit applications for consumers acquiring vehicles, they can compare SC's terms and conditions against its competitors’ pricing. Dealer relationships are important in the automotive finance industry. Vehicle finance providers tailor product offerings to meet dealers' needs. SC's primary competitors in the vehicle finance space are national and regional banks, credit unions, independent financial institutions, and the affiliated finance companies of automotive manufacturers.

Supervision and Regulation

SHUSA is a bank holding company (“BHC”) pursuant to the Bank Holding Company Act of 1956 (the “BHC Act”). As a BHC, the Company is subject to consolidated supervision by the Federal Reserve. SBNA is an FDIC-insured national bank authorized under the National Bank Act and subject to supervision by the OCC. In addition, CFPB has oversight over SHUSA, SBNA, and SHUSA’s other non-bank affiliates, including SC, for compliance with federal consumer protection laws.

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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") (“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 IHC. In addition, the Final Rule required U.S. BHCs and FBOs with at least $50 billion in total U.S. consolidated non-branch assets to be subject to EPS and heightened capital, liquidity, risk management, and stress testing requirements. Due to both its global and U.S. non-branch total consolidated asset size, Santander was subject to both of the above provisions of the 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 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.

DFA

The DFA instituted major changes to banking and financial institution regulatory regimes as a result of the financial crisis. The DFA includes a number of provisions designed to promote enhanced supervision and regulation of financial companies and financial markets. The DFA introduced substantial reforms that reshape the financial services industry, including significantly enhanced regulation. This enhanced regulation has required and will continue to require higher compliance costs and negatively affect the Company's revenue and earnings.

EPS

The DFA imposes EPS on BHCs with at least $50 billion in total consolidated assets (often referred to as “systemically important financial institutions”), including the Company, and required the Federal Reserve to establish prudential standards for such BHCs that are more stringent than those applicable to other BHCs, including standards for risk-based capital requirements and leverage limits; heightened capital and liquidity standards, including eliminating trust preferred securities as Tier 1 regulatory capital; enhanced risk management requirements; and credit exposure reporting and concentration limits. These changes have impacted and are expected to continue impacting the profitability and growth of the Company.

The DFA mandates an enhanced supervisory framework, which means that the Company is subject to annual stress tests by the Federal Reserve, and the Company and the Bank are required to conduct semi-annual and annual stress tests, respectively, reporting results to the Federal Reserve and the OCC. The Federal Reserve also has discretionary authority to establish additional prudential standards, on its own or at the Financial Stability Oversight Council's recommendation, regarding contingent capital, enhanced public disclosures, short-term debt limits, and otherwise as deemed appropriate.

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.

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

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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 proposed 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 the MD&A of this Form 10-K 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 Improvement Act (the “FDIA”) and OCC regulations, institutions which are not categorized as well-capitalized or adequately-capitalized are restricted from making capital distributions, which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital account of the institution.

At December 31, 2017, the Bank met the criteria to be classified as “well-capitalized.”

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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 this proposed rule would have on its financial position, results of operations and disclosures.

Resolution and Recovery Planning

The DFA requires all BHCs and FBOs with assets of $50 billion or more to prepare and regularly update a resolution plan. The resolution plan must assume that the covered company is resolved under the U.S. Bankruptcy Code and that no “extraordinary support” is received from the U.S. or any other government. In addition, the insured depository resolution plan rule requires that a bank with assets of $50 billion or more develop a plan for its resolution in a manner that ensures that depositors receive rapid access to their insured deposits, maximizes the net present value return from the sale or disposition of its assets, and minimizes the amount of any loss realized by the creditors in resolution. Santander and the Bank most recently submitted resolution plans in accordance with these rules in December 2015.

In September 2016, the OCC issued final guidelines that requires a bank with consolidated assets of $50 billion to develop and maintain a recovery plan that is appropriate for its size, risk profile, activities, and complexity, including the complexity of its organizational and legal entity structure. As provided in the final rule, SBNA must complete its initial recovery plan by July 2018.

Total Loss-Absorbing Capacity ("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. global systemically important banks 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 common equity Tier 1 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.

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

The Company implemented certain policies and procedures, training programs, record keeping, 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 rule.

Collateral Requirements

The Company routinely executes interest rate swaps for the management of its asset/liability mix, and also executes such swaps with its borrower clients. Under the DFA, the Bank is required to post collateral with certain of its counterparties and clearing exchanges. While clearing these financial instruments offers some benefits and additional transparency in valuation, the system requirements for clearing execution add operational complexities to the business and accordingly increase operational risk.

Risk Retention Rule

In December 2014, the Federal Reserve issued its final credit risk retention rule, which generally requires sponsors of asset-backed securities ("ABS") to retain at least five percent of the credit risk of the assets collateralizing ABS. Compliance with the rule with respect to ABS collateralized by residential mortgages was required beginning in December of 2015. Compliance with the rule with regard to all other classes of ABS was required beginning in December of 2016. SHUSA, primarily through SC, is an active participant in the structured finance markets and began to comply with the retention requirements effective in December 2016.

Heightened Standards

The Bank is subject to the OCC's regulations under the National Bank Act. The various laws and regulations administered by the OCC for national banks affect the Bank's corporate practices and impose certain restrictions on its activities and investments to ensure that the Bank operates in a safe and sound manner. These laws and regulations also require the Bank to disclose substantial business and financial information to the OCC and the public.

In September 2014, the OCC finalized guidelines to strengthen the governance and risk management practices of large financial institutions commonly known as “heightened standards.” The heightened standards apply to insured national banks with $50 billion or more in consolidated assets. The heightened standards require covered institutions to establish and adhere to a written risk governance framework to manage and control their risk-taking activities. The heightened standards also provide minimum standards for the institutions’ boards of directors to oversee the risk governance framework.

Transactions with Affiliates

Depository institutions must remain in compliance with Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve's Regulation W, which governs the activities of the Bank 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 arms-length, the terms of the transaction must be the same, or at least as favorable, as those for similar transactions with non-affiliated companies.

As a U.S. domiciled subsidiary of a global parent with significant non-bank affiliates, the Bank and the Company face elevated compliance risk in this area.

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Community Reinvestment Act (“CRA”)

SBNA and Banco Santander Puerto Rico 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. Banco Santander Puerto Rico’s current CRA rating is “Outstanding.” SBNA’s most recent public CRA report of examination rated the Bank as “Needs to Improve” for the January 1, 2011 through December 31, 2013 evaluation period. The Bank’s rating based solely on the applicable CRA lending, service and investment tests would have been “satisfactory.” However, the overall rating was lowered to “Needs to Improve” due to previously disclosed instances of non-compliance by the Bank that are being remediated. The OCC takes into account the Bank’s CRA rating in considering certain regulatory applications the Bank makes, including applications related to establishing and relocating branches, and the Federal Reserve does the same with respect to certain regulatory applications the Company makes. In addition, there may be some negative impacts on aspects of the Bank’s business as a result of the downgrade. For example, certain categories of depositors are restricted from making deposits in banks with a “Needs to Improve” rating.

Interchange Rule

Under the Durbin Amendment to the DFA, in June 2011 the Federal Reserve issued the final rule implementing debit card interchange fee and routing regulation. The final rule establishes standards for assessing whether debit card interchange fees received by debit card issuers, including the Bank, are “reasonable and proportional” to the costs incurred by issuers for electronic debit transactions, and prohibits network exclusivity arrangements on debit cards to ensure merchants have choices in how debit card transactions are routed.

CFPB

The CFPB has broad regulatory and supervisory powers with respect to federal consumer protection laws. As a result, the CFPB has the authority to regulate the Company, the Bank, SC and other SHUSA subsidiaries that offer consumer products. The CFPB’s oversight includes deposit products, credit cards, mortgage lending, and automobile loans. In addition, the CFPB has broad powers with respect to unfair, deceptive, or abusive acts or practices in connection with any transaction with a consumer.

In March 2013, the CFPB issued a bulletin recommending that indirect vehicle lenders, including SC, take steps to monitor and impose controls over vehicle dealer "mark-up" policies under which dealers impose higher interest rates on certain consumers, with the mark-up shared between the dealer and the lender. In accordance with SC's policy, dealers were allowed to mark-up interest rates by a maximum of 2.00%, but in October 2014 SC reduced the maximum compensation (participation) from 2.00% (industry practice) to 1.75%. SC plans to continue to evaluate this policy for effectiveness and may make further changes to strengthen oversight of dealers and mark-up rates.

Regulation AB II

In August 2014, 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.

BHC Activity and Acquisition Restrictions

Federal laws restrict the types of activities in which BHCs may engage, and subject them to a range of supervisory requirements, including regulatory enforcement actions for violations of laws and policies. BHCs may engage in the business of banking and managing and controlling banks, as well as closely-related activities.

The Company would be required to obtain approval from the Federal Reserve if the Company were to acquire shares of any depository institution or any holding company of a depository institution, or any financial entity that is not a depository institution, such as a lending company.

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Control of the Company or the Bank

Under the Change in Bank Control Act, individuals, corporations or other entities acquiring SHUSA's common stock may, alone or together with other investors, be deemed to control the Company and thereby the Bank. Ownership of more than 10% of SHUSA’s capital stock may be deemed to constitute “control” if certain other control factors are present. If deemed to control the Company, those persons or groups would be required to obtain the Federal Reserve's approval to acquire the Company’s common stock and could be subject to certain ongoing reporting procedures and restrictions under federal law and regulations.

Standards for Safety and Soundness

The federal banking agencies adopted certain operational and managerial standards for depository institutions, including internal audit system components, loan documentation requirements, asset growth parameters, information technology and data security practices, and compensation standards for officers, directors and employees. The implementation or enforcement of these guidelines has not had a material adverse effect on the Company’s results of operations.

Insurance of Accounts and Regulation by the FDIC

The Bank is a member of the Deposit Insurance Fund, which is administered by the FDIC. Deposits are insured up to the applicable limits by the FDIC, and such insurance is backed by the full faith and credit of the U.S. government. The FDIC imposes deposit insurance premiums and is authorized to conduct examinations of, and require reporting by, FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the Deposit Insurance Fund. The FDIC also has the authority to initiate enforcement actions against banking institutions and may terminate an institution’s deposit insurance if it determines that the institution has engaged in unsafe or unsound practices or is in an unsafe or unsound condition.

The FDIC charges financial institutions deposit premium assessments to ensure it has reserves to cover deposits that are under FDIC-insured limits, which is currently $250,000 per depositor per ownership category for each ownership deposit account category.

FDIC insurance premium expenses were $61.3 million for the year ended December 31, 2017.

In addition to deposit insurance premiums, all insured institutions are required to pay a Financing Corporation assessment, in order to fund the interest on bonds issued to resolve thrift failures in the 1980s. In 2017, the Bank paid Financing Corporation assessments of $4.0 million, compared to $4.5 million in 2016. The annual rate for all insured institutions dropped to $0.046 for every $1,000 in domestic deposits in 2017, compared to $0.056 in 2016. The assessments are revised quarterly and continued until the bonds matured between 2017 and 2019.

In March 2016, the FDIC finalized the rule to implement Section 334 of the DFA to provide for a surcharge assessment at an annual rate of 4.5 basis points on banks with over $10 billion in assets to increase the FDIC insurance fund. The FDIC commenced this surcharge in the third quarter of 2016, and will continue for eight consecutive quarters. After the eight quarters, the FDIC may charge a shortfall assessment.

Restrictions on Subsidiary Banking Institution Capital Distributions

Under the FDIA, insured depository institutions must be classified in one of five defined tiers (well-capitalized, adequately-capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized). Under OCC regulations, an institution is considered “well-capitalized” if it (i) has a total risk-based capital ratio of 10% or greater, (ii) has a Tier 1 risk-based capital ratio of 8% or greater, (iii) has a CET1 capital ratio of 6.5% or greater, (iv) has a Tier 1 leverage ratio of 5% or greater and (v) is not subject to any order or written directive to meet and maintain a specific capital level.

If capital levels fall to significantly or critically undercapitalized levels, further material restrictions can be imposed, including restrictions on interest payable on accounts, dismissal of management and, in critically undercapitalized situations, appointment of a receiver or conservator. Critically undercapitalized institutions generally may not, beginning 60 days after becoming critically undercapitalized, make any payment of principal or interest on their subordinated debt. All but well-capitalized institutions are prohibited from accepting brokered deposits without prior regulatory approval. Pursuant to the FDIA and OCC regulations, institutions which are not categorized as well-capitalized or adequately-capitalized are restricted from making capital distributions, which include cash dividends, stock redemptions and repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the institution’s capital account. At December 31, 2017, the Bank met the criteria to be classified as “well-capitalized.”

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Federal banking laws, regulations and policies limit the Bank’s ability to pay dividends and make other distributions to the Company. The Bank must obtain prior OCC approval to declare a dividend or make any other capital distribution if, after such dividend or distribution: (1) the Bank’s total distributions to the Company within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years; (2) the Bank would not meet capital levels imposed by the OCC in connection with any order, or (3) the Bank is not adequately capitalized at the time. In addition, the OCC's prior approval is required if the OCC deems it to be in troubled condition or a problem institution.

Any dividends declared and paid have the effect of reducing the Bank’s Tier 1 capital to average consolidated assets and risk-based capital ratios. The Company paid cash dividends on common stock of $10.0 million in 2017 while no dividends were declared or paid in 2016. The Company returned capital of $11.7 million in 2017 while no capital was returned in 2016.

Federal Reserve Regulation

Under Federal Reserve regulations, the Bank is required to maintain a reserve against its transaction accounts (primarily interest-bearing and non-interest-bearing checking accounts). Because reserves must generally be maintained in cash or in low-interest-bearing accounts, the effect of the reserve requirements is to reduce an institution’s asset yields.

The amount of total reserve requirements at December 31, 2017 and 2016 were $294.2 million and $244.7 million, respectively. At December 31, 2017 and 2016, the Company complied with the reserve requirements.

Federal Home Loan Bank ("FHLB") System

The FHLB system was created in 1932 and consists of 11 regional FHLBs. FHLBs are federally-chartered but privately owned institutions created by Congress. The Federal Housing Finance Agency is an agency of the federal government that is charged with overseeing the FHLBs. Each FHLB is owned by its member institutions. The primary purpose of the FHLBs is to provide funding to their members for making housing loans as well as for affordable housing and community development lending. FHLBs are generally able to make advances to their member institutions at interest rates that are lower than could otherwise be obtained by such institutions. As a member, the Bank is required to make minimum investments in FHLB stock based on its level of borrowings from the FHLB. The Bank is a member of and held investments in the FHLB of Pittsburgh which totaled $116.1 million as of December 31, 2017, compared to $280.3 million at December 31, 2016. The Bank utilizes advances from FHLB to fund balance sheet growth, provide liquidity and for asset and liability management purposes. The Bank had access to advances with the FHLB of up to $17.7 billion at December 31, 2017, and had outstanding advances of $1.95 billion or 11% of total availability at that date. The level of borrowing capacity the Bank has with the FHLB of Pittsburgh is contingent upon the level of qualified collateral the Bank holds at a given time.

The Bank received $12.9 million and $24.2 million in dividends on its stock in the FHLB of Pittsburgh in 2017 and 2016, respectively.

Anti-Money Laundering and the USA Patriot Act

Several federal laws, including the Bank Secrecy Act, the Money Laundering Control Act, and the USA Patriot Act require all financial institutions to, among other things, implement policies and procedures relating to anti-money laundering, compliance, suspicious activities, currency transaction reporting and due diligence on customers. The USA Patriot Act substantially broadened existing anti-money laundering legislation and the extraterritorial jurisdiction of the U.S.; imposed compliance and due diligence obligations; created criminal penalties; compelled the production of documents located both inside and outside the U.S., including those of non-U.S. institutions that have a correspondent relationship in the U.S.; and clarified the safe harbor from civil liability to clients. The U.S. Treasury has issued a number of regulations that further clarify the USA Patriot Act’s requirements and provide more specific guidance on their application.

Financial Privacy

Under the Gramm-Leach-Bliley Act (the "GLBA"), financial institutions are required to disclose to their retail customers their policies and practices with respect to sharing nonpublic customer information with their affiliates and non-affiliates, how they maintain customer confidentiality, and how they secure customer information. Customers are required under the GLBA to be provided with the opportunity to “opt out” of information sharing with non-affiliates, subject to certain exceptions.

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Environmental Laws

Environmentally related hazards have become a source of high risk and potentially significant liability for financial institutions related to their loans. Environmentally contaminated properties owned by an institution’s borrowers may result in a drastic reduction in the value of the collateral securing the institution’s loans to such borrowers, high environmental cleanup costs to the borrower affecting its ability to repay its loans, the subordination of any lien in favor of the institution to a state or federal lien securing clean-up costs, and liability to the institution for cleanup costs if it forecloses on the contaminated property or becomes involved in the management of the borrower. To minimize this risk, the Bank may require an environmental examination of, and reports with respect to, the property of any borrower or prospective borrower if circumstances affecting the property indicate a potential for contamination, taking into consideration the potential loss to the institution in relation to the burdens to the borrower. Such examination must be performed by an engineering firm experienced in environmental risk studies and acceptable to the institution, and the costs of such examinations and reports are the responsibility of the borrower. These costs may be substantial and may deter a prospective borrower from entering into a loan transaction with the Bank. The Company is not aware of any borrower which is currently subject to any environmental investigation or clean-up preceding that is likely to have a material adverse effect on the financial condition or results of operations of SHUSA or its subsidiaries.

Securities Regulation

The Company conducts its securities activities through its subsidiaries SIS and SSLLC. SIS and SSLLC are registered broker-dealer with the Securities and Exchange Commission (the “SEC”) and members of the Financial Industry Regulatory Authority, Inc. (“FINRA”). SIS’s activities include investment banking, institutional sales, trading and offering research reports of Latin American and European equity and fixed income securities. SSLLC is a registered investment advisor.

Written Agreements and Regulatory Actions

See the “Regulatory Matters” section of the MD&A and Note 19 of the Consolidated Financial Statements in this Form 10-K for a description of current regulatory actions.

Corporate Information

All reports filed electronically by the Company with the SEC, including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as any amendments to those reports, are accessible on the SEC’s website at www.sec.gov. Our filings are also accessible through our website athttps://www.santanderus.com/us/investorshareholderrelations. The information contained on our website is not being incorporated herein and is provided for the information of the reader and are not intended to be active links.

ITEM 1A - RISK FACTORS

The Company is subject to a number of risks potentially impacting its business, financial condition, results of operations and cash flows. As a financial services organization, certain elements of risk are inherent in our transactions and are present in the business decisions made by the Company. Accordingly, the Company encounters risk as part of the normal course of its business, and risk management processes are designed to help manage these risks.

Risk management is an important part of the Company's business model. The success of the business is dependent on management's ability to identify, understand and manage the risks presented by business activities so that management can appropriately balance revenue generation and profitability. These risks include credit risk, market risk, liquidity risk, operational risk, model risk, compliance and legal risk, and strategic and reputation risk. We discuss our principal risk management processes in the Risk Management section included in Item 7 of this Report.

The following are the most significant risk factors that affect the Company. Any one or more of these risk factors could have a material adverse impact on the Company's business, financial condition, results of operations or cash flows, in addition to presenting other possible adverse consequences, which are described below. These risk factors and other risks are also discussed further in other sections of this Report.

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Macro-Economic and Political Risks

Given that our loan portfolios are concentrated in the United States, adverse changes affecting the economy of the United States could adversely affect our financial condition.

Our loan portfolios are concentrated in the United States. Accordingly, the recoverability of our loan portfolios and our ability to increase the amount of loans outstanding and our results of operations and financial condition in general are dependent to a significant extent on the level of economic activity in the United States. A return to recessionary conditions in the United States economy would likely have a significant adverse impact on our loan portfolios and, as a result, on our financial condition, results of operations, and cash flows.

We are vulnerable to disruptions and volatility in the global financial markets.

Global economic conditions deteriorated significantly between 2007 and 2009, and the United States fell into recession. Many major financial institutions, including some of the country's largest commercial banks, investment banks, mortgage lenders, mortgage guarantors and insurance companies, including us, experienced significant difficulties.

We face, among others, the following risks in the event of an economic downturn:

• Increased regulation of our industry. Compliance with such regulation has increased our costs and may affect the pricing of our products and services and limit our ability to pursue business opportunities.

• Reduced demand for our products and services.

• Inability of our borrowers to timely or fully comply with their existing obligations.

• The process we use to estimate losses inherent in our credit exposure requires complex judgments, including forecasts of economic conditions and how those economic conditions might impair the ability of our borrowers to repay their loans.

• The degree of uncertainty concerning economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the process and the sufficiency of our loan and lease loss allowances.

• The value and liquidity of the portfolio of investment securities that we hold may be adversely affected.

• Any worsening of economic conditions may delay the recovery of the financial industry and impact our financial condition and results of operations.

• Macroeconomic shocks may impact the household income of our retail customers negatively and adversely affect the recoverability of our retail loans, resulting in increased loan and lease losses. 

Despite recent improvements in the economy, some uncertainty remains concerning the future economic environment. There can be no assurance that economic conditions will continue to improve. Such economic uncertainty could have a negative impact on our business and results of operations. A slowing or failing of the economic recovery would likely aggravate the adverse effects of these difficult economic and market conditions on us and on others in the financial services industry.

In addition, the global recession and disruption of the financial markets led to concerns over the solvency of certain European countries, affecting those countries’ capital markets access and in some cases sovereign credit ratings, as well as market perception of financial institutions that have significant direct or indirect exposure to these countries. These concerns continue even as the global economy is recovering, and some previously stressed European economies have experienced at least partial recoveries from their low points during the recession. If measures to address sovereign debt and financial sector problems in Europe are inadequate, they may delay or weaken economic recovery, or result in the further exit of member states from the Eurozone or more severe economic and financial conditions. If realized, these risk scenarios could contribute to severe financial market stress or a global recession, likely affecting the economy and capital markets in the United States as well.

Increased disruption and volatility in the financial markets could have a material adverse effect on us, including our ability to access capital and liquidity on financial terms acceptable to us, if at all. If capital markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits to attract more customers and become unable to maintain certain liability maturities. Any such decrease in capital markets funding availability or increased costs or in deposit rates could have a material adverse effect on our interest margins and liquidity.

If some or all of the foregoing risks were to materialize, they could have a material adverse effect on us.

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Our growth, asset quality and profitability may be adversely affected by volatile macroeconomic and political conditions.

While the United States economy has recently shown signs of expansion, the economy experienced volatility in recent periods, characterized by slow or regressive growth. This volatility resulted in fluctuations in the levels of deposits and in the relative economic strength of various segments of the economy to which we lend.

Negative and fluctuating economic conditions, such as a changing interest rate environment, impact our profitability by causing lending margins to decrease and leading to decreased demand for higher margin products and services. Negative and fluctuating economic conditions could also result in government defaults on public debt. This could affect us in two ways: directly, through portfolio losses, and indirectly, through instabilities that a default in public debt could cause to the banking system as a whole, particularly since commercial banks' exposure to government debt is high in certain Latin American and European regions or countries.

In addition, our revenues are subject to risk of loss from unfavorable political and diplomatic developments, social instability, and changes in governmental policies, international ownership legislation, interest-rate caps and tax policies. Growth, asset quality and profitability may be affected by volatile macroeconomic and political conditions.

The actions of the U.S. administration could have a material adverse effect on us.

It is unclear what impact, if any, the current U.S. presidential administration and broader government, including regulatory agency leadership and/or the current Congress, will have on the laws, regulations and policies affecting the supervision of banking organizations. Although the administration has indicated its intention to approach regulation of the financial services industry differently than was the case under the previous administration, there remains significant uncertainty regarding the direction the administration will take and its ability to achieve its stated objectives, as well as how some existing laws and regulations will be enforced. In addition, there is uncertainty about how proposals and initiatives of the current administration or the broader government could directly or indirectly impact the Company. Although certain proposals and initiatives, such as income tax reform or increased spending on infrastructure projects, could result in greater economic activity and more expansive U.S. domestic economic growth, other initiatives, such as protectionist trade policies or isolationist foreign policies, could constrict economic growth. The continued uncertainty around these proposals and initiatives if enacted, could increase market volatility and affect the Company’s businesses directly or indirectly, including through the effects of such proposals and initiatives on the Company’s customers and/or counterparties.

Developments stemming from the U.K.’s referendum on membership in the EU could have a material adverse effect on us.

The result of the United Kingdom’s (“UK’s”) referendum on whether to remain part of the European Union (“EU”) has had and may continue to have negative effects on global economic conditions and global financial markets. The results of the UK's referendum in 2016 to withdraw from the EU and the UK's implementation of that referendum means that the UK's EU membership will cease. The long-term nature of the UK’s relationship with the EU is unclear (including with respect to the laws and regulations that will apply as the UK determines which EU laws to replicate or replace), and there is considerable uncertainty as to when the framework for any such relationship governing both the access of the UK to European markets and the access of EU member states to the UK’s markets will be determined and implemented. The result of the referendum has created an uncertain political and economic environment in the UK, and may create such environments in other EU member states. Political and economic uncertainty has in the past led to declines in market liquidity and activity levels, volatile market conditions, a contraction of available credit, lower or negative interest rates, weaker economic growth and reduced business confidence, each of which could adversely affect our business.

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Risks Relating to Our Business

Legal, Regulatory and Compliance Risks

We are subject to substantial regulation which could adversely affect our business and operations.

As a financial institution, the Company is subject to extensive regulation, which materially affects our businesses. The statutes, regulations, and policies to which the Company is subject may change at any time. In addition, the regulators' interpretation and application of the laws and regulations to which the Company is subject may change from time to time. Extensive legislation affecting the financial services industry has been adopted in the United States, and regulations have been and are in the process of being implemented. The manner in which those laws and related regulations are applied to the operations of financial institutions is still evolving. Any legislative or regulatory actions and any required changes to our business operations resulting from such legislation and regulations could result in significant loss of revenue, limit our ability to pursue business opportunities in which we might otherwise consider engaging and provide certain products and services, affect the value of assets we hold, require us to increase our prices and therefore reduce demand for our products, impose additional compliance and other costs on us or otherwise adversely affect our businesses. Accordingly, there can be no assurance that future changes in regulations or in their interpretation or application will not affect us adversely.

Regulation of the Company as a BHC includes limitations on permissible activities. Moreover, as described above, the Company and the Bank are required to perform stress tests and submit capital plans to the Federal Reserve and the OCC on an annual basis, and receive a notice of non-objection to the plans from the Federal Reserve and the OCC before taking capital actions, such as paying dividends, implementing common equity repurchase programs, or redeeming or repurchasing capital instruments. The Federal Reserve may also impose substantial fines and other penalties and enforcement actions for violations we may commit, and has the authority to disallow acquisitions we or our subsidiaries may contemplate, which may limit our future growth plans. Such constraints currently applicable to the Company and its subsidiaries and/or regulatory actions could have an adverse effect on our financial position and results of operations.

Other regulations which significantly affect the Company, or which could significantly affect the Company in the future, relate to capital requirements, liquidity and funding, taxation of the financial sector, and development of regulatory reforms in the United States.

In addition, the volume, granularity, frequency and scale of regulatory and other reporting requirements necessitate a clear data strategy to enable consistent data aggregation, reporting and management. Inadequate management information systems or processes, including those relating to risk data aggregation and risk reporting, could lead to a failure to meet regulatory reporting requirements or other internal or external information demands that may result in supervisory measures.

Significant United States Regulation

From time to time, we are or may become involved in formal and informal reviews, investigations, examinations, proceedings, and information gathering requests by federal and state government agencies, including, among others, the FRB, the OCC, the CFPB, the Department of Justice (the "DOJ"), the SEC, the Federal Trade Commission and various state regulatory and enforcement agencies.

The DFA will continue to result in significant structural reforms affecting the financial services industry. This legislation provided for, among other things, the establishment of the CFPB with broad authority to regulate the credit, savings, payment and other consumer financial products and services we offer, the creation of a structure to regulate systemically important financial companies, more comprehensive regulation of the over-the-counter derivatives market, prohibitions on engaging in certain proprietary trading activities, restrictions on ownership of, investment in or sponsorship of hedge funds and private equity funds, restrictions on interchange fees earned through debit card transactions, and a requirement that bank regulators phase out the treatment of trust preferred capital instruments as Tier 1 capital for regulatory capital purposes.

The DFA provides for an extensive framework for the regulation of over-the-counter ("OTC") derivatives, including mandatory clearing, exchange trading and transaction reporting of certain OTC derivatives. Entities that are swap dealers, security-based swap dealers, major swap participants or major security-based swap participants are required to register with the SEC or the U.S. Commodity Futures Trading Commission (the "CFTC"), or both, and are or will be subject to new capital, margin, business conduct, record-keeping, clearing, execution, reporting and other requirements. We may register as a swap dealer with the CFTC.

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In February 2014, the Federal Reserve issued the Final Rule to enhance its supervision and regulation of certain FBOs. Among other things, this rule required FBOs, such as the Company, with over $50 billion of United States non-branch assets to establish or designate a United States IHC and to transfer its entire ownership interest in substantially all of its United States subsidiaries to that IHC by July 1, 2016. United States branches and agencies were not required to be transferred to the IHC. As a result of this rule, Santander transferred substantially all of its equity interests in its U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. These subsidiaries included Santander BanCorp, BSI, SIS and SSLLC, as well as several other subsidiaries. The entities transferred approximately $14.1 billion of assets and approximately $11.8 billion of liabilities to the Company on July 1, 2016. On July 1, 2017, an additional Santander subsidiary, Santander Financial Services, Inc. (“SFS”), a finance company located in Puerto Rico, was transferred to SHUSA. The contribution of SFS to the Company transferred approximately $679 million of assets, which were primarily comprised of cash and cash equivalents and loans held for sale, approximately $357 million of liabilities and approximately $322 million of equity to the Company. The IHC is subject to an enhanced supervision framework, including enhanced risk-based and leverage capital requirements, liquidity requirements, risk/management requirements, and stress-testing requirements. A phased-in approach is being used for those standards and requirements. SHUSA's status as an IHC will require it to invest significant management attention and resources.

Within the DFA, the Volcker Rule prohibits “banking entities” from engaging in certain forms of proprietary trading or from sponsoring or investing in covered funds, in each case subject to certain exceptions. The Volcker Rule also limits the ability of banking entities and their affiliates to enter into certain transactions with such funds with which they or their affiliates have certain relationships. The final regulations implementing the Volcker Rule contain exclusions and certain exemptions for market-making, hedging, underwriting, and trading in United States government and agency obligations as well as certain foreign government obligations, and trading solely outside the United States, and also permit certain ownership interests in certain types of funds to be retained.

In December 2016, the Federal Reserve adopted a final rule on TLAC, LTD, and clean holding company requirements for systemically important U.S. BHCs and IHCs of systemically important FBOs. Covered institutions must be in compliance with this rule by January 1, 2019 and SHUSA, as the IHC for Santander in the U.S., will be subject to these requirements. The TLAC requirement will create additional material quantitative requirements for the Company, including new minimum risk-based and leverage TLAC ratios of (i) the Company's regulatory capital plus certain types of long-term unsecured debt instruments and other eligible liabilities that can be written down or converted into equity during resolution to (ii) the Company's RWA and the Basel III leverage ratio denominator. Actions we are required to take to comply with the TLAC requirement by January 1, 2019 could impact our cost of funding and liquidity risk management.

Each of these aspects of the DFA, as well as other changes in United States banking regulations, may directly and indirectly impact various aspects of our business. The full spectrum of risks that the DFA, including the Volcker Rule, poses to us is not yet known. However, such risks could be material and could materially and adversely affect us.

Our resolution in a bankruptcy proceeding could result in losses for holders of our debt and equity securities.

Under regulations issued by the Federal Reserve and the FDIC, and as required by Section 165(d) of the DFA, we must provide to the Federal Reserve and the FDIC a plan (a “Section 165(d) Resolution Plan”) for our rapid and orderly resolution in the event of material financial distress affecting the Company or the failure of the Company. The purpose of this provision of the DFA is to provide regulators with plans that would enable them to resolve failing financial companies that pose a significant risk to the financial stability of the United States in a manner that mitigates such risk. The most recently filed Section 165(d) Resolution Plan by Santander, dated December 16, 2015 (the “2015 Resolution Plan”), provides a roadmap for the orderly resolution of the material U.S. operations of Santander under hypothetical stress scenarios and the failure of one or more of its U.S. material entities (“U.S. MEs”). Material entities are defined as subsidiaries or foreign offices of Santander that are significant to the activities of a critical operation or core business line. The U.S. MEs identified in the 2015 Resolution Plan include, among other entities, the Company, the Bank and SC.

The 2015 Resolution Plan describes a strategy for resolving Santander’s U.S. operations, including its U.S. MEs and the core business lines that operate within those U.S. MEs, in a manner that would substantially mitigate the risk that the resolutions would have serious adverse effects on U.S. or global financial stability. Under the 2015 Resolution Plan’s hypothetical resolutions of the U.S. MEs, the Bank would be placed into FDIC receivership and the Company and SC would be placed into bankruptcy under Chapter 7 and Chapter 11 of the U.S. Bankruptcy Code, respectively.

The strategy described in the 2015 Resolution Plan contemplates a “multiple point of entry” strategy, in which Santander and the Company would each undergo separate resolution proceedings under the laws of Spain and the U.S. Bankruptcy Code, respectively. In a scenario in which the Bank and SC were in resolution, the Company would file a voluntary petition under Chapter 7 of the Bankruptcy Code, and holders of our LTD and other debt securities would be junior to the claims of priority (as determined by statute) and secured creditors of the Company.

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The Company, the Federal Reserve and the FDIC are not obligated to follow the Company’s preferred resolution strategy for resolving its U.S. operations under its resolution plan. In addition, Santander could in the future change its resolution strategy for resolving its U.S. operations. In an alternative scenario, the Company alone could enter bankruptcy under the U.S. Bankruptcy Code, and the Company’s subsidiaries would be recapitalized as needed, using assets of the Company, so that they could continue normal operations as going concerns or subsequently be wound down in an orderly manner. As a result, the losses incurred by the Company and its subsidiaries would be imposed first on the holders of the Company’s equity securities and thereafter on unsecured creditors, including holders of our LTD and other debt securities. Holders of our LTD and other debt securities would be junior to the claims of creditors of the Company’s subsidiaries and to the claims of priority (as determined by statute) and secured creditors of the Company. Under either of these scenarios, in a resolution of the Company under Chapter 11 of the U.S. Bankruptcy Code, holders of our LTD and other debt securities would realize value only to the extent available to the Company as a shareholder of the Bank, SC and its other subsidiaries, and only after any claims of priority and secured creditors of the Company have been fully repaid.

In December 2016, the Federal Reserve finalized rules requiring intermediate holding companies of foreign global systematically important banks ("G-SIBs"), including the Company, to maintain minimum amounts of LTD and TLAC. It is possible that the Company’s resolution strategy in connection with the implementation of those rules, which will become effective on January 1, 2019, could change on or before that date. Further, even if Santander’s and the Company’s strategy for resolving its U.S. operations does not change, it is possible that the Federal Reserve or the FDIC could choose not to follow the current strategy.

The resolution of the Company under the orderly liquidation authority could result in greater losses for holders of our equity and debt securities.

The ability of holders of our LTD and other debt securities to recover the full amount that would otherwise be payable on those securities in a resolution proceeding under Chapter 11 of the U.S. Bankruptcy Code may be impaired by the exercise of the FDIC’s powers under the “orderly liquidation authority” under Title II of the DFA.

Title II of the DFA created a new resolution regime known as the “orderly liquidation authority” to which financial companies, including U.S. IHC of FBOs with assets of $50 billion or more, such as the Company, can be subjected. Under the orderly liquidation authority, the FDIC may be appointed as receiver in order to liquidate a financial company if, upon the recommendation of applicable regulators, the United States Secretary of the Treasury determines that the entity is in severe financial distress, the entity’s failure would have serious adverse effects on the U.S. financial system and resolution under the orderly liquidation authority would avoid or mitigate those effects, among other things. Absent such determinations, the Company would remain subject to the U.S. Bankruptcy Code.

If the FDIC is appointed as receiver under the orderly liquidation authority, then the orderly liquidation authority, rather than the U.S. Bankruptcy Code, would determine the powers of the receiver and the rights and obligations of creditors and other parties who have transacted with the Company. There are substantial differences between the rights available to creditors under the orderly liquidation authority and under the U.S. Bankruptcy Code. For example, under the orderly liquidation authority, the FDIC may disregard the strict priority of creditor claims in some circumstances (which would otherwise be respected under the U.S. Bankruptcy Code), and an administrative claims procedures is used to determine creditors’ claims (as opposed to the judicial procedure utilized in bankruptcy proceedings). Under the orderly liquidation authority, in certain circumstances, the FDIC could elevate the priority of claims if it determines that doing so is necessary to facilitate a smooth and orderly liquidation without the need to obtain the consent of other creditors or prior court review. Furthermore, the FDIC has the right to transfer assets or liabilities of the failed company to a third party or “bridge” entity under the orderly liquidation authority.

Regardless of what resolution strategy Santander might prefer for resolving its U.S. operations, the FDIC could determine that it is a desirable strategy to resolve the Company in a manner that would, among other things, impose losses on the Company’s shareholder, unsecured debt holders (including holders of LTD) and other creditors, while permitting the Company’s subsidiaries to continue to operate. It is likely that the application of such an entry strategy in which the Company would be the only legal entity in the U.S. to enter resolution proceedings would result in greater losses to holders of our LTD and other debt securities than the losses that would result from the application of a bankruptcy proceeding or a different resolution strategy for the Company. Assuming the Company entered resolution proceedings and support from the Company to its subsidiaries was sufficient to enable the subsidiaries to remain solvent, losses at the subsidiary level could be transferred to the Company and ultimately borne by the Company’s security holders (including holders of our LTD and other debt securities), with the result that third-party creditors of the Company’s subsidiaries would receive full recoveries on their claims, while the Company’s security holders (including holders of our LTD) and other unsecured creditors could face significant losses. In addition, in a resolution under the orderly liquidation authority, holders of our LTD and other debt securities of the Company could face losses ahead of our other similarly situated creditors if the FDIC exercised its right, described above, to disregard the strict priority of creditor claims.

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The orderly liquidation authority also requires that creditors and shareholders of the financial company in receivership must bear all losses before taxpayers are exposed to any losses, and amounts owed by the financial company or the receivership to the U.S. government would generally receive a statutory payment priority over the claims of private creditors, including holders of our LTD and other debt securities. In addition, under the orderly liquidation authority, claims of creditors (including holders of our LTD and other debt securities) could be satisfied through the issuance of equity or other securities in a bridge entity to which the Company’s assets are transferred, as described above. If securities were to be delivered in satisfaction of claims, there can be no assurance that the value of the securities of the bridge entity would be sufficient to repay all or any part of the creditor claims for which the securities were exchanged.

Although the FDIC has issued regulations to implement the orderly liquidation authority, not all aspects of how the FDIC might exercise this authority are known, and additional rulemaking is possible.

United States stress testing, capital planning, and related supervisory actions

The Company is subject to stress testing and capital planning requirements under regulations implementing the DFA and other banking laws and policies. Effective January 2017, the Federal Reserve finalized a rule adjusting its capital plan and stress testing rules, exempting from the qualitative portion of the Comprehensive Capital Analysis and Review (“CCAR") certain BHCs and U.S. IHCs of FBOs with total consolidated assets between $50 billion and $250 billion and total nonbank assets of less than $75 billion, and that are not identified as G-SIBS. Such firms, including the Company, are still required to meet CCAR’s quantitative requirements and are subject to regular supervisory assessments that examine their capital planning processes. In 2017, the Federal Reserve provided its non-objection to SHUSA’s capital plan; however, in 2015 and 2016, the Federal Reserve, as part of its CCAR process, objected on qualitative grounds to the capital plans the Company submitted. There is the risk that the Federal Reserve could object to the Company’s future capital plans, which would result in the Company being required to obtain the Federal Reserve’s approval prior to making a capital distribution or taking certain capital actions.

Other supervisory actions and restrictions on U.S. activities

In addition to the foregoing, U.S. bank regulatory agencies from time to time take supervisory actions under certain circumstances that restrict or limit a financial institution’s activities. In some instances, we are subject to significant legal restrictions on our ability to publicly disclose these actions or the full details of these actions. In addition, as part of the regular examination process, certain U.S. subsidiaries’ regulators may advise certain U.S. subsidiaries to operate under various restrictions as a prudential matter. The U.S. supervisory environment has become significantly more demanding and restrictive since the financial crisis of 2008. Under the BHC Act, the Federal Reserve has the authority to disallow us and certain of our U.S. subsidiaries from engaging in certain categories of new activities in the United States or acquiring shares or control of other companies in the United States. Such actions and restrictions currently applicable to us or certain of our U.S. subsidiaries could adversely affect our costs and revenues. Moreover, efforts to comply with nonpublic supervisory actions or restrictions could require material investments in additional resources and systems, as well as a significant commitment of managerial time and attention. As a result, such supervisory actions or restrictions could have a material adverse effect on our business and results of operations, and we may be subject to significant legal restrictions on our ability to publicly disclose these matters or the full details of these actions.

We are subject to potential intervention by any of our regulators or supervisors, particularly in response to customer complaints.

As noted above, our business and operations are subject to increasingly significant rules and regulations relating to banking and financial services business. These apply to business operations, affect financial returns, include reserve and reporting requirements, and prudential and conduct of business regulations. These requirements are set by the relevant central banks and regulatory authorities that authorize, regulate and supervise us in the jurisdictions in which we operate.

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In their supervisory roles, regulators seek to maintain the safety and soundness of financial institutions with the aim of strengthening, but not guaranteeing, the protection of customers and the financial system. Supervisors' continuing supervision of financial institutions is conducted through a variety of regulatory tools, including the collection of information by way of reports obtained from skilled persons, visits to firms and regular meetings with management to discuss issues such as performance, risk management and strategy. In general, regulators have an outcome-focused regulatory approach that involves proactive enforcement and penalties for infringement. As a result, we face increased supervisory intrusion and scrutiny (resulting in increasing internal compliance costs and supervision fees), and in the event of a breach of our regulatory obligations we are likely to face more stringent regulatory fines. Some of the regulators focus strongly on consumer protection and on conduct risk and will continue to do so. This has included a focus on the design and operation of products, the behavior of customers and the operation of markets. Some of the laws in the relevant jurisdictions in which we operate give regulators the power to make temporary product intervention rules either to improve a company's systems and controls in relation to product design, product management and implementation, or address problems identified with financial products. These problems may potentially cause significant detriment to consumers because of certain product features, governance flaws or distribution strategies. Such rules may prevent institutions from entering into product agreements with customers until such problems have been solved. Some regulators in the jurisdictions in which we operate also require us to be in compliance with training, authorization and supervision of personnel, systems, processes and documentation requirements. Sales practices with retail customers, including incentive compensation structures related to such practices, have recently been a focus of various regulatory and governmental agencies. If we fail to be compliant with such regulations, there would be a risk of an adverse impact on our business from sanctions, fines or other actions imposed by regulatory authorities. Customers of financial services institutions, including our customers, may seek redress if they consider that they have suffered loss as a result of the mis-selling of a particular product, or through incorrect application of the terms and conditions of a particular product. Given the inherent unpredictability of litigation and the evolution of judgments by the relevant authorities, it is possible that an adverse outcome in some matters could harm our reputation or have a material adverse effect on our operating results, financial condition and prospects arising from any penalties imposed or compensation awarded, together with the costs of defending such actions, thereby reducing our profitability.

We are exposed to risk of loss from legal and regulatory proceedings.

As noted above, we face risk of loss from legal and regulatory proceedings, including tax proceedings that could subject us to monetary judgments, regulatory enforcement actions, fines and penalties. The current regulatory environment reflects an increased supervisory focus on enforcement, combined with uncertainty about the evolution of the regulatory regime, and may lead to material operational and compliance costs.

We are subject to certain claims and party to certain legal proceedings incidental to the normal course of our business from time to time, including in connection with lending activities, relationships with our employees and other commercial or tax matters. In view of the inherent difficulty of predicting the outcome of legal matters, particularly when the claimants seek very large or indeterminate damages, or when the cases present novel legal theories, involve a large number of parties or are in the early stages of discovery, we cannot state with confidence what the eventual outcome of these pending matters will be or what the eventual loss, fines or penalties related to each pending matter may be. We believe that we have established adequate reserves related to the costs anticipated to be incurred in connection with these various claims and legal proceedings. However, the amount of these provisions is substantially less than the total amount of the claims asserted against us and, in light of the uncertainties involved in such claims and proceedings, there is no assurance that the ultimate resolution of these matters will not significantly exceed the reserves we have currently accrued. As a result, the outcome of a particular matter may materially and adversely affect our financial condition and results of operations for a particular period, depending upon, among other factors, the size of the loss or liability imposed and our level of income for that period.

In addition, from time to time, the Company is, or may become, the subject of governmental and self-regulatory agency information-gathering requests, reviews, investigations and proceedings and other forms of regulatory inquiry, including by the SEC and law enforcement authorities.

Often, the announcement or other publication of claims or actions that may arise from such litigation and proceedings or of any related settlement may spur the initiation of similar claims by other clients or governmental entities. In any such claim or action, demands for substantial monetary damages may be asserted against us and may result in financial liability, changes in our business practices or an adverse effect on our reputation or client demand for our products and services. In regulatory settlements since the financial crisis, fines imposed by regulators have increased substantially and may in some cases exceed the profit earned or harm caused by the breach.

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Our operations are subject to regular and ongoing inspection by our banking and other regulators, which may result in the need to enhance our regulatory compliance or risk management practices. Such remedial actions may entail significant costs, management attention, and systems development, and such efforts may affect our ability to expand our business until those remedial actions are completed. In some instances, we are subjected to significant legal restrictions on our ability to disclose these types of actions or the full detail of these actions publicly. Our failure to implement enhanced compliance and risk management procedures in a manner and timeframe deemed to be responsive by the applicable regulatory authority could adversely impact our relationship with that regulatory authority and lead to restrictions on our activities or other sanctions.

In addition, the magnitude and complexity of projects required to address the expectations of the Company’s regulators’ and legal proceedings, in addition to the challenging macroeconomic environment and pace of regulatory change, may result in execution risk and adversely affect the successful execution of such regulatory or legal priorities.

In many cases, we are required to self-report inappropriate or non-compliant conduct to regulatory authorities, and our failure to do so may represent an independent regulatory violation. Even when we promptly bring matters to the attention of appropriate authorities, we may nonetheless experience regulatory fines, liabilities to clients, harm to our reputation or other adverse effects in connection with self-reported matters.

We may not be able to detect money laundering and other illegal or improper activities fully or on a timely basis, which could expose us to additional liability and could have a material adverse effect on us.

We are required to comply with anti-money laundering, anti-terrorism and other laws and regulations in the jurisdictions in which we operate. These laws and regulations require us, among other things, to adopt and enforce “know-your-customer” policies and procedures and to report suspicious and large transactions to applicable regulatory authorities. These laws and regulations have become increasingly complex and detailed, require improved systems and sophisticated monitoring and compliance personnel, and have become the subject of enhanced government supervision.

While we have adopted policies and procedures aimed at detecting and preventing the use of our banking network for money laundering and related activities, those policies and procedures may not completely eliminate instances in which we may be used by other parties to engage in money laundering and other illegal or improper activities. To the extent we fail to fully comply with applicable laws and regulations, the relevant government agencies to which we report have the authority to impose fines and other penalties on us. In addition, our business and reputation could suffer if customers use our banking network for money laundering or other illegal or improper purposes.

While we review our relevant counterparties’ internal policies and procedures with respect to such matters, to a large degree, we rely on our relevant counterparties to maintain and properly apply their own appropriate anti-money laundering procedures. Such measures, procedures and compliance may not be completely effective in preventing third parties from using our and our relevant counterparties’ services as conduits for money laundering (including illegal cash operations) or other illegal activities without our and our counterparties’ knowledge. If we are associated with, or even accused of being associated with, or become a party to, money laundering or other illegal activities, our reputation could suffer and/or we could become subject to fines, sanctions and/or legal enforcement (including being added to any “blacklists” that would prohibit certain parties from engaging in transactions with us), any one of which could have a material adverse effect on our operating results, financial condition and prospects.

An incorrect interpretation of tax laws and regulations may adversely affect us.

The preparation of our tax returns requires the use of estimates and interpretations of complex tax laws and regulations, and is subject to review by taxing authorities. We are subject to the income tax laws of the United States and certain foreign countries. These tax laws are complex and subject to different interpretations by the taxpayer and relevant governmental taxing authorities, which are sometimes subject to prolonged evaluation periods until a final resolution is reached. In establishing a provision for income tax expense and filing returns, we must make judgments and interpretations about the application of these inherently complex tax laws. If the judgments, estimates, and assumptions we use in preparing our tax returns are subsequently found to be incorrect, there could be a material effect on our results of operations.

Changes in taxes and other assessments may adversely affect us.

The legislatures and tax authorities in the jurisdictions in which we operate regularly enact reforms to the tax and other assessment regimes to which we and our customers are subject. Such reforms include changes in the rate of assessments and, occasionally, enactment of temporary taxes, the proceeds of which are earmarked for designated governmental purposes. The effects of these changes and any other changes that result from enactment of additional tax reforms cannot be quantified and there can be no assurance that any such reforms would not have an adverse effect upon our business.

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Liquidity and Financing Risks

Liquidity and funding risks are inherent in our business and could have a material adverse effect on us.

Liquidity risk is the risk that we either do not have available sufficient financial resources to meet our obligations as they become due or can secure them only at excessive cost. This risk is inherent in any retail and commercial banking business and can be heightened by a number of enterprise-specific factors, including over-reliance on a particular source of funding, changes in credit ratings or market-wide phenomena such as market dislocation. While we implement liquidity management processes to seek to mitigate and control these risks, unforeseen systemic market factors in particular make it difficult to eliminate these risks completely. Adverse and continued constraints in the supply of liquidity, including inter-bank lending, may materially and adversely affect the cost of funding our business, and extreme liquidity constraints may affect our current operations and our ability to fulfill regulatory liquidity requirements as well as limit growth possibilities.

Our cost of obtaining funding is directly related to prevailing market interest rates and our credit spreads. Increases in interest rates and our credit spreads can significantly increase the cost of our funding. Changes in our credit spreads are market-driven, and may be influenced by market perceptions of our creditworthiness. Changes to interest rates and our credit spreads occur continuously and may be unpredictable and highly volatile.

If wholesale markets financing ceases to become available, or becomes excessively expensive, we may be forced to raise the rates we pay on deposits, with a view to attracting more customers, and/or to sell assets, potentially at depressed prices. The persistence or worsening of these adverse market conditions or an increase in base interest rates could have a material adverse effect on our ability to access liquidity and cost of funding.

We rely, and will continue to rely, primarily on deposits to fund lending activities. The ongoing availability of this type of funding is sensitive to a variety of factors outside our control, such as general economic conditions and the confidence of depositors in the economy, in general, and the financial services industry in particular, as well as competition between banks for deposits. Any of these factors could significantly increase the amount of deposit withdrawals in a short period of time, thereby reducing our ability to access deposit funding in the future on appropriate terms, or at all. If these circumstances were to arise, they could have a material adverse effect on our operating results, financial condition and prospects.

We anticipate that our customers will continue to make deposits (particularly demand deposits and short-term time deposits) in the near future, and we intend to maintain our emphasis on the use of banking deposits as a source of funds. The short-term nature of some deposits could cause liquidity problems for us in the future if deposits are not made in the volumes we expect or are not renewed. If a substantial number of our depositors withdraw their demand deposits or do not roll over their time deposits upon maturity, we may be materially and adversely affected.

There can be no assurance that, in the event of a sudden or unexpected shortage of funds in the banking system, we will be able to maintain levels of funding without incurring high funding costs, a reduction in the term of funding instruments, or the liquidation of certain assets. If this were to happen, we could be materially adversely affected.

Credit, market and liquidity risk may have an adverse effect on our credit ratings and our cost of funds. Any downgrading in our credit rating would likely increase our cost of funding, require us to post additional collateral or take other actions under some of our derivative contracts and adversely affect our interest margins and results of operations.

Credit ratings affect the cost and other terms upon which we are able to obtain funding. Rating agencies regularly evaluate us, and their ratings of our debt are based on a number of factors, including our financial strength and conditions affecting the financial services industry generally.

Any downgrade in our or Santander's debt credit ratings would likely increase our borrowing costs and require us to post additional collateral or take other actions under some of our derivative contracts, and could limit our access to capital markets and adversely affect our commercial business. For example, a ratings downgrade could adversely affect our ability to sell or market certain of our products, engage in certain longer-term and derivatives transactions and retain customers, particularly customers who need a minimum rating threshold in order to invest. In addition, under the terms of certain of our derivative contracts, we may be required to maintain a minimum credit rating or terminate the contracts. Any of these results of a ratings downgrade, in turn, could reduce our liquidity and have an adverse effect on us, including our operating results and financial condition.

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We conduct a significant number of our material derivative activities through Santander and Santander UK. We estimate that, as of December 31, 2017, if all of the rating agencies were to downgrade Santander’s or Santander UK’s long-term senior debt ratings, we would be required to post additional collateral pursuant to derivative and other financial contracts. Refer to further discussion in Note 14 of the Notes to the Consolidated Financial Statements.

While certain potential impacts of these downgrades are contractual and quantifiable, the full consequences of a credit rating downgrade are inherently uncertain, as they depend upon numerous dynamic, complex and inter-related factors and assumptions, including market conditions at the time of any downgrade, whether any downgrade of a company's long-term credit rating precipitates downgrades to its short-term credit rating, and assumptions about the potential behaviors of various customers, investors and counterparties. Actual outflows could be higher or lower than this hypothetical example, depending on certain factors including which credit rating agency downgrades our credit rating, any management or restructuring actions that could be taken to reduce cash outflows and the potential liquidity impact from loss of unsecured funding (such as from money market funds) or loss of secured funding capacity. Although unsecured and secured funding stresses are included in our stress testing scenarios and a portion of our total liquid assets is held against these risks, it is still the case that a credit rating downgrade could have a material adverse effect on the Company, the Bank, and SC.

In addition, if we were required to cancel our derivatives contracts with certain counterparties and were unable to replace those contracts, our market risk profile could be altered.

There can be no assurance that the rating agencies will maintain their current ratings or outlooks. Failure to maintain favorable ratings and outlooks could increase the cost of funding and adversely affect interest margins, which could have a material adverse effect on us.

Credit Risks

If the level of our non-performing loans increases or our credit quality deteriorates in the future, or if our loan and lease loss reserves are insufficient to cover loan and lease losses, this could have a material adverse effect on us.

Risks arising from changes in credit quality and the recoverability of loans and amounts due from counterparties are inherent in a wide range of our businesses. Non-performing or low credit quality loans have in the past negatively impacted and can continue to negatively impact our results of operations. In particular, the amount of our reported non-performing loans ("NPLs") may increase in the future as a result of growth in our total loan portfolio, including as a result of loan portfolios we may acquire in the future, or factors beyond our control, such as adverse changes in the credit quality of our borrowers and counterparties or a general deterioration in economic conditions in the United States, the impact of political events, events affecting certain industries or events affecting financial markets. There can be no assurance that we will be able to effectively control the level of the NPLs in our loan portfolio.

Our loan and lease loss reserves are based on our current assessment of and expectations concerning various factors affecting the quality of our loan portfolio. These factors include, among other things, our borrowers’ financial condition, repayment abilities and repayment intentions, the realizable value of any collateral, the prospects for support from any guarantor, government macroeconomic policies, interest rates and the legal and regulatory environment. As the last global financial crisis demonstrated, many of these factors are beyond our control. As a result, there is no precise method for predicting loan and credit losses, and there can be no assurance that our current or future loan and lease loss reserves will be sufficient to cover actual losses. If our assessment of and expectations concerning the above-mentioned factors differ from actual developments, if the quality of our total loan portfolio deteriorates for any reason, including an increase in lending to individuals and small and medium enterprises, a volume increase in our credit card portfolio or the introduction of new products, or if future actual losses exceed our estimates of incurred losses, we may be required to increase our loan and lease loss reserves, which may adversely affect us. If we were unable to control or reduce the level of our non-performing or poor credit quality loans, this also could have a material adverse effect on us.

Our loan and investment portfolios are subject to risk of prepayment, which could have a material adverse effect on us.

Our fixed rate loan and investment portfolios are subject to prepayment risk, which results from the ability of a borrower or issuer to pay a debt obligation prior to maturity. Generally, in a low interest rate environment, prepayment activity increases, and this reduces the weighted average life of our earning assets and could have a material adverse effect on us. We would also be required to amortize net premiums into income over a shorter period of time, thereby reducing the corresponding asset yield and net interest income. Prepayment risk also has a significant adverse impact on credit card and collateralized mortgage loans, since prepayments could shorten the weighted average life of these assets, which may result in a mismatch in our funding obligations and reinvestment at lower yields. Prepayment risk is inherent in our commercial activity, and an increase in prepayments could have a material adverse effect on us.

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The value of the collateral securing our loans may not be sufficient, and we may be unable to realize the full value of the collateral securing our loan portfolio.

The value of the collateral securing our loan portfolio may fluctuate or decline due to factors beyond our control, including macroeconomic factors affecting the United States. The value of the collateral securing our loan portfolio may be adversely affected by force majeure events such as natural disasters, particularly in locations in which a significant portion of our loan portfolio is composed of real estate loans. Natural disasters such as earthquakes and floods may cause widespread damage, which could impair the asset quality of our loan portfolio and have an adverse impact on the economy of the affected region. We also may not have sufficiently recent information on the value of collateral, which may result in an inaccurate assessment of impairment losses of our loans secured by such collateral. If any of the above were to occur, we may need to make additional provisions to cover actual impairment losses on our loans, which may materially and adversely affect our results of operations and financial condition.

We are subject to counterparty risk in our banking business.

We are exposed to counterparty risk in addition to credit risks associated with lending activities. Counterparty risk may arise from, for example, investing in securities of third parties, entering into derivatives contracts under which counterparties have obligations to make payments to us or executing securities, futures, currency or commodity trades that fail to settle at the required time due to non-delivery by the counterparty or systems failure by clearing agents, clearinghouses or other financial intermediaries.

We routinely transact with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, mutual funds, hedge funds and other institutional clients. We rely on information provided by or on behalf of counterparties, such as financial statements, and we may rely on representations of our counterparties as to the accuracy and completeness of that information. Defaults by, and even rumors or questions about the solvency of, certain financial institutions and the financial services industry generally have led to market-wide liquidity problems and could lead to losses or defaults by other institutions. Many of the routine transactions we enter into expose us to significant credit risk in the event of default by one of our significant counterparties.

Market Risks

We are subject to fluctuations in interest rates and other market risks, which may materially and adversely affect us.

Market risk refers to the probability of variations in our net interest income or in the market value of our assets and liabilities due to volatility of interest rates, exchange rates or equity prices. Changes in interest rates affect the following areas, among others, of our business:

• net interest income;

• the volume of loans originated;

• the market value of our securities holdings;

• the value of our loans and deposits:

• gains from sales of loans and securities; and

• gains and losses from derivatives.

Interest rates are highly sensitive to many factors beyond our control, including increased regulation of the financial sector, monetary policies, domestic and international economic and political conditions, and other factors. Variations in interest rates could affect our net interest income, which comprises the majority of our revenue, reducing our growth rate and potentially resulting in losses. This is a result of the different effect a change in interest rates may have on the interest earned on our assets and the interest paid on our borrowings. In addition, we may incur costs (which, in turn, will impact our results) as we implement strategies to reduce future interest rate exposure.

Increases in interest rates may reduce the volume of loans we originate. Sustained high interest rates have historically discouraged customers from borrowing and have resulted in increased delinquencies in outstanding loans and deterioration in the quality of assets. Increases in interest rates may also reduce the propensity of our customers to prepay or refinance fixed-rate loans. Increases in interest rates may reduce the value of our financial assets and may reduce gains or require us to record losses on sales of our loans or securities.

In addition, we may experience increased delinquencies in a low interest rate environment when such an environment is accompanied by high unemployment and recessionary conditions.

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We are exposed to foreign exchange rate risk as a result of mismatches between assets and liabilities denominated in different currencies. Fluctuations in the exchange rate between currencies may negatively affect our earnings and value of our assets and securities.

Some of our investment management services fees are based on financial market valuations of assets certain of our subsidiaries manage or hold in custody for clients. Changes in these valuations can affect noninterest income positively or negatively, and ultimately affect our financial results. Significant changes in the volume of activity in the capital markets, and in the number of assignments we are awarded, could also affect our financial results.

We are also exposed to equity price risk in our investments in equity securities. The performance of financial markets may cause changes in the value of our investment and trading portfolios. The volatility of world equity markets due to economic uncertainty and sovereign debt concerns has had a particularly strong impact on the financial sector. Continued volatility may affect the value of our investments in equity securities and, depending on their fair value and future recovery expectations, could become a permanent impairment which would be subject to write-offs against our results. To the extent any of these risks materialize, our net interest income and the market value of our assets and liabilities could be materially adversely affected.

Market conditions have resulted, and could result, in material changes to the estimated fair values of our financial assets. Negative fair value adjustments could have a material adverse effect on our operating results, financial condition and prospects.

In the recent years, financial markets have been subject to volatility and the resulting widening of credit spreads. We have material exposures to securities and other investments that are recorded at fair value and are therefore exposed to potential negative fair value adjustments. Asset valuations in future periods, reflecting then-prevailing market conditions, may result in negative changes in the fair values of our financial assets, and also may translate into increased impairments. In addition, the value we ultimately realize on disposal of the asset may be lower than its current fair value. Any of these factors could require us to record negative fair value adjustments, which may have a material adverse effect on our operating results, financial condition and prospects.

In addition, to the extent that fair values are determined using financial valuation models, such values may be inaccurate or subject to change, as the data used by such models may not be available or may become unavailable due to changes in market conditions, particularly for illiquid assets and in times of economic instability. In such circumstances, our valuation methodologies require us to make assumptions, judgments and estimates in order to establish fair value, and reliable assumptions are difficult to make and are inherently uncertain. In addition, valuation models are complex, making them inherently imperfect predictors of actual results. Any resulting impairments or write-downs could have a material adverse effect on our operating results, financial condition and prospects.

We are subject to market, operational and other related risks associated with our derivatives transactions that could have a material adverse effect on us.

We enter into derivatives transactions for trading purposes as well as for hedging purposes. We are subject to market, credit and operational risks associated with these transactions, including basis risk (the risk of loss associated with variations in the spread between the asset yield and the funding and/or hedge cost) and credit or default risk (the risk of insolvency or other inability of the counterparty to a particular transaction to perform its obligations thereunder, including providing sufficient collateral).

The execution and performance of derivatives transactions depend on our ability to maintain adequate control and administration systems and to hire and retain qualified personnel. Moreover, our ability to adequately monitor, analyze and report derivative transactions continues to depend, to a great extent, on our information technology systems. These factors further increase the risks associated with these transactions and could have a material adverse effect on us.

In addition, disputes with counterparties may arise regarding the terms or the settlement procedures of derivative contracts, including with respect to the value of underlying collateral, which could cause us to incur unexpected costs, including transaction, operational, legal and litigation costs, or result in credit losses, all of which may impair our ability to manage our risk exposure from these products.

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Risk Management

Failure to successfully implement and continue to improve our risk management policies, procedures and methods, including our credit risk management system, could materially and adversely affect us, and we may be exposed to unidentified or unanticipated risks.

The management of risk is an integral part of our activities. We seek to monitor and manage our risk exposure through a variety of separate but complementary financial, credit, market, operational, compliance and legal reporting systems. Although we employ a broad and diversified set of risk monitoring and risk mitigation techniques, such techniques and strategies may not be fully effective in mitigating our risk exposure in all economic market environments or against all types of risk, including risks that we fail to identify or anticipate.

We rely on quantitative models to measure risks and estimate certain financial values. Models may be used in such processes as determining the pricing of various products, grading loans and extending credit, measuring interest rate and other market risks, predicting losses, assessing capital adequacy, and calculating economic and regulatory capital levels, as well as estimating the value of financial instruments and balance sheet items. Poorly designed or implemented models present the risk that our business decisions based on information incorporating models will be adversely affected due to the inadequacy of that information. Also, information we provide to the public or our regulators based on poorly designed or implemented models could be inaccurate or misleading.

Some of our qualitative tools and metrics for managing risk are based on our use of observed historical market behavior. We apply statistical and other tools to these observations to arrive at quantifications of our risk exposures. These qualitative tools and metrics may fail to predict future risk exposures. These risk exposures could, for example, arise from factors we did not anticipate or correctly evaluate in our statistical models. This would limit our ability to manage our risks. Our losses therefore could be significantly greater than the historical measures indicate. In addition, our quantified modeling does not take all risks into account. Our more qualitative approach to managing those risks could prove insufficient, exposing us to material unanticipated losses. We could face adverse consequences as a result of decisions based on models that are poorly developed, implemented, or used, or as a result of a modeled outcome being misunderstood or used of for purposes for which it was not designed. In addition, if existing or potential customers believe our risk management is inadequate, they could take their business elsewhere or seek to limit transactions with us. This could have a material adverse effect on our reputation, operating results, financial condition, and prospects.

As a commercial bank, one of the main types of risks inherent in our business is credit risk. For example, an important feature of our credit risk management is to employ an internal credit rating system to assess the particular risk profile of a customer. Since this process involves detailed analyses of the customer, taking into account both quantitative and qualitative factors, it is subject to human and IT systems errors. In exercising their judgment on the current and future credit risk of our customers, our employees may not always assign an accurate credit rating, which may result in our exposure to higher credit risks than indicated by our risk rating system.

We have been refining our credit policies and guidelines to address potential risks associated with particular industries or types of customers. However, we may not be able to timely detect all possible risks before they occur or, due to limited tools available to us, our employees may not be able to implement them effectively, which may increase our credit risk. Failure to effectively implement, consistently follow or continuously refine our credit risk management system may result in an increase in the level of NPL and a higher risk exposure for us, which could have a material adverse effect on us.

General Business and Industry Risks

The financial problems our customers face could adversely affect us.

Market turmoil and economic recession could materially and adversely affect the liquidity, businesses and/or financial conditions of our borrowers, which could in turn increase our NPL ratios, impair our loan and other financial assets and result in decreased demand for borrowings in general. In addition, our customers may further decrease their risk tolerance to non-deposit investments such as stocks, bonds and mutual funds significantly, which would adversely affect our fee and commission income. Any of the conditions described above could have a material adverse effect on our business, financial condition and results of operations.

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We depend in part upon dividends and other funds from subsidiaries.

Some of our operations are conducted through our subsidiaries. As a result, our ability to pay dividends, to the extent we decide to do so, depends in part on the ability of our subsidiaries to generate earnings and pay dividends to us. Payment of dividends, distributions and advances by our subsidiaries will be contingent on our subsidiaries’ earnings and business considerations, and are limited by legal, regulatory, and contractual restrictions. Additionally, our right to receive any assets of any of our subsidiaries as an equity holder of such subsidiaries upon their liquidation or reorganization will be effectively subordinated to the claims of our subsidiaries’ creditors, including trade creditors.

Increased competition and industry consolidation may adversely affect our results of operations.

We face substantial competition in all parts of our business, including in originating loans and attracting deposits. Our competition in originating loans comes principally from other domestic and foreign banks, mortgage banking companies, consumer finance companies, insurance companies and other lenders and purchasers of loans.

There has been a trend towards consolidation in the banking industry, which has created larger and stronger banks with which we must now compete. There can be no assurance that increased competition will not adversely affect our growth prospects and therefore our operations. We also face competition from non-bank competitors, such as brokerage companies, department stores (for some credit products), leasing and factoring companies, mutual fund and pension fund management companies and insurance companies.

Non-traditional providers of banking services, such as internet based e-commerce providers, mobile telephone companies and internet search engines, may offer and/or increase their offerings of financial products and services directly to customers. These non-traditional providers of banking services currently have an advantage over traditional providers because they are not subject to banking regulation. Several of these competitors may have long operating histories, large customer bases, strong brand recognition and significant financial, marketing and other resources. They may adopt more aggressive pricing and rates and devote more resources to technology, infrastructure and marketing. New competitors may enter the market or existing competitors may adjust their services with unique product or service offerings or approaches to providing banking services. If we are unable to successfully compete with current and new competitors, or if we are unable to anticipate and adapt our offerings to changing banking industry trends, including technological changes, our business may be adversely affected. In addition, our failure to effectively anticipate or adapt to emerging technologies or changes in customer behavior, including among younger customers, could delay or prevent our access to new digital-based markets, which would in turn have an adverse effect on our competitive position and business.

The rise in customer use of internet and mobile banking platforms in recent years could negatively impact our investments in bank premises, equipment and personnel for our branch network. The persistence or acceleration of this shift in demand towards internet and mobile banking may necessitate changes to our retail distribution strategy, which may include closing and/or selling certain branches and restructuring our remaining branches and workforce. These actions could lead to losses on these assets and increased expenditures to renovate, reconfigure or close a number of our remaining branches or otherwise reform our retail distribution channel. Furthermore, our failure to swiftly and effectively implement such changes to our distribution strategy could have an adverse effect our competitive position.

Increasing competition could require that we increase the rates we offer on deposits or lower the rates we charge on loans, which could also have a material adverse effect on us, including on our profitability. It may also negatively affect our business results and prospects by, among other things, limiting our ability to increase our customer base and expand our operations and increasing competition for investment opportunities.

In addition, if our customer service levels were perceived by the market to be materially below those of our competitors, we could lose existing and potential business. If we are not successful in retaining and strengthening customer relationships, we may lose market share, incur losses on some or all of our activities or fail to attract new deposits or retain existing deposits, which could have a material adverse effect on our operating results, financial condition and prospects.

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Our ability to maintain our competitive position depends, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties, and we may not be able to manage various risks we face as we expand our range of products and services that could have a material adverse effect on us.

The success of our operations and our profitability depend, in part, on the success of new products and services we offer our clients and our ability to continue offering products and services from third parties. However, we cannot guarantee that our new products and services will be responsive to client demands or successful once they are offered to our clients, or that they will be successful in the future. In addition, our clients’ needs or desires may change over time, and such changes may render our products and services obsolete, outdated or unattractive, and we may not be able to develop new products that meet our clients’ changing needs. Our success is also dependent on our ability to anticipate and leverage new and existing technologies that may have an impact on products and services in the banking industry. Technological changes may further intensify and complicate the competitive landscape and influence client behavior. If we cannot respond in a timely fashion to the changing needs of our clients, we may lose clients, which could in turn materially and adversely affect us.

The introduction of new products and services can entail significant time and resources, including regulatory approvals. Substantial risks and uncertainties are associated with the introduction of new products and services, including technical and control requirements that may need to be developed and implemented, rapid technological change in the industry, our ability to access technical and other information from our clients and the significant and ongoing investments required to bring new products and services to market in a timely manner at competitive prices. Our failure to manage these risks and uncertainties also exposes us to the enhanced risk of operational lapses, which may result in the recognition of financial statement liabilities. Regulatory and internal control requirements, capital requirements, competitive alternatives, vendor relationships and shifting market preferences may also determine whether initiatives can be brought to market in a manner that is timely and attractive to our clients. Failure to successfully manage these risks in the development and implementation of new products or services could have a material adverse effect on our business and reputation, as well as on our consolidated results of operations and financial condition.

As we expand the range of our products and services, some of which may be at an early stage of development in the markets of certain regions in which we operate, we will be exposed to new and potentially increasingly complex risks and development expenses. Our employees and risk management systems as well as our experience and that of our partners may not be adequate to enable us to handle or manage such risks properly. In addition, the cost of developing products that are not launched is likely to affect our results of operations. Any or all of these factors, individually or collectively, could have a material adverse effect on us.

If we are unable to manage the growth of our operations, this could have an adverse impact on our profitability.

We cannot ensure that we will, in all cases, be able to manage our growth effectively or deliver our strategic growth objectives. Challenges that may result from our strategic growth decisions include our ability to:

• manage efficiently the operations and employees of expanding businesses;

• maintain or grow our existing customer base;

• align our current information technology ("IT") systems adequately with those of an enlarged group;

• apply our risk management policies effectively to an enlarged group; and

• manage a growing number of entities without over-committing management or losing key personnel.

Any failure to manage growth effectively, including any or all of the above challenges associated with our growth plans, could have a material adverse effect on our operating results, financial condition and prospects.

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Goodwill impairments may be required in relation to acquired businesses.

We have made business acquisitions for which it is possible that the goodwill which has been attributed to those businesses may have to be written down if our valuation assumptions are required to be reassessed as a result of any deterioration in the business’ underlying profitability, asset quality or other relevant matters. Impairment testing with respect to goodwill is performed annually, more frequently if impairment indicators are present, and includes a comparison of the carrying amount of the reporting unit with its fair value. If the carrying value of the reporting unit is higher than the fair value, the impairment is measured as this excess of carrying value over fair value. We recognized a $10.5 million impairment of goodwill in 2017 primarily due to the unfavorable economic environment in Puerto Rico and the additional adverse effect of Hurricane Maria. We did not recognize any impairments of goodwill in 2016. The Company recorded a goodwill impairment in the fourth quarter of 2015 related to the goodwill from the first quarter 2014 consolidation and Change in Control of SC. It is reasonably possible we may be required to record impairment of our remaining $4.5 billion of goodwill attributable to SC and SBNA in the future. There can be no assurance that we will not have to write down the value attributed to goodwill further in the future, which would not impact risk-based capital ratios adversely, but would adversely affect our results of operations and stockholder's equity.

We rely on recruiting, retaining and developing appropriate senior management and skilled personnel.

Our continued success depends in part on the continued service of key members of our management team. The ability to continue to attract, train, motivate and retain highly qualified professionals is a key element of our strategy. The successful implementation of our growth strategy depends on the availability of skilled management, both at our head office and at each of our business units. If we or one of our business units or other functions fails to staff its operations appropriately or loses one or more of its key senior executives and fails to replace them in a satisfactory and timely manner, our business, financial condition and results of operations, including control and operational risks, may be adversely affected.

The financial industry in the United States has experienced and may continue to experience more stringent regulation of employee compensation, which could have an adverse effect on our ability to hire or retain the most qualified employees. In addition, due to our relationship with Santander, we are subject to indirect regulation by the European Central Bank, which has recently imposed compensation restrictions that may apply to certain of our executive officers and other employees under the Capital Requirements Directive IV prudential rules. These restrictions may impact our ability to retain our experienced management team and key employees and our ability to attract appropriately qualified personnel, which could have a material adverse impact on our business, financial condition, and results of operations.

We rely on third parties for important products and services.

Third-party vendors provide key components of our business infrastructure such as loan and deposit servicing systems, internet connections and network access. Third parties can be sources of operational risk to us, including with respect to security breaches affecting those parties. We may be required to take steps to protect the integrity of our operational systems, thereby increasing our operational costs and potentially decreasing customer satisfaction. In addition, any problems caused by these third parties, including as a result of their not providing us their services for any reason, their performing their services poorly, or employee misconduct could adversely affect our ability to deliver products and services to customers and otherwise to conduct business, which could lead to reputational damage and regulatory investigations and intervention. Replacing these third-party vendors could also entail significant delays and expense.

Further, the operational and regulatory risk we face as a result of these arrangements may be increased to the extent that we restructure them.  Any restructuring could involve significant expense to us and entail significant delivery and execution risk, which could have a material adverse effect on our business, financial condition and operations.

Damage to our reputation could cause harm to our business prospects.

Maintaining a positive reputation is critical to our attracting and maintaining customers, investors and employees and conducting business transactions with our counterparties. Damage to our reputation can therefore cause significant harm to our business and prospects. Harm to our reputation can arise from numerous sources including, among others, employee misconduct, litigation or regulatory outcomes, failure to deliver minimum standards of service and quality, compliance failures, unethical behavior, and the activities of customers and counterparties. Further, adverse publicity, regulatory actions or fines, litigation, operational failures or the failure to meet client expectations or other obligations could materially and adversely affect our reputation, our ability to attract and retain clients or our sources of funding for the same or other businesses.

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Actions by the financial services industry generally or by certain members of, or individuals in, the industry can also affect our reputation. For example, the role played by financial services firms in the financial crisis and the seeming shift toward increasing regulatory supervision and enforcement has caused public perception of us and others in the financial services industry to decline.

Preserving and enhancing our reputation also depends on maintaining systems, procedures and controls that address known risks and regulatory requirements, as well as our ability to timely identify, understand and mitigate additional risks that arise due to changes in our businesses and the markets in which we operate, the regulatory environment and customer expectations.

We could suffer significant reputational harm if we fail to identify and manage potential conflicts of interest properly. The failure to adequately address, or the perceived failure to adequately address, conflicts of interest could affect the willingness of clients to deal with us, or give rise to litigation or enforcement actions against us. Therefore, there can be no assurance that conflicts of interest will not arise in the future that could cause material harm to us.

The Bank engages in transactions with its subsidiaries or affiliates that others may not consider to be on an arm’s-length basis.

The Bank and its subsidiaries have entered into a number of services agreements pursuant to which we render services, such as administrative, accounting, finance, treasury, legal services and others.

United States law applicable to public companies and financial groups and institutions provide for several procedures designed to ensure that the transactions entered into with or among our subsidiaries and/or affiliates do not deviate from prevailing market conditions for those types of transactions.

The Bank is likely to continue to engage in transactions with our affiliates. Future conflicts of interests between us and any of affiliates, or among our affiliates, may arise, which conflicts are not required to be and may not be resolved in our favor.

Our business and financial performance could be adversely affected, directly or indirectly, by disasters, natural or otherwise, terrorist activities or international hostilities.

Neither the occurrence nor potential impact of disasters (such as earthquakes, hurricanes, tornadoes, floods and other severe weather conditions, pandemics, dislocations, fires, explosions, or other catastrophic accidents or events), terrorist activities or international hostilities can be predicted. However, these occurrences could impact us directly (for example, by causing significant damage to our facilities or preventing us from conducting our business in the ordinary course), or indirectly as a result of their impact on our borrowers, depositors, other customers, suppliers or other counterparties. We could also suffer adverse consequences to the extent that disasters, terrorist activities or international hostilities affect the financial markets or the economy in general or in any particular region. These types of impacts could lead, for example, to an increase in delinquencies, bankruptcies and defaults that could result in our experiencing higher levels of nonperforming assets, net charge-offs and provisions for credit losses.

Our ability to mitigate the adverse consequences of such occurrences is in part dependent on the quality of our resiliency planning and our ability to anticipate the nature of any such event that may occur. The adverse impact of disasters, terrorist activities or international hostilities also could be increased to the extent that there is a lack of preparedness on the part of national or regional emergency responders or on the part of other organizations and businesses with which we deal.

Technology and Cybersecurity Risks

Any failure to effectively improve or upgrade our IT infrastructure and management information systems in a timely manner could have a material adverse effect on us.

Our ability to remain competitive depends in part on our ability to upgrade our IT on a timely and cost-effective basis. We must continually make significant investments and improvements in our IT infrastructure in order to remain competitive. There can be no assurance that we will be able to maintain the level of capital expenditures necessary to support the improvement or upgrading of our IT infrastructure in the future. Any failure to improve or upgrade our IT infrastructure and management information systems effectively and in a timely manner could have a material adverse effect on us.

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Risks relating to data collection, processing, storage systems and security are inherent in our business.

Like other financial institutions with a large customer base, we manage and hold confidential personal information of customers in the conduct of our banking operations, as well as a large number of assets. Our business depends on the ability to process a large number of transactions efficiently and accurately, and on our ability to rely on our digital technologies, computer and e-mail services, spreadsheets, software and networks, as well as on the secure processing, storage and transmission of confidential and other information in our computer systems and networks. The proper functioning of financial controls, accounting and other data collection and processing systems is critical to our businesses and our ability to compete effectively. Losses can result from inadequate personnel, inadequate or failed internal control processes and systems, or external events that interrupt normal business operations. We also face the risk that the design of our controls and procedures proves to be inadequate or is circumvented. Although we work with our clients, vendors, service providers, counterparties and other third parties to develop secure transmission capabilities and prevent information security risk, we routinely exchange personal, confidential and proprietary information by electronic means, and we may be the target of attempted cyber-attacks.

Many companies across the country and in the financial services industry have reported significant breaches in the security of their websites or other systems. Cybersecurity risks have increased significantly in recent years due to the development and proliferation of new technologies, use of the internet and telecommunications technology to conduct financial transactions, and increased sophistication and activities of organized crime groups, state-sponsored and individual hackers, terrorist organizations, disgruntled employees and vendors, activists and other third parties. Financial institutions, the government and retailers have in recent years reported cyber incidents that compromised data, resulted in the theft of funds or the theft or destruction of corporate information and other assets.

We take protective measures and continuously monitor and develop our systems to protect our technology infrastructure and data from misappropriation or corruption. We have policies, practices and controls designed to prevent or limit disruptions to our systems and enhance the security of our infrastructure. These include performing risk management for information systems that store, transmit or process information assets identifying and managing risks to information assets managed by third-party service providers through on-going oversight and auditing of the service providers’ operations and controls. We develop controls regarding user access to software on the principle that access is forbidden to a system unless expressly permitted, limited to the minimum amount necessary for business purposes, and terminated promptly when access is no longer required. We seek to educate and make our employees aware of information security and privacy controls and their specific responsibilities on an ongoing basis.

Nevertheless, while we have not experienced any material losses or other material consequences relating to cyber-attacks or other information or security breaches, whether directed at us or third parties, our systems, software and networks, as well as those of our clients, vendors, service providers, counterparties and other third parties may be vulnerable to unauthorized access, misuse, computer viruses or other malicious code, cyber-attacks such as denial of service, malware, ransomware, phishing, and other events that could result in security breaches or give rise to the manipulation or loss of significant amounts of customer data and other sensitive information, disrupt, sabotage or degrade service on our systems, or result in the theft or loss of significant levels of liquid assets, including cash. As cybersecurity threats continue to evolve and increase in sophistication, we cannot guarantee the effectiveness of our policies, practices and controls to protect against all such circumstances that could result in disruptions to our systems. In the event of a cyber-attack or security breach affecting a vendor or other third party entity on whom we rely, our ability to conduct business, and the security of our customer information, could be impaired in a manner to that of a cyber-attack or security breach affecting us directly. We also may not receive information or notice of the breach in a timely manner, or we may have limited options to influence how and when the cyber-attack or security breach is addressed. In addition, as financial institutions are becoming increasingly interconnected with central agents, exchanges and clearing houses, they may be increasingly susceptible to negative consequences of cyber-attacks and security breaches affecting the systems of such third parties. It could take a significant amount of time for a cyber-attack to be investigated, during which time we may not be in a position to fully understand and remediate the attack, and certain errors or actions could be repeated or compounded before they are discovered and remediated, any or all of which could further increase the costs and consequences associated with a particular cyber-attack. The perception of a security breach affecting us or any part of the financial services industry, whether correct or not, could result in a loss of confidence in our cybersecurity measures or otherwise damage our reputation with customers and third parties with whom we do business. Should such adverse events occur, we may not have indemnification or other protection from the third party sufficient to compensate or protect us from the consequences.

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As attempted cyber-attacks continue to evolve in scope and sophistication, we may incur significant costs in our attempts to modify or enhance our protective measures against such attacks to investigate or remediate any vulnerability or resulting breach, or in communicating cyber-attacks to our customers. An interception, misuse or mishandling of personal, confidential or proprietary information sent to or received from a client, vendor, service provider, counterparty or third party or a cyber-attack could result in our inability to recover or restore data that has been stolen, manipulated or destroyed, damage to our systems and those of our clients, customers and counterparties, violations of applicable privacy and other laws, or other significant disruption of operations, including disruptions in our ability to use our accounting, deposit, loan and other systems and our ability to communicate with and perform transactions with customers, vendors and other parties. These effects could be exacerbated if we would need to shut down portions of our technology infrastructure temporarily to address a cyber-attack, if our technology infrastructure is not sufficiently redundant to meet our business needs while an aspect of our technology is compromised, or if a technological or other solution to a cyber-attack is slow to be developed. Even if we timely resolve the technological issues in a cyber-attack, a temporary disruption in our operations could adversely affect customer satisfaction and behavior, expose us to reputational damage, contractual claims, supervisory actions, or litigation.

U.S. banking agencies and other federal and state government agencies have increased their attention on cybersecurity and data privacy risks, and have proposed enhanced risk management standards that would apply to us. Such legislation and regulations relating to cybersecurity and data privacy may require that we modify systems, change service providers, or alter business practices or policies regarding information security, handling of data and privacy. Changes such as these could subject us to heightened operational costs. To the extent we do not successfully meet supervisory standards pertaining to cybersecurity, we could be subject to supervisory actions, litigation and reputational damage.

Financial Reporting and Control Risks

Changes in accounting standards could impact reported earnings.

The accounting standard setters and other regulatory bodies periodically change the financial accounting and reporting standards that govern the preparation of our Consolidated Financial Statements. These changes can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retroactively, resulting in the restatement of prior period financial statements.

Our financial statements are based in part on assumptions and estimates which, if inaccurate, could cause material misstatement of the results of our operations and financial position.

The preparation of consolidated financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make judgments, estimates and assumptions that affect our Consolidated Financial Statements and accompanying notes. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgments and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognized in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to our results and financial position, based upon materiality and significant judgments and estimates, include impairment of loans and advances, goodwill impairment, valuation of financial instruments, impairment of available-for-sale financial assets, deferred tax assets and provisions for liabilities.

The allowance for credit losses ("ACL") is a significant critical estimate. Due to the inherent nature of this estimate, we cannot provide assurance that the Company will not significantly increase the ACL or sustain credit losses that are significantly higher than the provided allowance.

The valuation of financial instruments measured at fair value can be subjective, in particular when models are used which include unobservable inputs. Given the uncertainty and subjectivity associated with valuing such instruments it is possible that the results of our operations and financial position could be materially misstated if the estimates and assumptions used prove inaccurate.

If the judgments, estimates and assumptions we use in preparing our Consolidated Financial Statements are subsequently found to be incorrect, there could be a material effect on our results of operations and a corresponding effect on our funding requirements and capital ratios.

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Disclosure controls and procedures over financial reporting and internal controls over financial reporting may not prevent or detect all errors or acts of fraud, and lapses in these controls could materially and adversely affect our operations, liquidity and/or reputation.

Disclosure controls and procedures over financial reporting are designed to provide reasonable assurance that information required to be disclosed by the Company in reports filed or submitted under the Exchange Act is accumulated and communicated to management, and recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. We also maintain a system of internal controls over financial reporting. However, these controls may not achieve, and in some cases have not achieved, their intended objectives. Control processes that involve human diligence and compliance, such as our disclosure controls and procedures and internal controls over financial reporting, are subject to lapses in judgement and breakdowns resulting from human failures. Controls can be circumvented by collusion or improper management override. Because of these limitations, there are risks that material misstatements due to error or fraud may not be prevented or detected, and that information may not be reported on a timely basis.

We have identified control deficiencies in our financial reporting process and for which remediation was still in process as of December 31, 2017. These control deficiencies contributed to the restatement of the audited Consolidated Financial Statements in our Form 10-K for the year ended December 31, 2015 and the unaudited financial statements included in certain of our previously filed Quarterly Reports on Form 10-Q. See Part II, Item 9A in this Form 10-K. We have initiated certain measures, including increasing the number of employees on, and the expertise of, our financial reporting team, and the enhancement of our model risk management framework and documentation process to remediate these weaknesses, and plan to implement additional appropriate measures as part of this effort. There can be no assurance that we will be able to fully remediate our existing material weaknesses. Further, there can be no assurance that we will not suffer from other material weaknesses in the future. If we fail to remediate these material weaknesses or fail to otherwise maintain effective internal controls over financial reporting in the future, such failure could result in a material misstatement of our annual or quarterly financial statements that would not be prevented or detected on a timely basis and which could cause investors and other users to lose confidence in our financial statements and limit our ability to raise capital. Additionally, failure to remediate the material weaknesses or otherwise failing to maintain effective internal controls over financial reporting may negatively impact our operating results and financial condition, impair our ability to timely file our periodic reports with the SEC, subject us to additional litigation and regulatory actions and cause us to incur substantial additional costs in future periods relating to the implementation of remedial measures.

Failure to satisfy obligations associated with being a public company may have adverse regulatory, economic, and reputational consequences.

As a public company, we are required to prepare and distribute periodic reports containing our Consolidated Financial Statements with the SEC, evaluate and maintain our system of internal control over financial reporting, and report on management’s assessment thereof, in compliance with the requirements of Section 404 of the Sarbanes-Oxley Act and the related rules and regulations of the SEC and the Public Company Accounting Oversight Board, and maintain internal policies, including those relating to disclosure controls and procedures.

We filed our Annual Report on Form 10-K for 2015 and certain Quarterly Reports on Form 10-Q in 2016 after the time periods prescribed by the SEC’s regulations. Those failures to file our periodic reports within the time periods prescribed by the SEC, among other consequences, resulted in the suspension of our eligibility to use Form S-3 registration statements until we have timely filed our SEC periodic reports for a period of 12 months. We timely filed our SEC periodic reports for 12 consecutive months as of November 13, 2017. If in the future we are not able to file our periodic reports within the time periods prescribed by the SEC, among other consequences, we would be unable to use Form S-3 registration statements until we have timely filed our SEC periodic reports for a period of 12 consecutive months. Our inability to use Form S-3 registration statements would increase the time and resources we need to spend if we choose to access the public capital markets.

Risks Associated with our Majority-Owned Consolidated Subsidiary

The financial results of SC could have a negative impact on the Company's operating results and financial condition.

SC historically has provided a significant source of funding to the Company through earnings. Our investment in SC involves risk, including the possibility that poor operating results of SC could negatively affect the operating results of SHUSA.

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Factors that affect the financial results of SC in addition to those which have been previously addressed include, but are not limited to:

• Periods of economic slowdown may result in decreased demand for automobiles as well as declining values of automobiles and other consumer products used as collateral to secure outstanding loans. Higher gasoline prices, the general availability of consumer credit, and other factors which impact consumer confidence could increase loss frequency and decrease consumer demand for automobiles. In addition, during an economic slowdown, servicing costs may increase without a corresponding increase in finance charge income. Changes in the economy may impact the collateral value of repossessed automobiles and repossession, and foreclosure sales may not yield sufficient proceeds to repay the receivables in full and result in losses.

• SC’s growth strategy is subject to significant risks, some of which are outside its control, including general economic conditions, the ability to obtain adequate financing for growth, laws and regulatory environments in the states in which the business seeks to operate, competition in new markets, the ability to attract new customers, the ability to recruit qualified personnel, and the ability to obtain and maintain all required approvals, permits, and licenses on a timely basis

• SC’s business may be negatively impacted if it is unsuccessful in developing and maintaining relationships with automobile dealerships that correlate to SC’s ability to acquire loans and automotive leases. In addition, economic downturns may result in the closure of dealerships and corresponding decreases in sales and loan volumes.

• SC's business could be negatively impacted if it is unsuccessful in developing and maintaining its serviced for others portfolio. As this is a significant and growing portion of SC's business strategy, if an institution for which SC currently services assets chooses to terminate SC's rights as a servicer or if SC fails to add additional institutions or portfolios to its servicing platform, SC may not achieve the desired revenue or income from this platform.

• SC has repurchase obligations in its capacity as a servicer in securitizations and whole loan sales. If significant repurchases of assets or other payments are required under its responsibility as a servicer, this could have a material adverse effect on SC’s financial condition, results of operations, and liquidity.

• The obligations associated with being a public company require significant resources and management attention which increases the costs of SC's operations and may divert focus from business operations. As a result of its initial public offering ("IPO"), SC is now required to remain in compliance with the reporting requirements of the SEC and the New York Stock Exchange ("NYSE"), maintain corporate infrastructure required of a public company, and incur significant legal and financial compliance costs, which may divert SC management’s attention and resources from implementing its growth strategy.

• The market price of SC common stock ("SC Common Stock") may be volatile, which could cause the value of an investment in SC Common Stock to decline. Conditions affecting the market price of SC Common Stock may be beyond SC’s control and include general market conditions, economic factors, actual or anticipated fluctuations in quarterly operating results, changes in or failure to meet publicly disclosed expectations related to future financial performance, analysts’ estimates of SC’s financial performance or lack of research or reports by industry analysts, changes in market valuations of similar companies, future sales of SC Common Stock, or additions or departures of its key personnel.

• SC's business and results of operations could be negatively impacted if it fails to manage and complete divestitures. SC regularly evaluates its portfolio in order to determine whether an asset or business may no longer be aligned with its strategic objectives. For example, in October 2015, SC disclosed a decision to exit the personal lending business and to explore strategic alternatives for its existing personal lending assets. Of its two primary lending relationships, SC completed the sale of substantially all of its loans associated with the LendingClub relationship in February 2016. SC continues to classify loans from its other primary lending relationship, Bluestem, as held-for-sale. SC remains a party to agreements with Bluestem that obligate it to purchase new advances originated by Bluestem, along with existing balances on accounts with new advances, for an initial term ending in April 2020 and which is renewable through April 2022 at Bluestem's option. Although SC is seeking a third party willing and able to take on this obligation, it may not be successful in finding such a party, and Bluestem may not agree to the substitution. SC has recorded significant lower-of-cost-or-market adjustments on this portfolio and may continue to do so as long as the portfolio is held, particularly due to the new volume it is committed to purchase.

• SC's business could be negatively impacted if access to funding is reduced. Adverse changes in SC's ABS program or in the ABS market generally could materially adversely affect its ability to securitize loans on a timely basis or upon terms acceptable to SC. This could increase its cost of funding, reduce its margins, or cause it to hold assets until investor demand improves.

• As with SHUSA, adverse outcomes to current and future litigation against SC may negatively impact its financial position, results of operations, and liquidity. SC is party to various litigation claims and legal proceedings. In particular, as a consumer finance company, it is subject to various consumer claims and litigation seeking damages and statutory penalties. Some litigation against it could take the form of class action complaints by consumers. As the assignee of loans originated by automotive dealers, it also may be named as a co-defendant in lawsuits filed by consumers principally against automotive dealers.

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SC's agreement with FCA 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 we fail to meet certain of these performance conditions, FCA may elect to terminate the agreement.

In February 2013, SC entered into the Chrysler Agreement with FCA under which SC launched the Chrysler Capital brand, which originates private-label loans and leases to facilitate the purchase of FCA vehicles by consumers and FCA-franchised automotive dealers. The financing services that SC provides under the Chrysler Agreement, which launched May 1, 2013, include credit lines to finance FCA-franchised dealers’ acquisitions of vehicles and other products that FCA sells or distributes, automotive loans and leases to finance consumer acquisitions of new and used vehicles at FCA-franchised dealerships, financing for commercial and fleet customers, and 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 accordance with the terms of the Chrysler Agreement, in May 2013 SC paid FCA a $150 million upfront, nonrefundable payment, which will be amortized over ten years. The unamortized portion would be recognized as expense immediately if the Chrysler Agreement is terminated in accordance with its terms.

As part 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. 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 our participation in gains and losses. In addition, under the Chrysler Agreement, FCA has the option to acquire, for fair market value, an equity participation in an operating entity through which the financial services contemplated by the Chrysler Agreement are offered and provided, through either an equity interest in the new entity or participation in a joint venture or other similar business relationship or structure. There is no maximum limit on the size of FCA’s potential equity participation. Although the Chrysler Agreement contains provisions that are designed to address a situation in which the parties disagree on the fair market value of the equity participation interest, there is a risk that SC ultimately receives less than what SC believes to be the fair market value for such interest.

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. These obligations include the Company's meeting specified escalating penetration rates for the first five years of the agreement. SC has not met these penetration rates in the past and may not meet these penetration rates in the future. If SC continues not to meet these specified penetration rates, FCA may elect to terminate the Chrysler Agreement. FCA may also terminate the agreement if, among other circumstances, (i) a person other than Santander and its affiliates or our other stockholders owns 20% or more of our common stock and Santander and its affiliates own fewer shares of common stock than such person, (ii) SC becomes, control, or become controlled by, an OEM that competes with FCA or (iii) certain of our credit facilities become impaired.

The loans and leases originated through Chrysler Capital are expected to provide us with a significant portion of our projected growth over the next several years. Our ability to realize the full strategic and financial benefits of our relationship with FCA depends in part on the successful development of our Chrysler Capital business, which will require a significant amount of management’s time and effort. If SC is unable to realize the expected benefits of our relationship with FCA, or if the Chrysler Agreement were to terminate, there would be a materially adverse impact to our business, financial condition, results of operations, profitability, loan and lease volume, the credit quality of our portfolio, liquidity, funding and growth, and the Company’s ability to implement its business strategy would be materially adversely affected.

ITEM 1B - UNRESOLVED STAFF COMMENTS

The Company currently has the following open comment letters from the Division of Corporation Finance of the SEC.

1. Comment letter on SHUSA’s Form 10-K for the fiscal year ended December 31, 2014, as filed on March 18, 2015, Form 10-Q for the quarter ended March 31, 2015, as filed on May 13, 2015, and Form 10-Q for the quarter ended September 30, 2015, as filed on November 13, 2015, with respect to accounting methodologies for the fair value option ("FVO") loan portfolios associated with our RICs and auto loan portfolio, the ACL associated with our RICs and auto loan portfolio, executive compensation, and certain loan credit quality disclosures.

2. Comment letter on SHUSA’s Form 10-K for the fiscal year ended December 31, 2016, as filed on March 20, 2017, and Form 10-Q for the quarter ended September 30, 2017, as filed on November 13, 2017, primarily with respect to clarification of certain of our disclosures in future filings.

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ITEM 2 - PROPERTIES

As of December 31, 2017, the Company utilized 796 buildings that occupy a total of 6.8 million square feet, including 196 owned properties with 1.4 million square feet, 475 leased properties with 3.6 million square feet, and 125 sale and leaseback properties with 1.7 million square feet. The executive and primary administrative offices for SHUSA and the Bank are located at 75 State Street, Boston, Massachusetts. This location is leased by the Company. SC's corporate headquarters are located at 1601 Elm Street, Dallas, Texas. This location is leased by SC.

Eleven major buildings serve as the headquarters or house significant operational and administrative functions, and are : Operations Center - 2 Morrissey Boulevard, Dorchester, Massachusetts-Leased; Call Center and Operations and Loan Processing Center-Santander Way; 95 Amaral Street, Riverside, Rhode Island-Leased; SHUSA/SBNA Administrative Offices-75 State Street, Boston, Massachusetts-Leased; Call Center and Operations and Loan Processing Center-450 Penn Street, Reading; Pennsylvania-Leased; Loan Processing Center-601 Penn Street; Reading, Pennsylvania-Owned; Operations and Administrative Offices-1130 Berkshire Boulevard, Wyomissing, Pennsylvania-Owned; Administrative Offices and Branch-446 Main Street, Worcester, Massachusetts-Leased; Operations and Administrative Offices-1401 Brickell Avenue, Miami, Florida-Owned; Operations and Administrative Offices - San Juan, Puerto Rico-Leased; Computer Data Center - Hato Rey, Puerto Rico-Leased; and SC Administrative Offices-1601 Elm Street, Dallas, Texas-Leased.

The majority of these eleven properties of the Company identified above are utilized for general corporate purposes. The remaining 785 properties consist primarily of bank branches and lending offices. Of the total number of buildings, 647 buildings are retail branches of the Bank and 27 are retail branches of Banco Santander Puerto Rico.

For additional information regarding the Company's properties refer to Note 6 - "Premises and Equipment" and Note 19 - "Commitments, Contingencies and Guarantees" in the Notes to Consolidated Financial Statements in Item 8 of this Report.

ITEM 3 - LEGAL PROCEEDINGS

Refer to Note 15 to the Consolidated Financial Statements for disclosure regarding the lawsuit filed by SHUSA against the Internal Revenue Service (“IRS”) and Note 19 to the Consolidated Financial Statements for SHUSA’s litigation disclosures, which are incorporated herein by reference.

ITEM 4 - MINE SAFETY DISCLOSURES

None.

PART II

ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

The Company has one class of common stock. The Company’s common stock was traded on the NYSE under the symbol “SOV” through January 29, 2009. On January 30, 2009, all shares of the Company's common stock were acquired by Santander and de-listed from the NYSE. Following this de-listing, there has not been, nor is there currently, an established public trading market in shares of the Company’s common stock. As of the date of this filing, Santander was the sole holder of the Company’s common stock.

At December 31, 2017, 530,391,043 shares of common stock were outstanding. There were no issuances of common stock during 2017, 2016, or 2015.

During the year ended, December 31, 2017, the Company declared and paid cash dividends of $10.0 million to its shareholder. The Company did not pay any cash dividends on its common stock in 2016 or 2015.

Refer to the "Liquidity and Capital Resources" section in Item 7 of the MD&A for the two most recent fiscal years' activity on the Company's common stock.

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ITEM 6 - SELECTED FINANCIAL DATA

	SELECTED FINANCIAL DATA FOR THE YEAR ENDED DECEMBER 31,
(Dollars in thousands)	2017 (1)(2)(12)		2016 (1)(2)		2015 (1)(2)		2014(1)(2)		2013(1)
Balance Sheet Data
Total assets (3)	$128,294,030		$138,360,290		$141,106,832		$132,839,460		$92,909,464
Loans held for investment, net of allowance	76,829,277		82,005,321		83,779,641		81,961,652		56,642,671
Loans held-for-sale	2,522,486		2,586,308		3,190,067		294,261		144,266
Total investments	16,871,855		19,415,330		22,768,783		18,083,235		12,644,597
Total deposits and other customer accounts	60,831,103		67,240,690		65,583,428		62,148,002		60,079,462
Borrowings and other debt obligations(4) (4)	39,003,313		43,524,445		49,828,582		40,381,582		14,025,101
Total liabilities	104,588,399		115,981,532		119,259,732		107,919,751		77,259,026
Total stockholder's equity (5)	23,705,631		22,378,758		21,847,100		24,919,709		15,650,438
Summary Statement of Operations
Total interest income	$7,786,134		$7,989,751		$8,137,616		$7,330,742		$2,706,915
Total interest expense	1,452,129		1,425,059		1,236,210		1,087,642		837,364
Net interest income	6,334,005		6,564,692		6,901,406		6,243,100		1,869,551
Provision for credit losses (6)	2,650,494		2,979,725		4,079,743		2,459,998		108,279
Net interest income after provision for credit losses	3,683,511		3,584,967		2,821,663		3,783,102		1,761,272
Total non-interest income (7)	2,929,576		2,766,759		2,905,035		5,059,462		1,552,830
Total general and administrative expenses(8)	5,570,159		5,122,211		4,724,400		3,777,173		2,215,411
Total other expenses (9)	222,488		275,037		4,657,492		358,173		170,475
Income/(loss) before income taxes	820,440		954,478		(3,655,194)		4,707,218		928,216
Income tax provision/(benefit) (10)	(152,334)		313,715		(599,758)		1,673,123		145,012
Net income / (loss) (13)	$972,774		$640,763		$(3,055,436)		$3,034,095		$783,204
Selected Financial Ratios (11)
Return on average assets	0.72	%	0.45	%	(2.18	)%	2.46	%	0.81	%
Return on average equity	4.16	%	2.88	%	(11.98	)%	12.95	%	5.10	%
Average equity to average assets	17.39	%	15.67	%	18.15	%	18.99	%	15.96	%
Efficiency ratio	62.53	%	57.84	%	95.67	%	36.59	%	69.71	%

(1) On July 1, 2016, ownership of several Santander subsidiaries, including Santander BanCorp, BSI, SIS and SSLLC, were transferred to the Company. As these entities were and are solely owned and controlled by Santander prior to and after July 1, 2016, in accordance with Accounting Standards Codification ("ASC") 805, the transaction has been accounted for under the common control guidance, which requires the Company to recognize the assets and liabilities transferred at their historical cost of the transferring entity at the date of the transfer. Additionally, as this transaction represents a change in reporting entity, the guidance requires retrospective combination of the entities for all periods presented in these financial statements as if the combination had been in effect since inception of common control.

(2) Financial results for the years ended 2017, 2016, 2015 and 2014 include the impact of the change in control of SC in the first quarter of 2014 (the "Change in Control"). Prior to the Change in Control, the Company accounted for its investment in SC as an equity method investment. The Company owned approximately 68%, 59%, 59%, and 60%, of SC as of December 31, 2017, 2016, 2015, and 2014, respectively.

(3) The change in total assets was primarily attributable to changes in the investment securities, loan, and operating lease portfolios. The decrease in investment securities from 2016 to 2017 and from 2015 to 2016 reflects sales used to pay down borrowed funds. The increase from 2014 to 2015 is due to an increase in the investment portfolio as the Company invested in high quality liquid assets as well as growth in the loan portfolio and the operating lease portfolio.

(4) The decrease in borrowings and other debt obligations from 2016 to 2017 and from 2015 to 2016 reflects the Company's use of portions of the proceeds from the sale of investment securities to pay off borrowed funds. The increase from 2014 to 2015 is primarily a result of the Company funding the growth of the loan portfolio and operating lease portfolio.

(5) The decrease in Stockholders Equity from 2014 to 2015 reflects the goodwill impairment recorded of $4.5 billion in 2015.

(6) The provision for credit losses decreased from 2016 to 2017, primarily due to a decrease in the loan portfolio. The provision for credit losses in 2015 and 2016 was primarily driven by SC's RIC portfolio.

(7) Non-interest income in 2014 includes a $2.4 billion gain on acquisition, which is related to the Change in Control.

(8) Increases in general and administrative expenses from 2016 to 2017 are primarily due to increases in compensation costs and legal expenses and increases in lease expenses relating to SC's leased vehicle portfolio. Increases from 2015 to 2016 are primarily related to increased compensation costs, technology expenses, and increased lease expenses relating to the SC's leased vehicle portfolio. Additional increases from 2014 to 2015 are a result of an increase in head count resulting in additional compensation and benefit expenses, increases in professional services related to consulting costs due to the Change in Control, preparation for and implementation of new capital requirements, and other regulatory and governance related-projects Refer to the Management’s Discussion and Analysis and Results of Operations (the “MD&A") for further discussion.

(9) Other expenses in 2015 included an impairment charge to goodwill in the amount of $4.5 billion on the Company's consumer finance subsidiary.

(10) Refer to Note 15 of the Notes to Consolidated Financial Statements for additional information on the Company's income taxes. The income tax benefit in 2017 was due to the impact of tax reform. The income tax benefit in 2015 was primarily the result of the benefit recorded for the release of the deferred tax liability in conjunction with the goodwill impairment charge. The higher income tax provision in 2014 was primarily attributable to the deferred tax expense recorded on the book gain resulting from the Change in Control.

(11) For further information on these ratios, see the Non-GAAP Financial Measures section of the MD&A.

(12) On July 1, 2017, an additional Santander subsidiary, Santander Financial Services, Inc. (“SFS”), a finance company located in Puerto Rico, was transferred to the Company. SFS is an entity under common control of Santander; however, its results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company. As a result, the Company has determined that it will report the results of SFS on a prospective basis beginning July 1, 2017 rather than retrospectively restate its financial statements for the contribution of SFS, as required by GAAP. Refer to Note 1 for additional information.

(13) Includes net income/(loss) attributable to non-controlling interest of $411.7 million, $277.9 million, $(1.7) billion, $464.6 million, and $0.0 million for the years ended December 31, 2017, 2016, 2015, 2014 and 2013, respectively.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ("MD&A")

EXECUTIVE SUMMARY

Santander Holdings USA, Inc. ("SHUSA" or the "Company") is the parent 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; 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.

In 2014, an initial public offering ("IPO") of shares of SC's common stock (the “SC Common Stock”) was completed. The IPO resulted in a change in control and consolidation of SC (the “Change in Control”).

Prior to the Change in Control, the Company accounted for its investment in SC under the equity method. Following the Change in Control, the Company consolidated the financial results of SC in the Company’s Consolidated Financial Statements. The Company’s consolidation of SC is treated as an acquisition of SC by the Company in accordance with Accounting Standards Codification ("ASC") 805 - Business Combinations (ASC 805).

Chrysler Capital

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, and FCA treating SC in a manner consistent with comparable original equipment manufacturers ("OEMs'") treatment of their captive providers, primarily in regard to sales support. The failure of either party to meet its obligations under the agreement could result in the agreement being terminated. The targeted and actual penetration rates under the terms of the Chrysler Agreement are as follows:

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Program Year (1)
	1	2	3	4	5-10
Retail	20%	30%	40%	50%	50%
Lease	11%	14%	14%	14%	15%
Total	31%	44%	54%	64%	65%
Actual Penetration (2)	30%	29%	26%	19%	18%

(1) Each program year runs from May 1 to April 30. Retail and lease penetration is based on a percentage of FCA retail sales.

(2) Actual penetration rates shown for program year 1, 2, 3 and 4 are as of April 30, 2014, 2015, 2016 and 2017, respectively, the end date of each of those program years. Actual penetration rate shown for program year 5, which ends April 30, 2018, is as of December 31, 2017.

The target penetration rate as of April 30, 2018 is 65%. SC's actual penetration rate as of December 31, 2017 was 18%, an increase from 17% as of December 31, 2016. The penetration rate has been constrained due to a more competitive landscape and low interest rates, causing SC's subvented loan offers not to be materially more attractive than other lenders' offers. While SC has not achieved the targeted penetration rates to date, Chrysler Capital continues to be a focal point of its strategy, SC continues to work with FCA to improve penetration rates, and SC remains committed to the Chrysler Agreement.

SC has worked strategically and collaboratively with FCA to continue to strengthen its relationship and create value within the Chrysler Capital program. SC has partnered with FCA to roll out two new pilot programs, including a dealer rewards program and a nonprime subvention program. During the year ended December 31, 2017, SC originated more than $6.7 billion in Chrysler Capital loans, which represents approximately 50% of its total RIC originations, with an approximately even share between prime and non-prime, as well as more than $6.0 billion in Chrysler Capital leases. Additionally, substantially all of the leases originated by SC during the year ended December 31, 2017 were made under the Chrysler Agreement. Since its May 1, 2013 launch, Chrysler Capital has originated more than $45.2 billion in retail loans and $23.6 billion in leases, and facilitated the origination of $3.0 billion in leases and dealer loans for the Bank. As of December 31, 2017, SC's auto RIC portfolio consisted of $8.2 billion of Chrysler Capital loans, which represents 37% of SC's auto RIC portfolio.

SC also originates vehicle loans through a web-based direct lending program, purchases vehicle RICs from other lenders, and services automobile and recreational and marine vehicle portfolios for other lenders. Additionally, SC has several relationships through which it has provided other consumer finance products. In October 2015, SC announced its planned exit from the personal lending business.

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

ECONOMIC AND BUSINESS ENVIRONMENT

Overview

During the fourth quarter of 2017, unemployment declined, while market results improved and the preliminary gross domestic product ("GDP") growth rate rose from the prior quarter.

The unemployment rate at December 31, 2017 decreased to 4.1% compared to 4.2% at September 30, 2017 and 4.7% one year ago. According to the U.S. Bureau of Labor Statistics, employment rose in health care, construction jobs and food services, but declined in retail trade employment.

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

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Market year-to-date returns for the following indices based on closing prices at December 31, 2017 were:

	December 31, 2017
Dow Jones Industrial Average	25.1%
S&P 500	19.4%
NASDAQ Composite	28.2%

At its December 2017 meeting, the Federal Open Market Committee decided to raise the federal funds rate target to 1.25-1.50%, indicating that the labor market has continued to strengthen and that economic activity has continued to expand at a solid pace. Inflation remains below the targeted rate of 2.0%.

The 10-year Treasury bond rate at December 31, 2017 was 2.40%, down from 2.45% at December 31, 2016. Within the industry, changes within this metric are often considered to correspond to changes in the 15-year and 30-year mortgage rates.

At the time of filing this Form 10-K, current year 2017 information was not available; however, for the third quarter of 2017, mortgage originations increased approximately 1.73% over the prior quarter, but decreased25.99% year-over-year. Similarly, refinancing activity showed an increase of approximately 2.72% over the prior quarter, but a decrease of 54.49% year-over- year.

After reaching its peak in 2009, the ratio of nonperforming loans ("NPLs") to total gross loans for U.S. banks declined for six consecutive years, to just under 1.5% in 2015. NPL trends have remained relatively flat since that time. NPLs for U.S. commercial banks were approximately 1.17% of loans using data for the fourth quarter of 2017, compared to 1.17% for the prior quarter.

Changing market conditions are considered a significant risk factor to the Company. The 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 Banco Santander Puerto Rico ("BSPR"), SHUSA, Santander, and the Kingdom of Spain, as of December 31, 2017:

	BANK			BSPR(1)			SHUSA
	Moody's	S&P	Fitch (2)	Moody's	S&P	Fitch (2)	Moody's	S&P	Fitch
Long-Term	Baa1	BBB+	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	A3	A-	A-	Baa2	BBB+	BBB+
Short-Term	P-2	A-2	F-2	P-2	A-2	F-2
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.

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

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

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

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

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

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

On November 17, 2017, Fitch initiated coverage of SHUSA and assigned ratings of F-2/BBB+/Stable to SHUSA, SBNA, and BSPR.

On December 4, 2017, Standard & Poor's lowered the long term issuer credit rating for SHUSA by one notch to BBB and kept its outlook for SHUSA at Stable.

On December 13, 2017, Moody's upgrades Santander Bank N.A. and Banco Santander Puerto Rico's senior and subordinate debt ratings to Baa1.

Subsequent to year end, 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.

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 December 31, 2017, 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 million. As of December 31, 2017, municipalities had not been designated “covered” territorial instrumentalities subject to the requirements of PROMESA, and the municipalities were current on their debt obligations to SHUSA. Under PROMESA, the FOB has sole discretion to designate territorial instrumentalities such as municipalities as covered entities subject to PROMESA’s requirements. If the FOB determines to designate municipalities as covered entities under PROMESA, the FOB could initiate debt restructuring of municipalities that have debt obligations to SHUSA, if deemed necessary.

Impact from Hurricanes

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

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Item 7.    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 and increased its allowance for loan losses by approximately $110 million recorded during the full year of 2017. However, for credit exposures in Puerto Rico, given the current state in the region, the Company has had limited information with which to estimate probable credit losses. As of December 31, 2017, the Company has approximately $3.5 billion of loan exposures in Puerto Rico consisting of $1.6 billion in consumer loans, $1.9 billion in commercial loans, and $220 million in loans to municipalities. The Company will continue to monitor and assess the impact of these hurricanes on our subsidiaries’ businesses, and may establish additional reserves for losses in future periods.

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.

During the year endedDecember 31, 2017, the Company paid cash dividends on common stock of $10.0 million to its sole shareholder, Santander.

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

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") (“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 IHC. In addition, the FBO Final Rule required U.S. BHCs and FBOs with at least $50 billion in total U.S. consolidated non-branch assets to be subject to EPS and heightened capital, liquidity, risk management, and stress testing requirements. Due to both its global and U.S. non-branch total consolidated asset size, Santander was subject to both of the above provisions of the 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 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.

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.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 proposed 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 Improvement Act (the “FDIA”) and OCC regulations, institutions which are not categorized as well-capitalized or adequately-capitalized are restricted from making capital distributions, which include cash dividends, stock redemptions or repurchases, cash-out mergers, interest payments on certain convertible debt and other transactions charged to the capital account of the institution.

At December 31, 2017, the Bank met the criteria to be classified as “well-capitalized.”

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.

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 the payment of dividends

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 this proposed rule would have on its financial position, results of operations and disclosures.

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. global systemically important banks ("G-SIB") and to IHCs with $50 billion or more in U.S. non-branch assets that are controlled by a global systemically important 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.

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 arms-length, the terms of the transaction must be the same, or at least as favorable, as those for similar transactions with non-affiliated companies.

As a U.S. domiciled subsidiary of a global parent with significant non-bank affiliates, the Company faces elevated compliance risk in this area.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Regulation AB II

In August 2014, 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.” SBNA’s most recent public CRA report of examination rated the Bank as “Needs to Improve” for the January 1, 2011 through December 31, 2013 evaluation period. The Bank’s rating based solely on the applicable CRA lending, service and investment tests would have been “satisfactory.” However, the overall rating was lowered to “Needs to Improve” due to previously disclosed instances of non-compliance by the Bank that are being remediated. The OCC takes into account the Bank’s CRA rating in considering certain regulatory applications the Bank makes, including applications related to establishing and relocating branches, and the Federal Reserve does the same with respect to certain regulatory applications the Company makes. In addition, there may be some negative impacts on aspects of the Bank’s business as a result of the downgrade. For example, certain categories of depositors are restricted from making deposits in banks with a “Needs to Improve” rating.

Other Regulatory Matters

On 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 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 approximate amount of the expected additional remediation is $5.2 million. The Bank is currently implementing plans to reimburse customers.

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

47

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), an issuer is required to disclose in its annual or quarterly reports, as applicable, whether it or any of its affiliates knowingly engaged in certain activities, transactions or dealings relating to Iran or with individuals or entities designated pursuant to certain Executive Orders. Disclosure is generally required even where the activities, transactions or dealings were conducted in compliance with applicable law.

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

(a)    Santander UK holds two savings accounts and one current account for two customers resident in the UK who are currently designated by the U.S. under the Specially Designated Global Terrorist ("SDGT") sanctions program. Revenues and profits generated by Santander UK on these accounts in the year ended December 31, 2017 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 2017. 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 in the year ended December 31, 2017.

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 in the year ended December 31, 2017, 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.

48

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS

On July 1, 2016, ownership of several Santander subsidiaries, including Santander BanCorp, BSI, SIS and SSLLC, were transferred to the Company. As these entities were and are solely owned and controlled by Santander prior to and after July 1, 2016, in accordance with ASC 805, the transaction has been accounted for under the common control guidance, which requires the Company to recognize the assets and liabilities transferred at their historical cost of the transferring entity at the date of the transfer. Additionally, as this transaction represents a change in reporting entity, the guidance requires retrospective combination of the entities for all periods presented in these financial statements as if the combination had been in effect since inception of common control. On July 1, 2017, an additional Santander subsidiary, Santander Financial Services ("SFS"), a finance company located in Puerto Rico, was transferred to the Company and accounted for prospectively. Refer to Note 1 for additional information.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

	Year Ended December 31,						YTD Change
(dollars in thousands)	2017			2016			Dollar			Percentage
Net interest income	$	6,334,005		$	6,564,692		$	(230,687	)	(3.5	)%
Provision for credit losses	(2,650,494		)	(2,979,725		)	329,231			11.0	%
Total non-interest income	2,929,576			2,766,759			162,817			5.9	%
General and administrative expenses	(5,570,159		)	(5,122,211		)	(447,948		)	(8.7	)%
Other expenses	(222,488		)	(275,037		)	52,549			19.1	%
Income before income taxes	820,440			954,478			(134,038		)	(14.0	)%
Income tax provision (benefit)	(152,334		)	313,715			(466,049		)	148.6	%
Net income	972,774			640,763			332,011			51.8	%
Net income attributable to NCI	411,707			277,879			133,828			48.2	%
Net income attributable to SHUSA	$	561,067		$	362,884		$	198,183		54.6	%

The Company reported pre-tax income of $820.4 million for the year endedDecember 31, 2017, compared to pre-tax income of $954.5 million for the year endedDecember 31, 2016. Factors contributing to this decline were as follows:

• Net interest income decreased $230.7 million for the year endedDecember 31, 2017 compared to 2016. This decrease was primarily due to a decrease in interest income earned on loans due to declining yields on consumer loans and an increase in interest expense on Other borrowings due to the rates paid on new debt issuances.

• The provision for credit losses decreased $329.2 million for the year endedDecember 31, 2017 compared to 2016. This decrease was primarily due to a decline in loan balances, improved credit performance and stable recovery rates for the auto loan portfolio and a decrease in the Corporate Banking and Middle Market Commercial Real Estate ("CRE") portfolio provisions.

• Total non-interest income increased $162.8 million for the year endedDecember 31, 2017 compared to 2016. This increase was primarily due to lease income associated with the continued growth of the lease portfolio, an increase in gain on sale of assets coming off of lease, and an increase on the gain on sale of bank branches. These were offset by a decrease in consumer and commercial loan fees due to a reduction in loans serviced by the Company for the year endedDecember 31, 2017.

• Total general and administrative expenses increased $447.9 million for the year endedDecember 31, 2017 compared to 2016. This increase was primarily due to an increase in lease depreciation expense due to the growth of the Company's leased vehicle portfolio and an increase in compensation expense. These increases were offset by a decrease in outside service costs for consulting and processing services and a decrease in loan servicing expense.

• Other expenses decreased $52.5 million for the year endedDecember 31, 2017 compared to 2016. This was primarily due to a decrease in expenses associated with loss on debt repurchases.

• The income tax provision decreased $466.0 million for the year endedDecember 31, 2017, compared to 2016. This decrease was primarily due to the enactment of H.R.1, known as the Tax Cuts and Jobs Act (the “TCJA”). Effective January 1, 2018, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%. As a result of the TCJA's enactment, GAAP requires that companies remeasure their deferred tax balances as of the enactment of the legislation. During the fourth quarter of 2017, we reduced our income tax provision by $427.3 million as a result of remeasuring our net deferred tax liabilities due to the federal rate reduction.

49

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

NON-GAAP FINANCIAL MEASURES

The Company's non-generally accepted accounting principle ("non-GAAP") information has limitations as an analytical tool and, therefore, should not be considered in isolation or as a substitute for analysis of our results or any performance measures under generally accepted accounting principles ("GAAP") as set forth in the Company's financial statements. These limitations should be compensated for by relying primarily on the Company's GAAP results and using this non-GAAP information only as a supplement to evaluate the Company's performance.

The Company considers various measures when evaluating capital utilization and adequacy. These calculations are intended to complement the capital ratios defined by banking regulators for both absolute and comparative purposes. Because GAAP does not include capital ratio measures, the Company believes that there are no comparable GAAP financial measures to these ratios. These ratios are not formally defined by GAAP and are considered to be non-GAAP financial measures. Since analysts and banking regulators may assess the Company's capital adequacy using these ratios, the Company believes they are useful to provide investors the ability to assess its capital adequacy on the same basis. The Company believes these non-GAAP measures are important because they reflect the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures may allow readers to compare certain aspects of the Company's capitalization to other organizations. However, because there are no standardized definitions for these ratios, the Company's calculations may not be directly comparable with those of other organizations, and the usefulness of these measures to investors may be limited. As a result, the Company encourages readers to consider its Consolidated Financial Statements in their entirety and not to rely on any single financial measure.

The following table includes the related GAAP measures included in our non-GAAP financial measures.

	Year Ended December 31,
(Dollars in thousands)	2017		2016		2015			2014		2013
Return on Average Assets:
Net income/(loss)	$	972,774	$	640,763	$	(3,055,436	)	$	3,034,095	$	783,204
Average assets	134,534,278		141,921,781		140,461,913			123,410,743		96,183,449
Return on average assets	0.72%		0.45%		(2.18)%			2.46%		0.81%
Return on Average Equity:
Net income/(loss)	$	972,774	$	640,763	$	(3,055,436	)	$	3,034,095	$	783,204
Average equity	23,395,479		22,232,729		25,495,652			23,434,691		15,353,336
Return on average equity	4.16%		2.88%		(11.98)%			12.95%		5.10%
Average Equity to Average Assets:
Average equity	$	23,395,479	$	22,232,729	$	25,495,652		$	23,434,691	$	15,353,336
Average assets	134,534,278		141,921,781		140,461,913			123,410,743		96,183,449
Average equity to average assets	17.39%		15.67%		18.15%			18.99%		15.96%
Efficiency Ratio:
General and administrative expenses	$	5,570,159	$	5,122,211	$	4,724,400		$	3,777,173	$	2,215,411
Other expenses	222,488		275,037		4,657,492			358,173		170,475
Total expenses (numerator)	5,792,647		5,397,248		9,381,892			4,135,346		2,385,886
Net interest income	$	6,334,005	$	6,564,692	$	6,901,406		$	6,243,100	$	1,869,551
Non-interest income	2,929,576		2,766,759		2,905,035			5,059,462		1,552,830
Total net interest income and non-interest income (denominator)	9,263,581		9,331,451		9,806,441			11,302,562		3,422,381
Efficiency ratio	62.53%		57.84%		95.67%			36.59%		69.71%

50

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Transitional												Fully Phased In(5)
	SBNA						SHUSA(4)						SBNA			SHUSA
	December 31, 2017			December 31, 2016			December 31, 2017			December 31, 2016			December 31, 2017			December 31, 2017
	Common Equity Tier 1(1)			Common Equity Tier 1(1)			Common Equity Tier 1(1)			Common Equity Tier 1(1)			Common Equity Tier 1(1)			Common Equity Tier 1(1)
Total stockholder's equity (U.S. GAAP)	$	13,522,396		$	13,418,228		$	21,182,698		$	19,621,883		$	13,522,396		$	21,182,698
Less: Preferred stock	—			—			(195,445		)	(195,445		)	—			(195,445		)
Goodwill	(3,402,637		)	(3,402,637		)	(4,444,389		)	(4,454,925		)	(3,402,637		)	(4,444,389		)
Intangible assets	(2,751		)	(3,679		)	(535,753		)	(597,244		)	(2,751		)	(535,753		)
Deferred taxes on goodwill and intangible assets	220,218			343,807			372,036			586,992			220,336			372,154
Other adjustments to Common equity tier 1 ("CET1")(3)	(157,707		)	(153,818		)	188,273			437,177			(197,669		)	20,267
Disallowed deferred tax assets	(391,449		)	(406,341		)	(423,554		)	(455,396		)	(391,449		)	(529,442		)
Accumulated other comprehensive loss	226,704			210,141			198,431			193,208			226,704			198,431
CET1 capital (numerator)	$	10,014,774		$	10,005,701		$	16,342,297		$	15,136,250		$	9,974,930		$	16,068,521
Risk weighted assets ("RWAs")(denominator)(2)	55,110,740			61,885,512			99,756,459			104,333,528			55,801,497			100,464,033
Ratio	18.17		%	16.17		%	16.38		%	14.51		%	17.88		%	15.99		%

(1) CET1 is calculated under Basel III regulations required as of January 1, 2015.

(2) Under the banking agencies' risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together with the measure for market risk, resulting in the Company's and the Bank's total RWAs.

(3) Represents the impact of NCI, transitional and other intangible adjustments for regulatory capital.

(4) Capital ratios as of December 31, 2015 have not been re-cast for the consolidation of IHC entities as regulatory filings are only impacted prospectively.

(5) Represents non-GAAP measures

51

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
	YEARS ENDED DECEMBER 31, 2017 AND 2016
	2017 (1)							2016 (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	$	26,251,822		$	498,734	1.90	%	$	29,287,122		$	378,404	1.29	%	$	120,330		$	(33,777	)	$	154,107
LOANS(3):
Commercial loans	32,897,457			1,216,958		3.70	%	37,313,431			1,219,667		3.27	%	(2,709		)	(20,182		)	17,473
Multifamily	8,334,329			311,068		3.73	%	9,126,075			331,344		3.63	%	(20,276		)	(29,710		)	9,434
Total commercial loans	41,231,786			1,528,026		3.71	%	46,439,506			1,551,011		3.34	%	(22,985		)	(49,892		)	26,907
Consumer loans:
Residential mortgages	8,471,891			334,463		3.95	%	7,887,893			316,015		4.01	%	18,448			23,121			(4,673		)
Home equity loans and lines of credit	5,902,819			233,477		3.96	%	6,076,177			219,691		3.62	%	13,786			(6,015		)	19,801
Total consumer loans secured by real estate	14,374,710			567,940		3.95	%	13,964,070			535,706		3.84	%	32,234			17,106			15,128
RICs and auto loans	26,874,580			4,513,616		16.80	%	26,636,271			4,831,270		18.14	%	(317,654		)	43,773			(361,427		)
Personal unsecured	2,500,670			619,053		24.76	%	2,310,996			610,998		26.44	%	8,055			35,669			(27,614		)
Other consumer(4)	698,654			58,765		8.41	%	910,686			82,362		9.04	%	(23,597		)	(18,160		)	(5,437		)
Total consumer	44,448,614			5,759,374		12.96	%	43,822,023			6,060,336		13.83	%	(300,962		)	78,388			(379,350		)
Total loans	85,680,400			7,287,400		8.51	%	90,261,529			7,611,347		8.43	%	(323,947		)	28,496			(352,443		)
Intercompany investments	10,832			626		5.78	%	14,640			904		6.17	%	(278		)	(224		)	(54		)
TOTAL EARNING ASSETS	111,943,054			7,786,760		6.96	%	119,563,291			7,990,655		6.68	%	(203,895		)	(5,505		)	(198,390		)
Allowance for loan losses(5)	(3,931,822		)					(3,664,095		)
Other assets(6)	26,523,046							26,022,585
TOTAL ASSETS	$	134,534,278						$	141,921,781
INTEREST BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest-bearing demand deposits	$	10,138,818		$	23,560	0.23	%	$	11,682,723		$	42,013	0.36	%	$	(18,453	)	$	(4,944	)	$	(13,509	)
Savings	5,888,011			11,004		0.19	%	5,956,770			12,723		0.21	%	(1,719		)	(186		)	(1,533		)
Money market	25,403,882			132,993		0.52	%	25,029,571			126,417		0.51	%	6,576			2,845			3,731
Certificates of deposit ("CDs")	6,592,535			73,487		1.11	%	9,738,344			95,869		0.98	%	(22,382		)	(37,978		)	15,596
TOTAL INTEREST-BEARING DEPOSITS	48,023,246			241,044		0.50	%	52,407,408			277,022		0.53	%	(35,978		)	(40,263		)	4,285
BORROWED FUNDS:
Federal Home Loan Bank ("FHLB") advances, federal funds, and repurchase agreements	4,258,450			65,294		1.53	%	9,466,243			126,799		1.34	%	(61,505		)	(82,860		)	21,355
Other borrowings	37,983,865			1,145,791		3.02	%	38,042,187			1,021,238		2.68	%	124,553			(1,520		)	126,073
TOTAL BORROWED FUNDS (7)	42,242,315			1,211,085		2.87	%	47,508,430			1,148,037		2.42	%	63,048			(84,380		)	147,428
TOTAL INTEREST-BEARING FUNDING LIABILITIES	90,265,561			1,452,129		1.61	%	99,915,838			1,425,059		1.43	%	27,070			(124,643		)	151,713
Noninterest bearing demand deposits	15,629,718							14,410,397
Other liabilities(8)	5,243,520							5,362,817
TOTAL LIABILITIES	111,138,799							119,689,052
STOCKHOLDER’S EQUITY	23,395,479							22,232,729
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	134,534,278						$	141,921,781
NET INTEREST SPREAD (9)						5.35	%						5.25	%
NET INTEREST MARGIN (10)						5.66	%						5.49	%
NET INTEREST INCOME				$	6,334,005						$	6,564,692
Ratio of interest-earning assets to interest-bearing liabilities						1.24x							1.20x

(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 Consolidated Financial Statements for further discussion.

(6) Other assets primarily includes goodwill and intangibles, premise and equipment, net deferred tax assets, equity method investments, bank-owned life insurance ("BOLI"), accrued interest receivable, derivative assets, miscellaneous receivables, prepaid expenses and mortgage servicing rights ("MSRs"). Refer to Note 9 to the Consolidated Financial Statements for further discussion.

(7) Refer to Note 11 to the 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.

52

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

NET INTEREST INCOME

	Year Ended December 31,				YTD Change
(dollars in thousands)	2017		2016		Dollar increase/(decrease)			Percentage
INTEREST INCOME:
Interest-earning deposits	$	86,205	$	57,361	$	28,844		50.3	%
Investments available-for-sale	352,601		284,796		67,805			23.8	%
Investments held-to-maturity	38,609		3,526		35,083			995.0	%
Other investments	21,319		32,721		(11,402		)	(34.8	)%
Total interest income on investment securities and interest-earning deposits	498,734		378,404		120,330			31.8	%
Interest on loans	7,287,400		7,611,347		(323,947		)	(4.3	)%
Total Interest Income	7,786,134		7,989,751		(203,617		)	(2.5	)%
INTEREST EXPENSE:
Deposits and customer accounts	241,044		277,022		(35,978		)	(13.0	)%
Borrowings and other debt obligations	1,211,085		1,148,037		63,048			5.5	%
Total Interest Expense	1,452,129		1,425,059		27,070			1.9	%
NET INTEREST INCOME	$	6,334,005	$	6,564,692	$	(230,687	)	(3.5	)%

Net interest income decreased $230.7 million for the year endedDecember 31, 2017 compared to 2016. This decrease was primarily due to a decrease in yield on interest income earned on loans and an increase in interest expense on borrowings due to higher borrowing rate.

Interest Income on Investment Securities and Interest-Earning Deposits

Interest income on investment securities and interest-earning deposits increased $120.3 million for the year endedDecember 31, 2017 compared to 2016. The average balance of investment securities and interest-earning deposits for the year endedDecember 31, 2017 was $26.3 billion with an average yield of 1.90%, compared to an average balance of $29.3 billion with an average yield of 1.29% for 2016. The increase in interest income on investment securities and interest-earning deposits for the year endedDecember 31, 2017 was primarily attributable to an increase of $35.1 million in interest income on investments held-to-maturity due to increased volume, and an increase of $67.8 million in interest income on investments AFS.

Interest Income on Loans

Interest income on loans decreased $323.9 million for the year endedDecember 31, 2017 compared to 2016, primarily due to declines in RIC rates, which comprised $317.7 million of the decrease. The average balance of total loans was $85.7 billion with an average yield of 8.51% for the year endedDecember 31, 2017, compared to $90.3 billion with an average yield of 8.43% for 2016. The decrease in the average balance of total loans of $4.6 billion was primarily due to a decline in the balance of the commercial loan portfolio. The average balance of commercial loans was $41.2 billion with an average yield of 3.71% for the year endedDecember 31, 2017, compared to $46.4 billion with an average yield of 3.34% for 2016.

Interest Expense on Deposits and Related Customer Accounts

Interest expense on deposits and related customer accounts decreased $36.0 million for the year endedDecember 31, 2017 compared to 2016, primarily due to a decrease in average interest-bearing deposits and interest rates. The average balance of total interest-bearing deposits was $48.0 billion with an average cost of 0.50% for the year endedDecember 31, 2017 compared to an average balance of $52.4 billion with an average cost of 0.53% for 2016.

53

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Interest Expense on Borrowed Funds

Interest expense on borrowed funds increased $63.0 million for the year endedDecember 31, 2017 compared to 2016. The increase in interest expense on borrowed funds was due to interest paid at higher rate during the year endedDecember 31, 2017. The average balance of total borrowings was $42.2 billion with an average cost of 2.87% for the year endedDecember 31, 2017, compared to an average balance of $47.5 billion with an average cost of 2.42% for 2016. The average balance of borrowed funds decreased from December 31, 2016 to December 31, 2017, primarily due to the decrease in FHLB advances as a result of maturities and terminations. The increase in interest expense on borrowed funds is due to the Company issuing $5.5 billion of long-term debt at higher fixed rates in 2017 to increase liquidity and meet the FRB's TLAC requirement.

PROVISION FOR CREDIT LOSSES

The provision for credit losses is based on credit loss experience, growth or contraction of specific segments of the loan portfolio, and the estimate of losses inherent in the portfolio. The provision for credit losses for the year endedDecember 31, 2017 was $2.7 billion, compared to $3.0 billion for 2016. The decrease for the year endedDecember 31, 2017 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-TDR loans, and recovery rates for the RIC and auto loan portfolio.

	Year Ended December 31,						YTD Change
(in thousands)	2017			2016			Dollar			Percentage
ALLL, beginning of period	$	3,814,464		$	3,246,145		$	568,319		17.5	%
Charge-offs:
Commercial	(144,002		)	(245,399		)	101,397			(41.3	)%
Consumer	(4,865,244		)	(4,720,135		)	(145,109		)	3.1	%
Total charge-offs	(5,009,246		)	(4,965,534		)	(43,712		)	0.9	%
Recoveries:
Commercial	37,999			86,312			(48,313		)	(56.0	)%
Consumer	2,401,613			2,442,921			(41,308		)	(1.7	)%
Total recoveries	2,439,612			2,529,233			(89,621		)	(3.5	)%
Charge-offs, net of recoveries	(2,569,634		)	(2,436,301		)	(133,333		)	5.5	%
Provision for loan and lease losses (1)	2,661,106			3,004,620			(343,514		)	(11.4	)%
Other(2):
Commercial	356			—			356			100.0%
Consumer	5,283			—			5,283			100.0%
ALLL, end of period	$	3,911,575		$	3,814,464		$	97,111		2.5	%
Reserve for unfunded lending commitments, beginning of period	$	122,418		$	149,021		$	(26,603	)	(17.9	)%
Release of reserves for unfunded lending commitments (1)	(10,612		)	(24,895		)	14,283			(57.4	)%
Loss on unfunded lending commitments	(2,695		)	(1,708		)	(987		)	57.8	%
Reserve for unfunded lending commitments, end of period	109,111			122,418			(13,307		)	(10.9	)%
Total allowance for credit losses ("ACL"), end of period	$	4,020,686		$	3,936,882		$	83,804		2.1	%

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

(2) Includes transfers in for the period ending December 31, 2017 related to the contribution of SFS to SHUSA.

The Company's net charge-offs increased$133.3 million for the year endedDecember 31, 2017 compared to 2016.

Consumer charge-offs increased$145.1 million for the year endedDecember 31, 2017 compared to 2016. The increase was due to a $153.7 million increase in consumer auto loan charge-offs, offset by an $8.5 million decrease in home mortgage charge-offs.

Consumer recoveries decreased$41.3 million for the year endedDecember 31, 2017 compared to 2016. This decrease was comprised of a $38.4 million decrease in consumer auto loan recoveries, and a $1.6 million decrease in other consumer loan recoveries.

54

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Consumer net charge-offs as a percentage of average consumer loans were 5.5% for the year endedDecember 31, 2017, compared to 5.2% for 2016.

Commercial charge-offs decreased$101.4 million for the year endedDecember 31, 2017 compared to 2016. This decrease was comprised of a $77.2 million decrease in Commercial Banking charge-offs, a $28.5 million decrease in commercial fleet charge-offs, and a $6.7 million decrease in Middle Market CRE charge-offs, offset by an $8.3 million increase in charge-offs for commercial loans in Puerto Rico.

Commercial recoveries decreased$48.3 million for the year endedDecember 31, 2017 compared to 2016. This decrease was primarily due to a $12.7 million decrease in recoveries for continuing care retirement communities, a $10.9 million decrease in Corporate Banking recoveries, an $18.8 million decrease in commercial fleet recoveries, and a $4.6 million decrease in Middle Market CRE recoveries.

Commercial loan net charge-offs as a percentage of average commercial loans, including multifamily loans, was 0.26% for the year endedDecember 31, 2017, compared to 0.34% for the year endedDecember 31, 2016.

NON-INTEREST INCOME

	Year Ended December 31,							YTD Change
(dollars in thousands)	2017				2016			Dollar increase/(decrease)			Percentage
Consumer fees	$	442,483			$	499,591		$	(57,108	)	(11.4	)%
Commercial fees	173,955			190	190,248			(16,293		)	(8.6	)%
Mortgage banking income, net	56,659				63,790			(7,131		)	(11.2	)%
BOLI	66,784				57,796			8,988			15.6	%
Capital markets revenue	195,906				190,647			5,259			2.8	%
Lease income	2,017,775				1,839,307			178,468			9.7	%
Miscellaneous loss	(21,542		)		(132,123		)	110,581			(83.7	)%
Net (losses)/gains recognized in earnings	(2,444		)		57,503			(59,947		)	(104.3	)%
Total non-interest income	$	2,929,576			$	2,766,759		$	162,817		5.9	%

Total non-interest income increased $162.8 million for the year endedDecember 31, 2017 compared to2016. The increase for theyear endedDecember 31, 2017was primarily due to the increase in lease income associated with the continued growth of the lease portfolio and increases in miscellaneous income. These increases were offset by decreases in consumer loan fees due to the reduction of loans serviced by the Company as well as a decrease in net gains recognized in earnings for the year endedDecember 31, 2017.

Consumer Fees

Consumer fees decreased $57.1 million for the year endedDecember 31, 2017, respectively, compared to 2016. This decrease was primarily due to a $76.3 million decrease in loan fee income, which was attributable to a reduction in loans serviced by the Company due to loan sales and payoffs and lower reserve recourse releases in 2017. This was partially offset by an increase of $19.6 million in consumer deposit fees for the year endedDecember 31, 2017.

Commercial Fees

Commercial fees consists of deposit overdraft fees, deposit automated teller machine ("ATM") fees, cash management fees, letter of credit fees, and loan syndication fees for commercial accounts. Commercial fees decreased $16.3 million for the year ended December 31, 2017compared to 2016, primarily due to lower capital markets income.

55

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Mortgage Banking Revenue

	Year Ended December 31,						YTD Change
(dollars in thousands)	2017			2016			Dollar increase/(decrease)			Percentage
Mortgage and multifamily servicing fees	$	41,344		$	42,996		$	(1,652	)	(3.8	)%
Net gains on sales of residential mortgage loans and related securities	28,535			35,720			(7,185		)	(20.1	)%
Net gains on sales of multifamily mortgage loans	2,500			6,368			(3,868		)	(60.7	)%
Net gains/(losses) on hedging activities	1,678			(723		)	2,401			(332.1	)%
Net gains/(losses) from changes in MSR fair value	1,967			3,887			(1,920		)	(49.4	)%
MSR principal reductions	(19,365		)	(24,458		)	5,093			(20.8	)%
Total mortgage banking income, net	$	56,659		$	63,790		$	(7,131	)	(11.2	)%

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 $7.1 million for the year endedDecember 31, 2017 compared to 2016. This decrease for December 31, 2017 was primarily attributable to $7.2 million in lower net gains on sales of residential mortgage loans and related securities, $3.9 million in lower net gains on sales of multifamily loans and $1.9 million in lower net gains from changes in MSR fair value. These decreases were offset by $5.1 million in lower MSR principal paydowns and $2.4 million of higher net gains on hedging activities.

Since 2015, mortgage interest rates have remained stable, resulting in relative stability in mortgage banking fees from rate changes.

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

	30-Year Fixed		15-Year Fixed
December 31, 2015	4.13	%	3.38	%
March 31, 2016	3.63	%	2.88	%
June 30, 2016	3.50	%	2.75	%
September 30, 2016	3.50	%	2.88	%
December 31, 2016	4.38	%	3.63	%
March 31, 2017	4.25	%	3.50	%
June 30, 2017	4.13	%	3.38	%
September 30, 2017	3.99	%	3.25	%
December 31, 2017	4.13	%	3.63	%

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

Mortgage and multifamily loan servicing fees decreased $1.7 million for the year endedDecember 31, 2017, compared to2016. AtDecember 31, 2017and2016, the Company serviced mortgage and multifamily real estate loans for the benefit of others with a principal balance totaling$241.3 millionand$621.1 million, respectively. The decrease in loans serviced for others was primarily due to pay-downs received during 2017.

Net gains on sales of residential mortgage loans and related securities decreased $7.2 million for the year endedDecember 31, 2017 compared to 2016. For the year endedDecember 31, 2017, the Company sold $1.7 billion of mortgage loans for gains of $28.5 million, compared to $2.2 billion of loans sold for gains of $35.7 million for 2016.

56

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company periodically sells qualifying mortgage loans to the Federal Home Loan Mortgage Corporation ("FHLMC"), the Government National Mortgage Association ("GNMA") and the Federal National Mortgage Association ("FNMA") in return for MBS issued by those agencies. The Company records these transactions as sales when the transfers meet all of the accounting criteria for a sale. For those loans sold to the agencies for which the Company retains the servicing rights, the Company recognizes the servicing rights at fair value. These loans are also generally sold with standard representation and warranty provisions, which the Company recognizes at fair value. Any difference between the carrying value of the transferred mortgage loans and the fair value of the MBS, servicing rights, and representation and warranty reserves is recognized as gain or loss on sale.

The net gains on sales of multifamily mortgage loans decreased $3.9 million for the year endedDecember 31, 2017 compared to 2016. This decrease was due to a reduction in loan sales during 2017 compared to 2016 and the release of FNMA recourse reserves of $2.5 million for the year ended 2017, compared to $3.0 million for the year ended 2016.

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

At December 31, 2017, the Company serviced loans with a principal balance of $136.0 million for FNMA, compared to $341.7 million at December 31, 2016. These loans had a credit loss exposure of $12.2 million as of December 31, 2017, compared to $34.4 million as of December 31, 2016. Losses, if any, resulting from representation and warranty defaults would be in addition to the Company's credit loss exposure. The servicing asset for these loans 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 December 31, 2017 and December 31, 2016, the Company had a liability of $1.3 million and $3.8 million, respectively, related to the fair value of the retained credit exposure for multifamily loans sold to the FNMA under this program.

Net gains on hedging activities increased $2.4 million for the year endedDecember 31, 2017 compared to 2016. This variance for December 31, 2017 was primarily due to the Company's hedging strategy in the current mortgage rate environment and net gains on its MSR hedging strategies.

Net gains/losses from changes in MSR fair value were a net gain of $2.0 million for the year endedDecember 31, 2017 as compared to a net gain of $3.9 million for the corresponding period in 2016. The value of the related MSRs carried at fair value at December 31, 2017 and December 31, 2016 was $146.0 million and $146.6 million, respectively. The MSR asset fair value change for the year endedDecember 31, 2017 was the result of fluctuations in interest rates and a smaller servicing portfolio.

The Company recognized $19.4 million of principal reductions for the year endedDecember 31, 2017, compared to $24.5 million for 2016. Principal reduction activity is impacted by changes in the level of prepayments and mortgage refinancing.

BOLI

BOLI income represents fluctuations in the cash surrender value of life insurance policies on certain employees. The Bank is the beneficiary and the recipient of the insurance proceeds. Income from BOLI increased $9.0 million for the year endedDecember 31, 2017 compared to 2016 as a result of an increase in death benefits received.

Lease income

Lease income increased $178.5 million for the year endedDecember 31, 2017 compared to 2016. This increase was the result of the growth in the Company's lease portfolio, with an average balance of $10.1 billion for the year endedDecember 31, 2017, compared to $9.1 billion at December 31, 2016.

57

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Miscellaneous Income/(loss)

	Year Ended December 31,						YTD Change
(dollars in thousands)	2017			2016			Dollar increase/(decrease)			Percentage
Net gain on sale of operating leases	$	127,156		$	66,909		$	60,247		90.0	%
Trust and wealth management	147,749			148,514			(765		)	(0.5	)%
Loss on sale of non-mortgage loans	(396,220		)	(436,419		)	40,199			(9.2	)%
Net gain/(loss) on sale of fixed assets	29,371			(864		)	30,235			(3,499.4	)%
Re-valuation adjustments for FVO assets and liabilities	13,612			54,676			(41,064		)	(75.1	)%
Other miscellaneous income	56,790			35,061			21,729			62.0	%
Total miscellaneous income/(loss)	$	(21,542	)	$	(132,123	)	$	110,581		(83.7	)%

Miscellaneous income increased $110.6 million for the year endedDecember 31, 2017 compared to 2016. Factors contributing to this change were as follows:

• An increase in the net gain on sale of operating leases of $60.2 million.

• A decrease in the loss on the sale of non-mortgage loans of $40.2 million. This line item is primarily driven by lower of cost or market adjustments on the Company's Bluestem personal loan portfolio, which was held for sale at December 31, 2017 and 2016.

• Net gain/(loss) on sale of fixed assets increased by $30.2 million in 2017, primarily due to the Company selling and leasing back ten properties in 2017. For further discussion, see Note 6 to the Consolidated Financial Statements.

• A decrease of $41.1 million in re-valuation adjustments relating primarily to the change in the fair value of the loan portfolio compared to 2016. For further discussion, see Note 18 to the Consolidated Financial Statements.

Net (losses)/gains recognized in earnings

The Company recognized $2.4 million in net losses for the year endedDecember 31, 2017 on the sale of AFS investment securities compared to net gains of $57.5 million for the year ended December 31, 2016. The net gain realized for the year endedDecember 31, 2016 was primarily comprised of the sale of state and municipal securities with a book value of $748.0 million for a gain of $19.9 million, the sale of U.S. Treasury securities with a book value of $3.2 billion for a gain of $7.0 million, the sale of corporate debt securities with a book value of $1.4 billion for a gain of $5.9 million, and the sale of MBS, including FHLMC residential debt securities and CMOs, with a book value of $1.3 billion for a gain of $24.7 million.

GENERAL AND ADMINISTRATIVE EXPENSES

	Year Ended December 31,				YTD Change
(dollars in thousands)	2017		2016		Dollar			Percentage
Compensation and benefits	$	1,895,326	$	1,719,645	$	175,681		10.2	%
Occupancy and equipment expenses	669,113		618,597		50,516			8.2	%
Technology expense	581,164		644,079		(62,915		)	(9.8	)%
Loan expense	386,468		415,267		(28,799		)	(6.9	)%
Lease expense	1,553,096		1,305,712		247,384			18.9	%
Other administrative expenses	484,992		418,911		66,081			15.8	%
Total general and administrative expenses	$	5,570,159	$	5,122,211	$	447,948		8.7	%

Total general and administrative expenses increased $447.9 million for the year endedDecember 31, 2017 compared to 2016. Factors contributing to this increase were as follows:

• Compensation and benefits expense increased $175.7 million for the year endedDecember 31, 2017 compared to 2016. This increase was primarily the result of a Company's other compensation and benefits expense increase of $104.5 million, salary expense increase of $47.6 million and commission expense increase of $17.1 million for the year endedDecember 31, 2017 compared to 2016. These increases were offset by decreases in benefits expense of $6.9 million and bonus expense of $3.3 million for the year endedDecember 31, 2017 compared to 2016.

58

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

• Occupancy and equipment expenses increased $50.5 million for the year endedDecember 31, 2017 compared to 2016. This was primarily due to an increase in depreciation expense of $17.9 million for the year endedDecember 31, 2017 compared to 2016. This increase was primarily due to more assets being placed in service and an increase in depreciation for assets that were moved to held for sale and sold during the periods. Also, there were increases of $15.4 million in maintenance and repair expense and $6.8 million in impairment loss on building expense for the year endedDecember 31, 2017 compared to 2016.

• Technology, outside services, and marketing expenses decreased $62.9 million for the year ended December 31, 2017 compared to 2016. This decrease was primarily due to a decrease in consulting services of $73.7 million related to regulatory initiatives, including preparation for meeting the requirements of the IHC during 2016. This was offset by an increase of $6.0 million for outside processing services and an increase of $6.8 million in marketing expenses related to direct mail, advertising and outside processing services.

• Loan expense decreased $28.8 million for the year endedDecember 31, 2017 compared to 2016. This decrease was primarily due to decreases of $21.6 million in loan collection expenses and $11.7 million in loan servicing expense. These decreases were offset by an increase in origination expense of $5.9 million for the year ended December 31, 2017 compared to 2016.

• Lease expense increased $247.4 million for the year endedDecember 31, 2017 compared to 2016. This increase was primarily due to the continued growth of the Company's leased vehicle portfolio and depreciation associated with that portfolio.

• Other administrative expenses increased $66.1 million for the year endedDecember 31, 2017 compared to 2016. This increase was primarily attributable to an increase in legal reserve expense of $79.7 million for the year ended December 31, 2017 compared to 2016. During 2017, the Company increased its legal reserves for certain matters discussed in Note 19 to the Consolidated Financial Statements. This increase was offset by lower operational risk expenses and other non-income tax expenses for year endedDecember 31, 2017.

OTHER EXPENSES

	Year Ended December 31,				YTD Change
(dollars in thousands)	2017		2016		Dollar (decrease)/increase			Percentage
Amortization of intangibles	$	61,491	$	70,034	$	(8,543	)	(12.2	)%
Deposit insurance premiums and other expenses	70,661		77,976		(7,315		)	(9.4	)%
Loss on debt extinguishment	30,349		114,232		(83,883		)	(73.4	)%
Impairment of goodwill	10,536		—		10,536			100.0%
Impairment on long lived assets	15,540		—		15,540			100.0%
Other miscellaneous expenses	33,911		12,795		21,116			165.0	%
Total other expenses	$	222,488	$	275,037	$	(52,549	)	(19.1	)%

Total other expenses decreased $52.5 million for the year endedDecember 31, 2017 compared to 2016. The primary factors contributing to this decrease were:

• Amortization of intangibles decreased $8.5 million for the year endedDecember 31, 2017 compared to 2016. This decrease was primarily due to a portion of the Company's core deposit intangibles becoming fully amortized in the second quarter of 2016, thereby reducing intangibles in 2017.

• Deposit insurance premiums and other expenses decreased $7.3 million for the year endedDecember 31, 2017 compared to 2016. This decrease was primarily attributable to decreases in FDIC insurance premiums and assessments.

• Losses on debt extinguishment decreased $83.9 million for the year endedDecember 31, 2017 compared to 2016. This decrease in expense was due to the Company incurring early termination fees for FHLB advances in 2016 that did not recur in 2017. The reduction in FHLB termination fees was offset by a $4.0 million charge on the buyback of real estate investment trust (“REIT”) preferred stock and a $26.4 million charge for repurchase of Bank debt.

• Impairment of goodwill increased $10.5 million for the year ended December 31, 2017 compared to 2016. There was no impairment recorded in 2016. This increase was related to the full impairment of Santander BanCorp's goodwill in 2017 which was primarily due to the unfavorable economic environment in Puerto Rico and the adverse effect of Hurricane Maria.

• Impairment on long-lived assets increased $15.5 million for the year ended December 31, 2017 compared to 2016. This increase was primarily related to impairment on capitalized software assets.

59

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

• Other miscellaneous expenses increased $21.1 million for the year endedDecember 31, 2017 compared to 2016. This increase was primarily due to a $17.3 million increase in equity method net income/expense due to a $27.1 million impairment charge on certain tax credit investments directly related to the Tax Cuts and Jobs Act.

INCOME TAX PROVISION

An income tax benefit of $152.3 million was recorded for the year endedDecember 31, 2017, compared to an income tax provision of $313.7 million for 2016. This resulted in an effective tax rate ("ETR") of (18.6)% for the year endedDecember 31, 2017, compared to 32.9% for 2016.

On December 22, 2017, H.R.1, known as the Tax Cuts and Jobs Act (the “TCJA”), was enacted. Effective January 1, 2018, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%. As a result of the TCJA's enactment, GAAP requires that companies re-measure their deferred tax balances as of the enactment of the legislation. During the fourth quarter of 2017, we reduced our income tax provision by $427.3 million as a result of re-measuring our deferred tax liabilities due to the federal rate reduction. The rate reduction is expected to have a positive impact to future earnings.

The Company's ETR in future periods will be affected by the results of operations allocated to the various tax jurisdictions in which the Company operates, any change in income tax laws or regulations within those jurisdictions, and interpretations of income tax regulations that differ from the Company's interpretations by tax authorities that examine tax returns filed by the Company or any of its subsidiaries.

LINE OF BUSINESS RESULTS

General

The Company's segments at December 31, 2017 consisted of Consumer and Business Banking, Commercial Banking, CRE, Global Corporate Banking ("GCB"), and SC. For additional information with respect to the Company's reporting segments, see Note 23 to the Consolidated Financial Statements.

Results Summary

Consumer and Business Banking

	Year Ended December 31,						YTD Change
(dollars in thousands)	2017			2016			Dollar increase/(decrease)			Percentage
Net interest income	$	1,266,073		$	1,099,097		$	166,976		15.2	%
Total non-interest income	366,827			384,177			(17,350		)	(4.5	)%
Provision for credit losses	85,115			56,440			28,675			50.8	%
Total expenses	1,570,954			1,565,151			5,803			0.4	%
Loss before income taxes	(23,169		)	(138,317		)	115,148			83.2	%
Intersegment revenue	12,213			2,523			9,690			384.1	%
Total assets	19,889,065			19,828,173			60,892			0.3	%

Consumer and Business Banking reported a loss before income taxes of $23.2 million for the year endedDecember 31, 2017 compared to a loss before income taxes of $138.3 million for the year endedDecember 31, 2016. Factors contributing to this change were as follows:

• Net interest income increased$167.0 million for the year endedDecember 31, 2017 compared to 2016. This increase was primarily driven by deposit product margin where despite rising interest rates, costs have been managed down.

• Total non-interest income decreased$17.4 million for the year endedDecember 31, 2017 compared to 2016 driven by a change in the shared services agreement between the Bank and SSLLC made effective in the middle of 2017.

• The provision for credit losses increased by $28.7 million for the year endedDecember 31, 2017 compared to 2016, driven by the absence of reserve releases in 2017 for home equity and increased delinquency in the credit cards and personal loan portfolios.

60

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Commercial Banking

	Year Ended December 31,				YTD Change
(dollars in thousands)	2017		2016		Dollar increase/(decrease)			Percentage
Net interest income	$	346,766	$	349,834	$	(3,068	)	(0.9	)%
Total non-interest income	62,515		62,882		(367		)	(0.6	)%
Provision for credit losses	37,915		79,891		(41,976		)	(52.5	)%
Total expenses	219,158		210,984		8,174			3.9	%
Income before income taxes	152,208		121,841		30,367			24.9	%
Intersegment revenue	6,081		4,127		1,954			47.3	%
Total assets	11,626,318		11,962,637		(336,319		)	(2.8	)%

Commercial Banking reported income before income taxes of $152.2 million for the year endedDecember 31, 2017, compared to income before income taxes of $121.8 million for the year endedDecember 31, 2016. Factors contributing to this change were as follows:

• Net interest income decreased$3.1 million for the year endedDecember 31, 2017 compared to 2016. Total average gross loans were $11.6 billion for the year endedDecember 31, 2017 compared to $11.9 billion for 2016. The decline in average gross loans is primarily related to decreases in the Middle Market, Energy Lending, and Mortgage Warehouse portfolios.

• The provision for credit losses decreased$42.0 million for the year endedDecember 31, 2017 compared to 2016. The decrease in provision for the year endedDecember 31, 2017 was due to increased provisions required for the Energy Finance portfolio in the prior year that did not recur in 2017 and one large, previously unreserved charge-off that occurred in 2016 in the Middle Market portfolio.

CRE

	Year Ended December 31,					YTD Change
(dollars in thousands)	2017			2016		Dollar increase/(decrease)			Percentage
Net interest income	$	292,945		$	287,387	$	5,558		1.9	%
Total non-interest income	10,475			24,264		(13,789		)	(56.8	)%
Provision for credit losses	(8,329		)	6,025		(14,354		)	(238.2	)%
Total expenses	79,431			87,941		(8,510		)	(9.7	)%
Income before income taxes	232,318			217,685		14,633			6.7	%
Intersegment revenue	2,827			2,273		554			24.4	%
Total assets	13,691,750			14,630,450		(938,700		)	(6.4	)%

CRE reported income before income taxes of $232.3 million for the year endedDecember 31, 2017, compared to income before income taxes of $217.7 million for the year endedDecember 31, 2016. Factors contributing to this change were as follows:

• Net interest income increased$5.6 million for the year endedDecember 31, 2017 compared to 2016. The increasing rate environment led to an increase in the deposit margin and capital credit year-over-year. The average balance of this segment's gross loans decreased to $14.2 billion for the year endedDecember 31, 2017, compared to $15.2 billion for 2016. The balance decline was driven by higher runoff in the lower-priced Multi-Family portfolio outpacing originations. The average balance of deposits was $868.0 million for the year endedDecember 31, 2017, compared to $843.3 million for 2016.

• Total non-interest income decreased$13.8 million for the year endedDecember 31, 2017 compared to 2016 driven in part by a one-time gain on sale recognized in 2016.

• The provision for credit losses decreased$14.4 million for the year endedDecember 31, 2017 compared to 2016. The decrease in provisions was primarily related to a provision release in the real estate construction portfolio.

• Total expenses decreased$8.5 million for the year endedDecember 31, 2017 compared to 2016, driven by a reduction in indirect expenses. Total assets were $13.7 billion as of December 31, 2017, compared to $14.6 billion as of December 31, 2016.

61

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

GCB

	Year Ended December 31,						YTD Change
(dollars in thousands)	2017			2016			Dollar increase/(decrease)			Percentage
Net interest income	$	155,826		$	237,635		$	(81,809	)	(34.4	)%
Total non-interest income	37,135			82,765			(45,630		)	(55.1	)%
Provision for credit losses	33,275			7,952			25,323			318.4	%
Total expenses	102,164			118,804			(16,640		)	(14.0	)%
Income before income taxes	57,522			193,644			(136,122		)	(70.3	)%
Intersegment expense	(7,212		)	(9,052		)	1,840			20.3	%
Total assets	5,544,182			9,389,271			(3,845,089		)	(41.0	)%

GCB reported income before income taxes of $57.5 million for the year endedDecember 31, 2017 compared to income before income taxes of $193.6 million for the year endedDecember 31, 2016. Factors contributing to this change were as follows:

• Net interest income decreased$81.8 million for the year endedDecember 31, 2017 compared to 2016. The average balance of this segment's gross loans was $6.0 billion for the year endedDecember 31, 2017 compared to $9.3 billion for 2016. The average balance of deposits was $2.2 billion for the year endedDecember 31, 2017 compared to $2.2 billion for 2016. The decrease in loan balances is attributed to the strategic goal of building a less capital-intensive U.S. franchise, which was attained by exiting less profitable relationships across all sectors, and by pro-actively reducing exposures related to the commodities and oil and gas sectors.

• Total non-interest income decreased$45.6 million for the year endedDecember 31, 2017 compared to 2016.

• The provision for credit losses increased$25.3 million for the year endedDecember 31, 2017 compared to 2016. The provision increased for the year endedDecember 31, 2017 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$16.6 million for the year endedDecember 31, 2017 compared to 2016, driven by lower support and personnel expenses.

Other

	Year Ended December 31,						YTD Change
(dollars in thousands)	2017			2016			Dollar increase/(decrease)			Percentage
Net interest income	$	92,502		$	(63,191	)	$	155,693		246.4	%
Total non-interest income	713,933			792,457			(78,524		)	(9.9	)%
Provision for credit losses	93,166			52,490			40,676			77.5	%
Total expenses	1,055,804			1,152,027			(96,223		)	(8.4	)%
Loss before income taxes	(342,535		)	(475,251		)	132,716			27.9	%
Intersegment revenue/(expense)	(13,909		)	129			(14,038		)	NM1
Total assets	38,120,411			44,010,655			(5,890,244		)	(13.4	)%

¹ - not meaningful

The Other category reported losses before income taxes of $342.5 million for the year endedDecember 31, 2017, compared to losses before income taxes of $475.3 million for the year endedDecember 31, 2016. Factors contributing to this change were as follows:

• Net interest income increased$155.7 million for the year endedDecember 31, 2017 compared to 2016.

• Total non-interest income decreased$78.5 million for the year endedDecember 31, 2017 compared to 2016.

• The provision for credit losses increased$40.7 million for the year endedDecember 31, 2017 compared to 2016.

• Total expenses decreased$96.2 million for the year endedDecember 31, 2017 compared to 2016.

62

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

SC

	Year Ended December 31,				YTD Change
(dollars in thousands)	2017		2016		Dollar increase/(decrease)			Percentage
Net interest income	$	4,024,508	$	4,448,535	$	(424,027	)	(9.5	)%
Total non-interest income	1,793,556		1,432,634		360,922			25.2	%
Provision for credit losses	2,254,361		2,468,199		(213,838		)	(8.7	)%
Total expenses	2,740,190		2,252,259		487,931			21.7	%
Income before income taxes	823,513		1,160,711		(337,198		)	(29.1	)%
Intersegment revenue	—		—		—			0.0%
Total assets	39,422,304		38,539,104		883,200			2.3	%

SC reported income before income taxes of $823.5 million for the year endedDecember 31, 2017, compared to income before income taxes of $1.2 billion for the year endedDecember 31, 2016. Factors contributing to this change were as follows:

• Net interest income decreased$424.0 million for the year endedDecember 31, 2017 compared to 2016. This decrease was primarily related to an increase in interest expense during the period. SC's cost of funds increased during 2017 due to higher market rates and increased spreads.

• Total non-interest income increased$360.9 million for the year endedDecember 31, 2017 compared to 2016, due to the continued growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.

• The provision for credit losses decreased$213.8 million for the year endedDecember 31, 2017 compared to 2016. This decrease was primarily due to a lower build of the ACL as a result of the decline in originations during the year endedDecember 31, 2017 compared to 2016.

• Total expenses increased$487.9 million for the year endedDecember 31, 2017 compared to 2016, primarily due to the continued growth in the operating lease vehicle portfolio since SC launched Chrysler Capital in 2013.

63

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

On July 1, 2016, ownership of several Santander subsidiaries, including Santander BanCorp, BSI, SIS and SSLLC, were transferred to the Company. As these entities were and are solely owned and controlled by Santander prior to and after July 1, 2016, in accordance with ASC 805, the transaction has been accounted for under the common control guidance, which requires the Company to recognize the assets and liabilities transferred at their historical cost of the transferring entity at the date of the transfer. Additionally, as this transaction represents a change in reporting entity, the guidance requires retrospective combination of the entities for all periods presented in these financial statements as if the combination had been in effect since inception of common control. Consistent with the Company's December 31, 2016 Form 10-K, the following discussion has been updated to reflect the effects of the recast, except that ratios as of December 31, 2015 have not been recast for the consolidation of IHC entities as regulatory filings are only impacted prospectively.

	Year Ended December 31,						YTD Change
(dollars in thousands)	2016			2015			Dollar			Percentage
Net interest income	$	6,564,692		$	6,901,406		$	(336,714	)	(4.9	)%
Provision for credit losses	(2,979,725		)	(4,079,743		)	1,100,018			(27.0	)%
Total non-interest income	2,766,759			2,905,035			(138,276		)	(4.8	)%
General and administrative expenses	(5,122,211		)	(4,724,400		)	(397,811		)	8.4	%
Other expenses	(275,037		)	(4,657,492		)	4,382,455			(94.1	)%
(Loss)/income before income taxes	954,478			(3,655,194		)	4,609,672			(126.1	)%
Income tax provision/(benefit)	313,715			(599,758		)	913,473			(152.3	)%
Net income/(loss) (1)	$	640,763		$	(3,055,436	)	$	3,696,199		(121.0	)%

(1) Includes NCI.

The Company reported a pre-tax income of $954.5 million for the year ended December 31, 2016, compared to pre-tax loss of $3.7 billion for the year ended December 31, 2015. Factors contributing to this increase were as follows:

• Net interest income decreased $336.7 for the year ended December 31, 2016 compared to 2015. This decrease was primarily due to yield decreases on loans and an increase in interest expense due to higher borrowing levels and associated interest rates in 2016 compared to 2015.

• Provisions for credit losses decreased $1.1 billion for the year ended December 31, 2016, compared to 2015. This decrease was primarily related to the buildup of the allowance for loan and lease losses (“ALLL”) coverage ratio throughout 2015, mainly on the RIC and auto loan portfolio. The provision continues to reflect the growth of the RIC and auto loan portfolio.

• Total non-interest income decreased $138.3 million for the year ended December 31, 2016 compared to 2015. This decrease was primarily in miscellaneous income attributable to reduced sales of operating leases and mark-downs of the fair value associated with personal unsecured LHFS in 2016 compared to 2015, offset by an increase in lease income.

• Total general and administrative expenses increased $397.8 million for the year ended December 31, 2016 compared to 2015. This increase was primarily due to an increase in lease expenses and compensation and benefits.

• Other expenses decreased $4.4 billion for the year ended December 31, 2016 compared to 2015. This decrease was primarily due to an impairment of goodwill in the amount of $4.5 billion recorded in 2015, with no impairment recorded in 2016. There was also an increase in losses on debt extinguishment associated with repositioning the balance sheet.

• The income tax provision increased $913.5 million for the year ended December 31, 2016 compared to 2015. This increase was due to discrete tax provisions recognized in 2016 compared to discrete tax benefits in the prior year, which resulted in a higher effective tax rate for 2016.

64

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

CONSOLIDATED AVERAGE BALANCE SHEET / NET INTEREST MARGIN ANALYSIS
	YEARS ENDED DECEMBER 31, 2016 AND 2015
	2016 (1)							2015 (1)							Interest			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	$	29,287,122		$	378,404	1.29	%	$	27,457,675		$	405,594	1.48	%	$	(27,190	)	$	30,869		$	(58,059	)
LOANS(3):
Commercial loans	37,313,431			1,219,667		3.27	%	35,765,796			1,141,115		3.19	%	78,552			50,150			28,402
Multifamily	9,126,075			331,344		3.63	%	8,927,502			361,858		4.05	%	(30,514		)	8,276			(38,790		)
Total commercial loans	46,439,506			1,551,011		3.34	%	44,693,298			1,502,973		3.36	%	48,038			58,426			(10,388		)
Consumer loans:
Residential mortgages	7,887,893			316,015		4.01	%	8,165,625			339,541		4.16	%	(23,526		)	(11,345		)	(12,181		)
Home equity loans and lines of credit	6,076,177			219,691		3.62	%	6,165,718			218,018		3.54	%	1,673			(3,037		)	4,710
Total consumer loans secured by real estate	13,964,070			535,706		3.84	%	14,331,343			557,559		3.89	%	(21,853		)	(14,382		)	(7,471		)
RICs and auto loans	26,636,271			4,831,270		18.14	%	24,637,592			4,843,916		19.66	%	(12,646		)	(279,353		)	266,707
Personal unsecured	2,310,996			610,998		26.44	%	3,340,235			721,318		21.59	%	(110,320		)	(405,526		)	295,206
Other consumer(4)	910,686			82,362		9.04	%	1,156,606			106,256		9.19	%	(23,894		)	(22,265		)	(1,629		)
Total consumer	43,822,023			6,060,336		13.83	%	43,465,776			6,229,049		14.33	%	(168,713		)	(721,526		)	552,813
Total loans	90,261,529			7,611,347		8.43	%	88,159,074			7,732,022		8.77	%	(120,675		)	(663,100		)	542,425
Intercompany investments	14,640			904		6.17	%	14,591			886		6.07	%	18			3			15
TOTAL EARNING ASSETS	119,563,291			7,990,655		6.68	%	115,631,340			8,138,502		7.04	%	(147,847		)	(632,228		)	484,381
Allowance for loan losses(5)	(3,664,095		)					(2,631,602		)
Other assets(6)	26,022,585							27,462,175
TOTAL ASSETS	$	141,921,781						$	140,461,913
INTEREST BEARING FUNDING LIABILITIES
Deposits and other customer related accounts:
Interest bearing demand deposits	$	11,682,723		$	42,013	0.36	%	$	12,953,809		$	56,327	0.43	%	$	(14,314	)	$	(5,181	)	$	(9,133	)
Savings	5,956,770			12,723		0.21	%	6,488,645			14,389		0.22	%	(1,666		)	(1,149		)	(517		)
Money market	25,029,571			126,417		0.51	%	23,135,793			127,576		0.55	%	(1,159		)	43,042			(44,201		)
CDs	9,738,344			95,869		0.98	%	9,589,966			90,853		0.95	%	5,016			1,421			3,595
TOTAL INTEREST BEARING DEPOSITS	52,407,408			277,022		0.53	%	52,168,213			289,145		0.55	%	(12,123		)	38,133			(50,256		)
BORROWED FUNDS:
FHLB advances, federal funds, and repurchase agreements	9,466,243			126,799		1.34	%	10,219,740			181,414		1.78	%	(54,615		)	(12,617		)	(41,998		)
Other borrowings	38,042,187			1,021,238		2.68	%	35,108,308			765,651		2.18	%	255,587			67,909			187,678
TOTAL BORROWED FUNDS (7)	47,508,430			1,148,037		2.42	%	45,328,048			947,065		2.09	%	200,972			55,292			145,680
TOTAL INTEREST BEARING FUNDING LIABILITIES	99,915,838			1,425,059		1.43	%	97,496,261			1,236,210		1.27	%	188,849			93,425			95,424
Noninterest bearing demand deposits	14,410,397							12,710,485
Other liabilities(8)	5,362,817							4,759,515
TOTAL LIABILITIES	119,689,052							114,966,261
STOCKHOLDER’S EQUITY	22,232,729							25,495,652
TOTAL LIABILITIES AND STOCKHOLDER’S EQUITY	$	141,921,781						$	140,461,913
NET INTEREST SPREAD (9)						5.25	%						5.77	%
NET INTEREST MARGIN (10)						5.49	%						5.97	%
NET INTEREST INCOME				$	6,564,692						$	6,901,406
Ratio of interest-earning assets to interest-bearing liabilities						1.20x							1.19x

(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 LHFS.

(4) Other consumer primarily includes RV and marine loans.

(5) Refer to Note 4 to the 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 MSRs. Refer to Note 9 to the Consolidated Financial Statements for further discussion.

(7) Refer to Note 11 to the 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.

65

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

NET INTEREST INCOME

	Year Ended December 31,				YTD Change
(dollars in thousands)	2016		2015		Dollar			Percentage
INTEREST INCOME:
Interest-earning deposits	$	57,361	$	21,745	$	35,616		163.8	%
Investments available-for-sale	284,796		331,379		(46,583		)	(14.1	)%
Investments held-to-maturity	3,526		—		3,526			100.0	%
Other investments	32,721		52,470		(19,749		)	(37.6	)%
Total interest income on investment securities and interest-earning deposits	378,404		405,594		(27,190		)	(6.7	)%
Interest on loans	7,611,347		7,732,022		(120,675		)	(1.6	)%
Total interest income	7,989,751		8,137,616		(147,865		)	(1.8	)%
INTEREST EXPENSE:
Deposits and customer accounts	277,022		289,145		(12,123		)	(4.2	)%
Borrowings and other debt obligations	1,148,037		947,065		200,972			21.2	%
Total Interest Expense	1,425,059		1,236,210		188,849			15.3	%
NET INTEREST INCOME:	$	6,564,692	$	6,901,406	$	(336,714	)	(4.9	)%

Net interest income decreased $336.7 million for the year ended December 31, 2016 compared to 2015. This overall decrease was primarily due to yield decreases on loans and an increase in interest expense due to higher borrowing levels and associated interest rates in 2016 compared to 2015.

Net Interest Income on Investment Securities and Interest-Earning Deposits

Interest income on investment securities and interest-earning deposits decreased $27.2 million for the year ended December 31, 2016 compared to 2015. The average balance of investment securities and interest-earning deposits for the year ended December 31, 2016 was $29.3 billion with an average yield of 1.29%, compared to an average balance of $27.5 billion with an average yield of 1.48% for 2015. The decrease in interest income on investment securities and interest-earning deposits for the year ended December 31, 2016 was primarily attributable to a decrease of $66.3 million in interest income on AFS investment securities and other investments, offset by a $35.6 million increase in interest income on short-term deposits compared to 2015.

Interest Income on Loans

Interest income on loans decreased $120.7 million for the year ended December 31, 2016 compared to 2015. The average balance of total loans was $90.3 billion with an average yield of 8.43% for the year ended December 31, 2016, compared to $88.2 billion with an average yield of 8.77% for the year ended December 31, 2015. The increase in the average balance of total loans of $2.1 billion was primarily due to the growth of the RIC and auto loan portfolio. The average balance of RICs and auto loans, which comprised a majority of the increase, was $26.6 billion with an average yield of 18.14% for the year ended December 31, 2016, compared to $24.6 billion with an average yield of 19.66% for 2015.

The decrease in interest income on loans was primarily due to activity in the unsecured loan portfolios, as the Company sold the LendingClub loans in February 2016. Interest income on the personal unsecured loan portfolio decreased $110.3 million for the year ended December 31, 2016. The average balance of the portfolio decreased from $3.3 billion in 2015 to $2.3 billion in 2016.

Interest Expense on Deposits and Related Customer Accounts

Interest expense on deposits and related customer accounts decreased $12.1 million for the year ended December 31, 2016 compared to 2015. The average balance of total interest-bearing deposits was $52.4 billion with an average cost of 0.53% for the year ended December 31, 2016, compared to an average balance of $52.2 billion with an average cost of 0.55% for 2015. The decrease in interest expense on deposits and customer-related accounts during the year ended December 31, 2016 was primarily due to the decrease in the interest rates paid on deposits during the year.

66

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Interest Expense on Borrowed Funds

Interest expense on borrowed funds increased $201.0 million for the year ended December 31, 2016 compared to 2015. This increase was attributable to the increase in interest rates paid for the year ended December 31, 2016. This increase was primarily due to $1.6 billion of new debt issued by SHUSA, and net $1.4 billion of SC on-balance sheet securitization activity from December 31, 2015 to December 31, 2016. The average balance of total borrowings was $47.5 billion with an average cost of 2.42% for the year ended December 31, 2016, compared to an average balance of $45.3 billion with an average cost of 2.09% for 2015.

PROVISION FOR CREDIT LOSSES

The provision for credit losses is based on credit loss experience, growth or contraction of specific segments of the loan portfolio, and the estimate of losses inherent in the loan portfolio. The provision for credit losses for the year ended December 31, 2016 was $3.0 billion compared to $4.1 billion for the year ended December 31, 2015. This decrease for the year ended December 31, 2016 was primarily related to the buildup of the ALLL coverage ratio throughout 2015, mainly for the RIC and auto loan portfolio. The provision continues to reflect the growth of the RIC and auto loan portfolio.

The following table presents the activity in the ACL for the periods indicated:

	Year Ended December 31,
(in thousands)	2016			2015
ALLL, beginning of period	$	3,246,145		$	1,777,889
Charge-offs:
Commercial	(245,399		)	(175,234		)
Consumer	(4,720,135		)	(4,489,848		)
Total charge-offs	(4,965,534		)	(4,665,082		)
Recoveries:
Commercial	86,312			65,217
Consumer	2,442,921			2,030,177
Total recoveries	2,529,233			2,095,394
Charge-offs, net of recoveries	(2,436,301		)	(2,569,688		)
Provision for loan and lease losses (1)	3,004,620			4,065,061
Other(2):
Consumer	—			(27,117		)
ALLL, end of period	$	3,814,464		$	3,246,145
Reserve for unfunded lending commitments, beginning of period	$	149,021		$	134,003
(Release)/provision for unfunded lending commitments (1)	(24,895		)	14,682
(Gain)/loss on unfunded lending commitments	(1,708		)	336
Reserve for unfunded lending commitments, end of period	122,418			149,021
Total ACL, end of period	$	3,936,882		$	3,395,166

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

(2) The "Other" amount represents the impact on the ALLL in connection with SC classifying approximately $1 billion of RICs as held-for-sale during the first quarter of 2015.

The Company's net charge-offs decreased$133.4 million for the year ended December 31, 2016 compared to 2015.

Consumer charge-offs increased$230.3 million for the year ended December 31, 2016 compared to 2015. This increase was primarily due to a $251.1 million increase in charge-offs within the RIC and auto loan portfolio attributable to portfolio aging and mix shift, lower realized recovery rates, and smaller benefit from bankruptcy sales, partially offset by an $8.4 million decrease in charge-offs within the home equity loan portfolio and a $6.5 million decrease in home mortgage charge-offs. The increase in net charge-offs for the RIC and auto loan portfolio was substantially offset by a smaller build of the ALLL primarily due to higher credit quality originations during 2016 compared to 2015.

Consumer recoveries increased$412.7 million for the year ended December 31, 2016 compared to 2015. This increase was primarily due to a $420.8 million increase in consumer auto loan recoveries.

67

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Consumer loan net charge-offs as a percentage of average consumer loans was 5.2% for the year ended December 31, 2016, compared to 5.7% for the year ended December 31, 2015.

Commercial charge-offs increased$70.2 million for the year ended December 31, 2016 compared to 2015. This increase was primarily due to a $66.6 million increase in Corporate Banking charge-offs.

Commercial recoveries increased$21.1 million for the year ended December 31, 2016 compared to 2015. This increase was primarily due to a $15.6 million increase in Commercial Real Estate recoveries, and a $7.6 million increase in Corporate Banking recoveries.

Commercial loan net charge-offs as a percentage of average commercial loans, including multifamily loans, were 0.3% for the year ended December 31, 2016 and 0.2% for the year ended December 31, 2015.

NON-INTEREST INCOME

	Year Ended December 31,					YTD Change
(dollars in thousands)	2016			2015		Dollar			Percentage
Consumer fees	$	499,591		$	495,727	$	3,864		0.8	%
Commercial fees	190,248			216,057		(25,809		)	(11.9	)%
Mortgage banking income, net	63,790			108,569		(44,779		)	(41.2	)%
BOLI	57,796			57,913		(117		)	(0.2	)%
Capital markets revenue	190,647			141,667		48,980			34.6	%
Lease income	1,839,307			1,482,850		356,457			24.0	%
Miscellaneous income	(132,123		)	383,425		(515,548		)	(134.5	)%
Net gain recognized in earnings	57,503			18,827		38,676			205.4	%
Total non-interest income	$	2,766,759		$	2,905,035	$	(138,276	)	(4.8	)%

Total non-interest income decreased $138.3 million for the year ended December 31, 2016 compared to the year ended 2015. The decrease for the year ended December 31, 2016 was primarily due to decreases in miscellaneous income attributable to the decrease in sale of operating leases and the mark-down of the fair value associated with personal unsecured LHFS, partially offset by increases in lease income.

Consumer Fees

Consumer fees increased $3.9 million for the year ended December 31, 2016 compared to 2015. This increase was primarily due to a $9.7 million increase in insurance and investment activities. This was partially offset by a $5.8 million decrease in loan fee income, which was attributable to the reduction of loans serviced by the Company due to loan sales and payoffs and lower reserve recourse releases in 2016.

Commercial Fees

Commercial fees consists of deposit overdraft fees, ATM deposit fees, cash management fees, letter of credit fees, and loan syndication fees for commercial accounts. Commercial fees decreased $25.8 million for the year ended December 31, 2016, compared to 2015.

Mortgage Banking Revenue

	Year Ended December 31,						YTD Change
(dollars in thousands)	2016			2015			Dollar			Percentage
Mortgage and multifamily servicing fees	$	42,996		$	45,151		$	(2,155	)	(4.8	)%
Net gains on sales of residential mortgage loans and related securities	35,720			49,682			(13,962		)	(28.1	)%
Net gains on sales of multifamily mortgage loans	6,368			30,261			(23,893		)	(79.0	)%
Net gains / (losses) on hedging activities	(723		)	5,757			(6,480		)	(112.6	)%
Net (losses) / gains from changes in MSR fair value	3,887			3,948			(61		)	(1.5	)%
MSR principal reductions	(24,458		)	(26,230		)	1,772			(6.8	)%
Total mortgage banking income, net	$	63,790		$	108,569		$	(44,779	)	(41.2	)%

68

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Mortgage banking revenue decreased $44.8 million for the year ended December 31, 2016 compared to 2015. This decrease was primarily attributable to $23.9 million in lower gains on sales of multifamily mortgage loans, driven by lower provision releases, $14.0 million in lower gains on sales of residential mortgage loans driven by lower residential mortgage sale activity, and $6.5 million lower gains on hedging activity.

Since 2014, mortgage interest rates have remained stable, resulting in relative stability in mortgage banking fee fluctuations from rate changes.

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

	30-Year Fixed		15-Year Fixed
December 31, 2014	3.99	%	3.25	%
March 31, 2015	3.88	%	3.13	%
June 30, 2015	4.13	%	3.38	%
September 30, 2015	3.88	%	3.13	%
December 31, 2015	4.13	%	3.38	%
March 31, 2016	3.63	%	2.88	%
June 30, 2016	3.50	%	2.75	%
September 30, 2016	3.50	%	2.88	%
December 31, 2016	4.38	%	3.63	%

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

Mortgage and multifamily servicing fees decreased $2.2 million for the year ended December 31, 2016 compared to 2015. At December 31, 2016 and December 31, 2015, the Company serviced mortgage and multifamily real estate loans for the benefit of others with a principal balance totaling $621.1 million and $858.2 million, respectively. The decrease in loans serviced for others was primarily due to paydowns received during 2016.

Net gains on sales of residential mortgage loans and related securities decreased $14.0 million for the year ended December 31, 2016 compared to 2015. For the year ended December 31, 2016, the Company sold $2.2 billion of mortgage loans for a gain of $35.7 million, compared to $2.5 billion of loans sold for a gain of $49.7 million for the year ended December 31, 2015.

The Company periodically sells qualifying mortgage loans to the FHLMC, GNMA and FNMA in return for MBS issued by those agencies. The Company records these transactions as sales when the transfers met all the accounting criteria for a sale. For those loans sold to the agencies for which the Company retains the servicing rights, the Company recognizes the servicing rights at fair value. These loans are also generally sold with standard representation and warranty provisions which the Company recognizes at fair value. Any difference between the carrying value of the transferred mortgage loans and the fair value of MBS, servicing rights, and representation and warranty reserves are recognized as gain or loss on sale.

Net gains on sales of multifamily mortgage loans decreased $23.9 million for the year ended December 31, 2016 compared to 2015. This decrease was primarily due to a $3.0 million release in the FNMA recourse reserve for the year ended December 31, 2016 compared to a $29.9 million release for 2015.

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.

69

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

At December 31, 2016, the Company serviced loans with a principal balance of $341.7 million, for FNMA, compared to $552.1 million in 2015. These loans had a credit loss exposure of $34.4 million as of both December 31, 2016 and December 31, 2015. Losses, if any, resulting from representation and warranty defaults would be in addition to the Company's credit loss exposure. The servicing asset for these loans has completely amortized.

The Company has established a liability related to the fair value of the retained credit exposure for multifamily loans sold to the FNMA. This liability represents the amount the Company estimated it would have to pay a third party to assume the retained recourse obligation. The estimated liability represents the present value of the estimated losses the portfolio is projected to incur based upon specific internal information and an industry-based default curve with a range of estimated losses. At December 31, 2016 and December 31, 2015, the Company had a liability of $3.8 million and $6.8 million, respectively, related to the fair value of the retained credit exposure for multifamily loans sold to FNMA under this program.

Net gains/(losses) on hedging activities decreased $6.5 million for the year ended December 31, 2016, compared to 2015. This variance for the year ended December 31, 2016 was primarily due to the decrease in the mortgage loan pipeline valuation and the Company's hedging strategy in the current mortgage rate environment.

Net gains from changes in MSR fair value was $3.9 million for the year ended December 31, 2016, and a net gain of $3.9 million for 2015. The carrying value of the related MSRs at December 31, 2016 and December 31, 2015 was $146.6 million and $147.2 million, respectively. The MSR asset fair value changes for the year ended December 31, 2016 were the result of decreases in interest rates.

The Company recognized $24.5 million of principal reductions for the year ended December 31, 2016, compared to $26.2 million for 2015. Principal reduction activity is impacted by changes in the level of prepayments and mortgage refinancing and generally follows along with interest rates.

Equity Method Investments

Equity method investments gains/(losses), net consists of income and losses on investments in unconsolidated entities and joint ventures in which the Company has an interest, but does not have a controlling interest. These include investments in community reinvestment projects and entities which own wind power generating projects. Equity method investments gains/(losses), net decreased $2.2 million for the year ended December 31, 2016, compared to 2015.

BOLI

BOLI income represents fluctuations in the cash surrender value of life insurance policies on certain employees. The Bank is the beneficiary and the recipient of the insurance proceeds. Income from BOLI decreased $0.1 million, for the year ended December 31, 2016 compared to 2015.

Capital Markets Revenue

Capital markets revenue increased $49.0 million for the year ended December 31, 2016, compared to 2015. The increase was primarily due to a $41.4 million increase in investment banking income and a $9.1 million increase in commission fees.

Lease Income

Lease income increased $356.5 million for the year ended December 31, 2016, compared to 2015. The average leased vehicle portfolio balance as of December 31, 2016 and December 31, 2015 was $9.1 billion and $7.5 billion, respectively. These increases were the result of the growth of the Company's lease portfolio.

Miscellaneous Income

Miscellaneous income decreased $515.5 million for the year ended December 31, 2016 compared to 2015, primarily due to additional lower of cost or market adjustments of $198.0 million on SC's personal unsecured portfolio. SC also earned $167.0 million less on lease and other miscellaneous sales for the year ended December 31, 2016, compared to 2015, primarily due to a lack of bulk loan and lease sales in 2016. Total other income decreased $332.8 million, including a $17.1 million decrease in miscellaneous income, mainly due to lower fair value adjustments on the Company's fair value option ("FVO") loan portfolio. For further discussion please see Note 18 to the Consolidated Financial Statements.

70

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net gain/(losses) recognized in earnings

The Company recognized $57.5 million of gains for the year ended December 31, 2016 in net (losses)/gains on sale of investment

securities as a result of overall balance sheet and interest rate risk management. The net gain realized for the year ended December 31, 2016 was primarily comprised of the sale of U.S. Treasury securities with a book value of $3.2 billion for a gain of $7.0 million, corporate debt securities with a book value of $1.4 billion for a gain of $5.9 million, MBS, including FHLMC residential debt securities and CMOs with a book value of $1.3 billion for a gain of $24.7 million, and state and municipal securities with a book value of $748.0 million for a gain of $19.9 million.

The Company recognized $18.8 million of gains for the year ended December 31, 2015, in net (losses)/gains on sale of investment securities as a result of overall balance sheet and interest rate risk management. The net gain for the year ended December 31, 2015 was primarily comprised of the sale of state and municipal securities with a book value of $421.5 million for a gain of $12.1 million, the sale of corporate debt securities with a book value of $566.2 million for a gain of $6.7 million, and the sale of ABS with a book value of $683.9 million for a loss of $0.2 million, offset by other-than-temporary-impairment ("OTTI") of $1.1 million.

GENERAL AND ADMINISTRATIVE EXPENSES

	Year Ended December 31,				YTD Change
(dollars in thousands)	2016		2015		Dollar			Percentage
Compensation and benefits	$	1,719,645	$	1,598,497	$	121,148		7.6	%
Occupancy and equipment expenses	618,597		591,569		27,028			4.6	%
Technology expense	644,079		601,865		42,214			7.0	%
Loan expense	415,267		384,051		31,216			8.1	%
Lease expense	1,305,712		1,121,531		184,181			16.4	%
Other administrative expenses	418,911		426,887		(7,976		)	(1.9	)%
Total general and administrative expenses	$	5,122,211	$	4,724,400	$	397,811		8.4	%

Total general and administrative expenses increased $397.8 million for the year ended December 31, 2016, compared to 2015. Factors contributing to this increase were as follows:

• Compensation and benefits expense increased $121.1 million for the year ended December 31, 2016 compared to 2015. The primary driver of this increase was the Company's headcount, in particular within its consumer finance subsidiary.

• Occupancy and equipment expenses increased $27.0 million for the year ended December 31, 2016 from 2015. This was primarily due to an increase in depreciation expense for the year ended December 31, 2016 of $30.9 million due to more assets being placed in service. There was a decrease in rental expense, which was almost completely offset by an increase in maintenance and repair expense.

• Technology services expense increased $42.2 million for the year ended December 31, 2016 compared to 2015. The increase was primarily due to the Company's increased technology services relating to Produban, a Santander subsidiary and an increase in accounting and audit services expenses and outside bank service expense. The increase was offset by a decrease in consulting service fees related to regulatory initiatives, including preparation for meeting the requirements of the IHC which became effective on July 1, 2016.

• Loan expense increased $31.2 million for the year ended December 31, 2016 compared to 2015. This increase was primarily due to an increase of $51.0 million in loan collection expenses. This was offset by $19.9 million decrease in loan servicing and loan origination expenses, primarily associated with the activity in the RIC and auto loan portfolio.

• Lease expense increased $184.2 million for the year ended December 31, 2016 compared to 2015. This increase was primarily due to the continued growth of the Company's leased vehicle portfolio and depreciation associated with that portfolio.

71

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

OTHER EXPENSES

	Year Ended December 31,				YTD Change
(dollars in thousands)	2016		2015		Dollar			Percentage
Amortization of intangibles	$	70,034	$	79,921	$	(9,887	)	(12.4	)%
Deposit insurance premiums and other costs	77,976		61,503		16,473			26.8	%
Loss on debt extinguishment	114,232		—		114,232			100%
Equity investment expense, net	11,054		8,818		2,236			25.4	%
Impairment of goodwill	—		4,507,095		(4,507,095		)	(100.0	)%
Investment income/expense on qualified affordable housing projects	1,741		155		1,586			1,023.2	%
Total other expenses	$	275,037	$	4,657,492	$	(4,382,455	)	(94.1	)%

Total other expenses decreased $4.4 billion for the year ended December 31, 2016 compared to 2015. The primary factors contributing to this decrease were:

• Amortization of intangibles decreased $9.9 million for the year ended December 31, 2016 compared to 2015. This decrease was primarily due to the Company's core deposit intangibles and purchased credit card relationships from its acquisitions in 2006 and before becoming fully amortized in the second quarter of 2016.

• Deposit insurance premiums and other expenses increased $16.5 million for the year ended December 31, 2016, compared to 2015. This increase was primarily driven by an increase in FDIC insurance premiums and an additional $13.9 million FDIC quarterly surcharge which commenced in the third quarter of 2016.

• There were $114.2 million of losses on debt extinguishment during the year ended December 31, 2016, compared to no such losses for the year ended December 31, 2015. These expenses were primarily related to early termination fees incurred by the Company in association with the 2016 termination of FHLB advances. During the year ended December 31, 2016, the Bank terminated $3.8 billion of FHLB advances.

• There was no impairment of goodwill recorded for the year ended December 31, 2016. The Company recorded an impairment of goodwill in the amount of $4.5 billion in 2015 related its SC reporting unit.

INCOME TAX PROVISION

An income tax provision of $313.7 million was recorded for the year ended December 31, 2016, compared to a benefit of $599.8 million for the year ended December 31, 2015. This resulted in an effective tax rate ("ETR") of 32.9% for the year ended December 31, 2016, compared to 16.4% for the year ended December 31, 2015.

The income tax provision in 2016 included a provision of $36.0 million related to increases in reserves regarding a dispute with the United States for certain financing transactions. The lower income tax provision in 2015 was primarily due to a $996.1 million reduction in the deferred tax liability related to an impairment of goodwill with respect to the Company's investment in SC.

During 2015, the Company also increased the reserve by $104.2 million for income taxes under this dispute with the United States for certain financing transactions.

The Company's ETR in future periods will be affected by the results of operations allocated to the various tax jurisdictions in which the Company operates, any change in income tax laws or regulations within those jurisdictions, and interpretations of income tax regulations that differ from the Company's interpretations by tax authorities that examine tax returns filed by the Company or any of its subsidiaries.

LINE OF BUSINESS RESULTS

General

The Company's segments at December 31, 2016 consisted of Consumer and Business Banking, Commercial Banking, Commercial Real Estate ("CRE"), GCB, and SC. For additional information with respect to the Company's reporting segments, see Note 23 to the Consolidated Financial Statements.

72

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Results Summary

Consumer and Business Banking

	Year Ended December 31,						YTD Change
(dollars in thousands)	2016			2015			Dollar increase/(decrease)			Percentage
Net interest income	$	1,099,097		$	865,044		$	234,053		27.1	%
Total non-interest income	384,177			301,758			82,419			27.3	%
Provision for credit losses	56,440			42,629			13,811			32.4	%
Total expenses	1,565,151			1,625,814			(60,663		)	(3.7	)%
Loss before income taxes	(138,317		)	(501,641		)	363,324			72.4	%
Intersegment revenue	2,523			1,207			1,316			109.0	%
Total assets	19,828,173			19,997,036			(168,863		)	(0.8	)%

Consumer and Business Banking reported a loss before income taxes of $138.3 million for the year endedDecember 31, 2016 compared to losses before income taxes of $501.6 million for the year endedDecember 31, 2015. Factors contributing to this change were as follows:

• Net interest income increased$234.1 million for the year endedDecember 31, 2016 compared to 2015.

• Total non-interest income increased$82.4 million for the year endedDecember 31, 2016 compared to 2015.

• The provision for credit losses increased by $13.8 million for the year endedDecember 31, 2016 compared to 2015.

• Total expenses decreased$60.7 million for the year endedDecember 31, 2016 compared to 2015.

Commercial Banking

	Year Ended December 31,				YTD Change
(dollars in thousands)	2016		2015		Dollar increase/(decrease)			Percentage
Net interest income	$	349,834	$	276,407	$	73,427		26.6	%
Total non-interest income	62,882		53,052		9,830			18.5	%
Provision for credit losses	79,891		17,398		62,493			359.2	%
Total expenses	210,984		184,365		26,619			14.4	%
Income before income taxes	121,841		127,696		(5,855		)	(4.6	)%
Intersegment revenue	4,127		4,146		(19		)	(0.5	)%
Total assets	11,962,637		16,581,175		(4,618,538		)	(27.9	)%

Commercial Banking reported income before income taxes of $121.8 million for the year endedDecember 31, 2016, compared to income before income taxes of $127.7 million for the year endedDecember 31, 2015. Factors contributing to this change were as follows:

• Net interest income increased$73.4 million for the year endedDecember 31, 2016 compared to 2015. Total average gross loans were $11.9 billion for the year endedDecember 31, 2016 compared to $10.4 billion in 2015.

• Total non-interest income increased$9.8 million for the year endedDecember 31, 2016 compared to 2015.

• The provision for credit losses increased$62.5 million for the year endedDecember 31, 2016 compared to 2015, primarily driven by reserves for the energy finance business line.

• Total expenses increased$26.6 million for the year endedDecember 31, 2016 compared to 2015.

73

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Commercial Real Estate

	Year Ended December 31,				YTD Change
(dollars in thousands)	2016		2015		Dollar increase/(decrease)			Percentage
Net interest income	$	287,387	$	272,999	$	14,388		5.3	%
Total non-interest income	24,264		44,170		(19,906		)	(45.1	)%
Provision for credit losses	6,025		25,719		(19,694		)	(76.6	)%
Total expenses	87,941		72,095		15,846			22.0	%
Income before income taxes	217,685		219,355		(1,670		)	(0.8	)%
Intersegment revenue	2,273		2,814		(541		)	(19.2	)%
Total assets	14,630,450		15,085,971		(455,521		)	(3.0	)%

CRE reported income before income taxes of $217.7 million for the year endedDecember 31, 2016 compared to income before income taxes of $219.4 million for the year endedDecember 31, 2015. Factors contributing to this change were as follows:

• Net interest income increased$14.4 million for the year endedDecember 31, 2016 compared to 2015. The average balance of this segment's gross loans increased to $15.2 billion for the year endedDecember 31, 2016 compared to $14.5 billion in 2015. The average balance of deposits was $843.3 million for the year endedDecember 31, 2016 compared to $787.5 million for 2015.

• Total non-interest income decreased$19.9 million for the year endedDecember 31, 2016 compared to 2015.

• The provision for credit losses decreased$19.7 million for the year endedDecember 31, 2016 compared to 2015.

• Total expenses increased$15.8 million for the year endedDecember 31, 2016 compared to 2015.

• Total assets were $14.6 billion as of December 31, 2016 compared to $15.1 billion as of December 31, 2015.

GCB

	Year Ended December 31,						YTD Change
(dollars in thousands)	2016			2015			Dollar increase/(decrease)			Percentage
Net interest income	$	237,635		$	218,917		$	18,718		8.6	%
Total non-interest income	82,765			89,208			(6,443		)	(7.2	)%
Provision for credit losses	7,952			40,881			(32,929		)	(80.5	)%
Total expenses	118,804			108,718			10,086			9.3	%
Income before income taxes	193,644			158,526			35,118			22.2	%
Intersegment expense	(9,052		)	(9,601		)	549			5.7	%
Total assets	9,389,271			12,092,986			(2,703,715		)	(22.4	)%

GCB reported income before income taxes of $193.6 million for the year endedDecember 31, 2016 compared to income before income taxes of $158.5 million for the year endedDecember 31, 2015. Factors contributing to this change were as follows:

• Net interest income increased$18.7 million for the year endedDecember 31, 2016 compared to 2015. The average balance of this segment's gross loans were $9.3 billion for the year endedDecember 31, 2016 compared to $9.6 billion for 2015. The average balance of deposits was $2.2 billion for the year endedDecember 31, 2016 compared to $1.8 billion for 2015.

• Total non-interest income decreased$6.4 million for the year endedDecember 31, 2016 compared to 2015.

• The provision for credit losses decreased$32.9 million for the year endedDecember 31, 2016 compared to 2015.

• Total expenses increased$10.1 million for the year endedDecember 31, 2016 compared to 2015.

• Total assets were $9.4 billion as of December 31, 2016, compared to $12.1 billion as of December 31, 2015.

74

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Other

	Year Ended December 31,					YTD Change
(dollars in thousands)	2016			2015		Dollar increase/(decrease)			Percentage
Net interest income	$	(63,191	)	$	246,151	$	(309,342	)	(125.7	)%
Total non-interest income	792,457			873,413		(80,956		)	(9.3	)%
Provision for credit losses	52,490			75,293		(22,803		)	(30.3	)%
Total expenses	1,152,027			955,719		196,308			20.5	%
Income/(loss) before income taxes	(475,251		)	88,552		(563,803		)	(636.7	)%
Intersegment revenue	129			1,434		(1,305		)	(91.0	)%
Total assets	44,010,655			42,586,543		1,424,112			3.3	%

The Other category reported losses before income taxes of $475.3 million for the year endedDecember 31, 2016, compared to losses before income taxes of $88.6 million for the year endedDecember 31, 2015. Factors contributing to this change were as follows:

• Net interest income decreased$309.3 million for the year endedDecember 31, 2016 compared to 2015.

• Total non-interest income decreased$81.0 million for the year endedDecember 31, 2016 compared 2015.

• The provision for credit losses decreased$22.8 million for the year endedDecember 31, 2016 compared to 2015.

• Total expenses increased$196.3 million for the year endedDecember 31, 2016 compared to 2015.

SC

	Year Ended December 31,				YTD Change
(dollars in thousands)	2016		2015		Dollar increase/(decrease)			Percentage
Net interest income	$	4,448,535	$	4,614,402	$	(165,867	)	(3.6	)%
Total non-interest income	1,432,634		1,303,643		128,991			9.9	%
Provision for credit losses	2,468,199		2,785,871		(317,672		)	(11.4	)%
Total expenses	2,252,259		1,842,562		409,697			22.2	%
Income before income taxes	1,160,711		1,289,612		(128,901		)	(10.0	)%
Intersegment revenue	—		—		—			0.0%
Total assets	38,539,104		35,567,663		2,971,441			8.4	%

SC reported income before income taxes of $1.2 billion for the year endedDecember 31, 2016 compared to income before income taxes of $1.3 billion for the year endedDecember 31, 2015. Factors contributing to this change were as follows:

• Net interest income decreased$165.9 million for the year endedDecember 31, 2016 compared to 2015. The fluctuation was primarily related to an increase in interest expense during the period. SC's cost of funds increased during 2016 due to higher market rates and increased spreads.

• Total non-interest income increased$129.0 million for the year endedDecember 31, 2016 compared to 2015

• The provision for credit losses decreased$317.7 million for the year endedDecember 31, 2016 compared to 2015. This decrease was primarily attributable to the lower of cost or fair value adjustment that was recorded in 2015 related to the transfer of the personal unsecured loan portfolio to held for sale from held for investment that did not recur in 2016.

• Total expenses increased$409.7 million for the year endedDecember 31, 2016 compared to 2015, attributable to growth in the leased vehicle portfolio during the year, which increased leased vehicle expenses. Compensation expense also increased in 2016 compared to 2015, as SC continues to invest in its control and compliance functions.

75

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

CRITICAL ACCOUNTING ESTIMATES

This MD&A is based on the Consolidated Financial Statements and accompanying notes that have been prepared in accordance with GAAP. The significant accounting policies of the Company are described in Note 1 to the Consolidated Financial Statements. The preparation of financial statements in accordance with GAAP requires management to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates. Certain policies inherently have a greater reliance on the use of estimates, assumptions and judgments and, accordingly, have a greater possibility of producing results that could be materially different than originally reported. However, the Company is not currently aware of any likely events or circumstances that would result in materially different results. Management identified accounting for ALLL and the reserve for unfunded lending commitments, accretion of discounts and subvention on RICs, estimates of expected residual values of leased vehicles subject to operating leases, goodwill, fair value measurements and income taxes as the Company's most critical accounting estimates, in that they are important to the portrayal of the Company's financial condition and results and require management’s most difficult, subjective and complex judgments as a result of the need to make estimates about the effects of matters that are inherently uncertain.

ALLL for Originated Loans and Reserve for Unfunded Lending Commitments

The ALLL and reserve for unfunded lending commitments represent management's best estimate of probable losses inherent in the loan portfolio. The adequacy of SHUSA's ALLL and reserve for unfunded lending commitments is regularly evaluated. This evaluation process is subject to several estimates and applications of judgment. Management's evaluation of the adequacy of the allowance to absorb loan and lease losses takes into consideration the risks in the loan portfolio, past loan and lease loss experience specific loans that have loss potential, geographic and industry concentrations, delinquency trends, economic conditions, the level of originations and other relevant factors. Management also considers loan quality, changes in the size and character of the loan portfolio, the amount of NPLs, and industry trends. Changes in these estimates could have a direct material impact on the provision for credit losses recorded in the Consolidated Statements of Operations and/or could result in a change in the recorded allowance and reserve for unfunded lending commitments. The loan portfolio represents the largest asset on the Consolidated Balance Sheets. Note 1 to the Consolidated Financial Statements describes the methodology used to determine the ALLL and reserve for unfunded lending commitments in the Consolidated Balance Sheets. A discussion of the factors driving changes in the amount of the ALLL and reserve for unfunded lending commitments for the periods presented is included in the Credit Risk Management section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A"). 

The ALLL includes: (i) an allocated allowance, which is comprised of allowances established on loans individually evaluated for impairment (specific reserves) and loans collectively evaluated for impairment (general reserves) based on historical loan and lease loss experience adjusted for current trends general economic conditions and other risk factors, and (ii) an unallocated allowance to account for a level of imprecision in management's estimation process. Generally, the Company’s loans held for investment are carried at amortized cost, net of the ALLL. The ALLL includes the estimate of credit losses to be realized during the loss emergence period based on the recorded investment in the loan, including 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 Company's allocated reserves are principally based on various models subject to the Company's Model Risk Management framework. New models are approved by the Company's Model Risk Management Committee. Models, inputs and documentation are further reviewed and validated at least annually, and the Company completes a detailed variance analysis of historical model projections against actual observed results on a quarterly basis. Required actions resulting from the Company's analysis, if necessary, are governed by its Allowance for Loan and Lease Losses Committee.

The Company's unallocated allowance is no more than 5% of the overall allowance. This is considered to be reasonably sufficient to absorb imprecisions of models to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolio. Imprecisions include loss factors 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.

76

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

ALLL for Purchased Loans

The Company assesses the collectability of the recorded investment in ICs and personal unsecured loans on a collective basis quarterly and determines the ALLL at levels considered adequate to cover probable credit losses incurred in the portfolio. Purchased loans, including the loans acquired at the Change in Control, were initially recognized at fair value with no allowance. The Company only recognizes an allowance for loan losses on purchased loans through a provision expense when incurred losses in the portfolio exceed the unaccreted purchase discount on the portfolio.

Loans purchased in a bulk purchase or business combination are expected to have greater uncertainty in cash flows, which generally results in larger discounts compared to newly originated loans. Purchase discounts on purchased loans are accreted over the remaining expected lives of the loans using the retrospective effective interest method. The unamortized portion of the purchase discount is a reduction to the loans’ recorded investment and therefore reduces the allowance requirements. Because the loans purchased in a bulk purchase or in a business combination are initially recognized at fair value with no allowance, the Company considers the entire discount on the purchased portfolio as available to absorb the credit losses in the purchased portfolio when determining the ACL. Except for purchased loan portfolios acquired with evidence of credit deterioration (on which we elected to apply the FVO), this accounting policy is applicable to all loan purchases, including loan portfolio acquisitions or business combinations. Currently, the portfolio acquired in the Change of Control is the only purchased loan portfolio meeting this criterion.

The other considerations utilized by the Company to determine the ALLL for purchased loans are described in the “Allowance for Loan and Lease Losses for Originated Loans and Reserve for Unfunded Lending Commitments” section above.

Accretion of Discounts and Subvention on RICs

LHFI include the RIC portfolio which consists largely of nonprime automobile loans, and which are primarily acquired individually from dealers at a nonrefundable discount from the contractual principal amount. The Company also pays dealer participation on certain receivables. The amortization of discounts, subvention payments from manufacturers, and other origination costs are recognized as adjustments to the yield of the related contracts. The Company applies significant assumptions including prepayment speeds in estimating the accretion rates used to approximate effective yield.

The Company estimates future principal prepayments specific to pools of homogeneous loans which are based on the vintage, credit quality at origination and term of the loan. Prepayments in our portfolio are sensitive to credit quality, with higher credit quality loans experiencing higher voluntary prepayment rates than lower credit quality loans. The impact of defaults is not considered in the prepayment rate; the prepayment rate only considers voluntary prepayments. The resulting prepayment rate specific to each pool is based on historical experience and is used as an input in the calculation of the constant effective yield.

Valuation of Automotive Lease Assets and Residuals

The Company has significant investments in vehicles in SC's operating lease portfolio. In accounting for operating leases, management must make a determination at the beginning of the lease contract of the estimated realizable value (i.e., residual value) of the vehicle at the end of the lease. Residual value represents an estimate of the market value of the vehicle at the end of the lease term, which typically ranges from two to four years. At contract inception, the Company determines the projected residual value based on an internal evaluation of the expected future value. This evaluation is based on a proprietary model using internally-generated data that is compared against third party, independent data for reasonableness. The customer is obligated to make payments during the term of the lease for the difference between the purchase price and the contract residual value plus a finance charge. However, since the customer is not obligated to purchase the vehicle at the end of the contract, the Company is exposed to a risk of loss to the extent the value of the vehicle is below the residual value estimated at contract inception. Management periodically performs a detailed review of the estimated realizable value of leased vehicles to assess the appropriateness of the carrying value of leased assets.

To account for residual risk, the Company depreciates automobile operating lease assets to estimated realizable value on a straight-line basis over the lease term. The estimated realizable value is initially based on the residual value established at contract inception. Periodically, the Company revises the projected value of the leased vehicle at termination based on current market conditions and other relevant data points, and adjusts depreciation expense appropriately over the remaining term of the lease.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company periodically evaluates its investment in operating leases for impairment if circumstances, such as a systemic and material decline in used vehicle values occurs. This could include a decline in the residual value of our lease portfolio due, for example, to an event caused by shocks to oil and gas prices that have a pronounced impact on certain models of vehicles or pervasive manufacturer defects, among other events that could systemically affect the value of a particular brand or model of leased asset, which indicates that an impairment may exist. Impairment is determined to exist if the fair value of the leased asset is less than its carrying value and it is determined that the net carrying value is not recoverable. The net carrying value of a leased asset is not recoverable if it exceeds the sum of the undiscounted expected future cash flows expected to result from the lease payments and the estimated residual value upon eventual disposition. If our operating lease assets are considered to be impaired, the impairment is measured as the amount by which the carrying amount of the assets exceeds the fair value as estimated by discounted cash flows ("DCF"). No such impairment was recognized in 2017, 2016, or 2015.

The Company's depreciation methodology for operating lease assets considers management's expectation of the value of the vehicles upon lease termination, which is based on numerous assumptions and factors influencing used vehicle values. The critical assumptions underlying the estimated carrying value of automobile lease assets include: (1) estimated market value information obtained and used by management in estimating residual values, (2) proper identification and estimation of business conditions, (3) SC's remarketing abilities, and (4) automobile manufacturer vehicle and marketing programs. Changes in these assumptions could have a significant impact on the value of the lease residuals. Expected residual values include estimates of payments from automobile manufacturers related to residual support and risk-sharing agreements, if any. To the extent an automotive manufacturer is not able to fully honor its obligation relative to these agreements, the Company's depreciation expense would be negatively impacted.

Goodwill

The acquisition method of accounting for business combinations requires the Company to make use of estimates and judgments to allocate the purchase price paid for acquisitions to the fair value of the assets acquired and liabilities assumed. The excess of the purchase price of an acquired business over the fair value of the identifiable assets and liabilities represents goodwill. Goodwill and other indefinite-lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing.

As more fully described in Note 23 to the Consolidated Financial Statements, a reporting unit is an operating segment or one level below. The Company conducts its evaluation of goodwill impairment at the reporting unit level on an annual basis on October 1, and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. As of December 31, 2017, the reporting units with assigned goodwill were Consumer and Business Banking, CRE, Commercial Banking, GCB, and SC.

An entity's quantitative goodwill impairment analysis must be completed unless the entity determines, based on certain qualitative factors, that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is greater than its carrying amount, including goodwill, and that no impairment exists. An entity has an unconditional option to bypass the preceding qualitative assessment for any reporting unit in any period and proceed directly to the first step of the goodwill impairment test.

The quantitative analysis requires a comparison of the fair value of each reporting unit to its carrying amount, including its allocated goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit is higher than the fair value, impairment is measured as the excess of the carrying amount over the fair value. A recognized impairment charge cannot exceed the amount of goodwill allocated to a reporting unit, and cannot subsequently be reversed even if the fair value of the reporting unit recovers. The Company utilizes the market approach to determine the fair value of its SC reporting unit, as it is a publicly traded company that has a single reporting unit. Determining the fair value of the remaining reporting units requires significant valuation inputs, assumptions, and estimates.

The Company determines the carrying value of each reporting unit using a risk-based capital approach. Certain of the Company's assets are assigned to a Corporate/Other category. These assets are related to the Company's corporate-only programs, such as BOLI, and are not employed in or related to the operations of a reporting unit or considered in determining the fair value of a reporting unit.

Goodwill impairment testing involves management's judgment, requiring an assessment of whether the carrying value of the reporting unit can be supported by its fair value. This is performed using widely-accepted valuation techniques, such as the guideline public company market approach (earnings and price-to-tangible book value multiples of comparable public companies), the market capitalization approach (share price of the reporting unit and control premium of comparable public companies), and the income approach (the DCF method).

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company uses a combination of these accepted methodologies to determine the fair valuation of reporting units. Several factors are taken into account, including actual operating results, future business plans, economic projections, and market data.

The guideline public company market approach ("market approach") includes earnings and price-to-tangible book value multiples of comparable public companies which were applied to the earnings and equity for all of the Company's reporting units. In addition, the market capitalization plus control premium approach was applied to the Company's SC reporting unit, as the SC reporting unit is a publicly traded subsidiary whose securities are traded in an active market.

In connection with the market capitalization plus control premium approach applied to the Company's SC reporting unit, the Company used SC's stock price as of the date of the annual impairment analysis. The Company also considered historical auto loan industry transactions and control premiums over the last three years in determining the control premium.

The DCF method of the income approach incorporated the reporting units' forecasted cash flows, including a terminal value to estimate the fair value of cash flows beyond the final year of the forecasts. The discount rates utilized to obtain the net present value of the reporting units' cash flows were estimated using a capital asset pricing model. Significant inputs to this model include a risk-free rate of return, beta (which is a measure of the level of non-diversifiable risk associated with comparable companies for each specific reporting unit), market equity risk premium, and, in certain cases, additional premium for size and/or unsystematic company-specific risk factors. The Company utilized discount rates that it believes adequately reflect the risk and uncertainty in the financial markets. The Company estimated expected rates of equity returns based on historical market returns and risk/return rates for similar industries of the reporting unit. The Company uses its internal forecasts to estimate future cash flows, so actual results may differ from forecasted results.

All of the preceding fair value determinations require considerable judgment and are sensitive to changes in underlying assumptions and factors. As a result, there can be no assurance that the estimates and assumptions made for purposes of the annual goodwill impairment test will prove to be accurate predictions in the future. Examples of events or circumstances that could reasonably be expected to negatively affect the underlying key assumptions and ultimately impacts the estimated fair value of the aforementioned reporting units include such items as:

• a prolonged downturn in the business environment in which the reporting units operate;

• an economic recovery that significantly differs from our assumptions in timing or degree;

• volatility in equity and debt markets resulting in higher discount rates; and

• unexpected regulatory changes.

• Specific to the SC reporting unit, a decrease in SC's share price would impact the fair value of the reporting segment

Refer to the Financial Condition, Goodwill section of this MD&A for further details on the Company's goodwill, including the results of management's goodwill impairment analyses.

Fair Value Measurements

The Company uses fair value measurements to estimate fair value of certain assets and liabilities for both measurement and disclosure purposes. Refer to Note 18 to the Consolidated Financial Statements for a description of valuation methodologies used to measure material assets and liabilities at fair value and details of the valuation models, key inputs to those models, and significant assumptions utilized. The Company follows the fair value hierarchy set forth in Note 18 to the Consolidated Financial Statements to prioritize the inputs utilized to measure fair value. The Company reviews and modifies, as necessary, the fair value hierarchy classifications on a quarterly basis. Accordingly, there may be reclassifications between hierarchy levels due to changes in inputs to the valuation techniques used to measure fair value.

The Company has numerous internal controls in place to ensure the appropriateness of fair value measurements, including controls over the inputs into and the outputs from the fair value measurements. Certain valuations are benchmarked to market indices when appropriate and available.

Considerable judgment is used in forming conclusions from observable market data used to estimate the Company's Level 2 fair value measurements and in estimating inputs to the Company's internal valuation models used to estimate Level 3 fair value measurements. Level 3 inputs such as interest rate movements, prepayment speeds, credit losses, recovery rates and discount rates are inherently difficult to estimate. Changes to these inputs can have a significant effect on fair value measurements. Accordingly, the Company's estimates of fair value are not necessarily indicative of the amounts that could be realized or would be paid in a current market exchange.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates that apply or will apply to taxable income in the years in which those temporary differences are expected to reverse or be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. A valuation allowance will be established if the Company determines that it is more likely than not that a deferred tax asset will not be realized. This requires periodic analysis of the carrying amount of deferred tax assets and when the deferred tax assets will be realized in future periods. Consideration is given to all positive and negative evidence related to the realization of deferred tax assets. The critical assumptions used in the Company's deferred tax asset valuation allowance analysis are as follows: (a) the expectation of future earnings; (b) estimates of the Company's long-term annual growth rate, based on the Company's long-term economic outlook in the U.S.; (c) estimates of the dividend income payout ratio from the Company's consolidated subsidiary, SC, based on the current policies and practices of SC; (d) estimates of book income to tax income differences, based on the analysis of historical differences and the historical timing of the reversal of temporary differences; (e) the ability to carry back losses to recoup taxes previously paid; (f) estimates of tax credits to be earned on current investments, based on the Company's evaluation of the credits applicable to each investment; (g) experience with operating loss and tax credit carry-forwards not expiring unused; (h) estimates of applicable state tax rates based on current/most recent enacted tax rates and state apportionment calculations; (i) tax planning strategies; and (j) current tax laws. Significant judgment is required to assess future earnings trends and the timing of reversals of temporary differences.

The Company bases its expectations of future earnings, which are used to assess the realizability of its deferred tax assets, on financial performance forecasts of its operating subsidiaries and unconsolidated investees. The budgets and estimates used in these forecasts are approved by the Company's management, and the assumptions underlying the forecasts are reviewed at least annually and adjusted as necessary based on current developments or when new information becomes available. The updates made and the variances between the Company's forecasts and its actual performance have not been significant enough to alter the Company's conclusions with regard to the realizability of its deferred tax asset including the effect of the SC transaction that occurred in 2011 and the Change in Control that occurred in the first quarter of 2014. The Company continues to forecast sufficient taxable income to fully realize its current deferred tax assets. Forecasted taxable income is subject to changes in overall market and global economic conditions.

In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of inherently complex tax laws in the U.S., its states and municipalities, and abroad. Actual income taxes paid may vary from estimates depending on changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. The Company reviews its tax balances quarterly and adjusts the balances as new information becomes available. Interest and penalties on income tax payments are included within income tax expense in the Consolidated Statements of Operations.

The Company recognizes tax benefits in its financial statements when it is more likely than not the related tax position will be sustained upon examination by tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority assuming full knowledge of the position and all relevant facts. See Note 15 of the Consolidated Financial Statements for details on the Company's income taxes.

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Item 7.    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:

	December 31, 2017				December 31, 2016				December 31, 2015				December 31, 2014				December 31, 2013
(dollars in thousands)	Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent		Amount		Percent
Commercial LHFI:
Commercial real estate loans	$	9,279,225	11.5	%	$	10,112,043	11.8	%	$	9,846,236	11.3	%	$	9,741,442	11.6	%	$	10,356,603	17.9	%
Commercial and industrial loans	14,438,311		17.9	%	18,812,002		21.9	%	20,908,107		24.0	%	18,453,165		22.1	%	14,556,843		25.3	%
Multifamily	8,274,435		10.1	%	8,683,680		10.1	%	9,438,463		10.8	%	8,705,890		10.4	%	8,237,029		14.3	%
Other commercial	7,174,739		8.9	%	6,832,403		8.0	%	6,257,072		7.2	%	5,539,848		6.6	%	4,717,342		8.2	%
Total Commercial Loans (1)	39,166,710		48.4	%	44,440,128		51.8	%	46,449,878		53.3	%	42,440,345		50.7	%	37,867,817		65.7	%
Consumer loans secured by real estate:
Residential mortgages	8,846,765		11.0	%	7,775,272		9.1	%	7,566,301		8.7	%	8,190,461		9.8	%	11,152,747		19.3	%
Home equity loans and lines of credit	5,907,733		7.3	%	6,001,192		7.0	%	6,151,232		7.1	%	6,211,298		7.4	%	6,311,694		10.9	%
Total consumer loans secured by real estate	14,754,498		18.3	%	13,776,464		16.1	%	13,717,533		15.8	%	14,401,759		17.2	%	17,464,441		30.2	%
Consumer loans not secured by real estate:
RICs and auto loans - originated	23,081,424		28.6	%	22,104,918		25.8	%	18,539,588		21.3	%	9,935,503		11.9	%	81,804		0.1	%
RICs and auto loans - purchased	1,834,868		2.3	%	3,468,803		4.0	%	6,108,210		7.0	%	12,449,526		14.8	%	—		—	%
Total RICs and auto loans	24,916,292		30.9	%	25,573,721		29.8	%	24,647,798		28.3	%	22,385,029		26.7	%	81,804		0.1	%
Personal unsecured loans	1,285,677		1.6	%	1,234,094		1.4	%	1,177,998		1.4	%	3,205,847		3.8	%	985,679		1.7	%
Other consumer	617,675		0.8	%	795,378		0.9	%	1,032,579		1.2	%	1,306,562		1.6	%	1,321,985		2.3	%
Total consumer loans	41,574,142		51.6	%	41,379,657		48.2	%	40,575,908		46.7	%	41,299,197		49.3	%	19,853,909		34.3	%
Total LHFI	$	80,740,852	100.0	%	$	85,819,785	100.0	%	$	87,025,786	100.0	%	$	83,739,542	100.0	%	$	57,721,726	100.0	%
Total LHFI with:
Fixed	$	50,653,790	62.7	%	$	51,752,761	60.3	%	$	52,283,715	60.1	%	$	50,237,181	60.0	%	$	28,632,554	49.6	%
Variable	30,087,062		37.3	%	34,067,024		39.7	%	34,742,071		39.9	%	33,502,361		40.0	%	29,089,172		50.4	%
Total LHFI	$	80,740,852	100.0	%	$	85,819,785	100.0	%	$	87,025,786	100.0	%	$	83,739,542	100.0	%	$	57,721,726	100.0	%

(1)As of December 31, 2017, the Company had $241.3 million of commercial loans that were denominated in a currency other than the U.S. dollar.

Commercial

Commercial loans decreased approximately $5.3 billion, or 11.9%, from December 31, 2016 to December 31, 2017. This decrease was primarily due to a decrease in commercial and industrial loans of $4.4 billion. Additionally, there was a decrease in multifamily loans of $409.2 million as the Company switches its focus from CRE loans. CRE loans decreased$832.8 million.

	At December 31, 2017, Maturing
(in thousands)	In One Year Or Less		One to Five Years		After Five Years		Total(1)
CRE loans	$	2,274,947	$	5,508,376	$	1,495,902	$	9,279,225
Commercial and industrial loans and other	8,525,068		11,338,691		1,898,469		21,762,228
Multi-family loans	739,179		6,341,184		1,194,072		8,274,435
Total	$	11,539,194	$	23,188,251	$	4,588,443	$	39,315,888
Loans with:
Fixed rates	$	3,545,579	$	11,239,354	$	2,267,162	$	17,052,095
Variable rates	7,993,615		11,948,897		2,321,281		22,263,793
Total	$	11,539,194	$	23,188,251	$	4,588,443	$	39,315,888

(1) Includes LHFS.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Consumer Loans Secured By Real Estate

Consumer loans secured by real estate increased$978.0 million, or 7.1%, from December 31, 2016 to December 31, 2017. This increase was comprised of an increase in the residential mortgage portfolio of $1.1 billion due to an increase in new loan originations, offset by a decrease in the home equity loans and lines of credit portfolio of $93.5 million.

Consumer Loans Not Secured By Real Estate

The consumer loan portfolio not secured by real estate decreased$783.5 million, or 2.8%, from December 31, 2016 to December 31, 2017. The decrease in the RIC and auto loan portfolio was primarily due to a decrease in the RIC and auto loan portfolio-purchased of $1.6 billion, which was partially offset by a $1.0 billionincrease in net new originations. The decrease in the RIC and auto loan portfolio-purchased was due to run-off of the portfolio from normal paydown and chargeoff activity.

As of December 31, 2017, 68.1% 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.

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 December 31, 2017, a typical RIC was originated with an average annual percentage rate of 16.4% and was purchased from the dealer at a discount of 0.7%. 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 December 31, 2017, 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 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.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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, authority to approve loans are executed in accordance with the Company’s credit and governance standards consistent with its Enterprise Risk Management Framework. Loans over certain dollar thresholds require approval by the Company's credit committees, with higher balance loans requiring approval by more senior level committees.

The Credit Risk Review group conducts ongoing independent reviews of the credit quality of the Company’s loan portfolios and credit management processes to ensure the accuracy of the risk ratings and adherence to established policies and procedures, verify compliance with applicable laws and regulations, provide objective measurement of the risk inherent in the loan portfolio, and ensure that proper documentation exists. The results of these periodic reviews are reported to business line management, Risk Management and the Audit Committee of both the Company and the Bank. The Company maintains a classification system for loans that identifies those requiring a higher level of monitoring by management because of one or more factors, including borrower performance, business conditions, industry trends, the nature of the collateral, collateral margin, economic conditions, or other factors. Loan credit quality is subject to scrutiny by business unit management, credit risk professionals, and Internal Audit.

The following discussion summarizes the underwriting policies and procedures for the major categories within the loan portfolio and addresses SHUSA’s strategies for managing the related credit risk. Additional credit risk management related considerations are discussed further in the "Allowance for Loan and Lease Losses" section of this MD&A.

Commercial Loans

Commercial loans principally represent commercial real estate loans (including multifamily loans), loans to commercial and industrial customers, and automotive dealer floor plan loans. Credit risk associated with commercial loans is primarily influenced by prevailing and expected economic conditions and the level of underwriting risk SHUSA is willing to assume. To manage credit risk when extending commercial credit, the Company focuses on assessing the borrower’s capacity and willingness to repay and obtaining sufficient collateral. Commercial and industrial loans are generally secured by the borrower’s assets and by personal guarantees. Commercial real estate loans are originated primarily within the Mid-Atlantic, New York, and New England market areas and are secured by real estate at specified LTV ratios and often by a guarantee of the borrower.

Consumer Loans Secured by Real Estate

Credit risk in the direct and indirect consumer loan portfolio is controlled by strict adherence to underwriting standards that consider DTI levels, the creditworthiness of the borrower, and collateral values. In the home equity loan portfolio, combined LTV ("CLTV") ratios are generally limited to 90% for both first and second liens. SHUSA originates and purchases fixed-rate and adjustable rate residential mortgage loans that are secured by the underlying 1-4 family residential properties. Credit risk exposure in this area of lending is minimized by the evaluation of the creditworthiness of the borrower, including debt-to-equity ratios, credit scores, and adherence to underwriting policies that emphasize conservative LTV ratios of generally no more than 80%. Residential mortgage loans originated or purchased in excess of an 80% LTV ratio are generally insured by private mortgage insurance, unless otherwise guaranteed or insured by the Federal, state, or local government. SHUSA also utilizes underwriting standards which comply with those of the FHLMC or FNMA. Credit risk is further reduced, since a portion of the Company’s fixed-rate mortgage loan production is sold to investors in the secondary market without recourse.

Consumer Loans Not Secured by Real Estate

The Company’s consumer loans not secured by real estate include RICs acquired from manufacturer-franchised dealers in connection with their sale of used and new automobiles and trucks, as well as acquired consumer marine, RV and credit card loans. Credit risk is mitigated to the extent possible through early and robust collection practices, which includes the repossession of vehicles.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

NON-PERFORMING ASSETS

The following table presents the composition of non-performing assets at the dates indicated:

(dollars in thousands)	December 31, 2017			December 31, 2016
Non-accrual loans:
Commercial:
CRE	$	139,236		$	179,220
Commercial and industrial loans	230,481			182,368
Multifamily	11,348			8,196
Other commercial	83,468			11,097
Total commercial loans	464,533			380,881
Consumer loans secured by real estate:
Residential mortgages	265,436			287,140
Home equity loans and lines of credit	134,162			120,065
Consumer loans not secured by real estate:
RICs and auto loans - originated	1,816,226			1,045,587
RICs - purchased	256,617			284,486
Total RICs and Auto loans	2,072,843			1,330,073
Personal unsecured loans	2,366			5,201
Other consumer	10,657			12,694
Total consumer loans	2,485,464			1,755,173
Total non-accrual loans	2,949,997			2,136,054
Other real estate owned	130,777			116,705
Repossessed vehicles	210,692			231,746
Other repossessed assets	2,190			3,838
Total other real estate owned ("OREO") and other repossessed assets	343,659			352,289
Total non-performing assets	$	3,293,656		$	2,488,343
Past due 90 days or more as to interest or principal and accruing interest	$	96,461		$	93,845
Annualized net loan charge-offs to average loans	3.0		%	2.7		%
Non-performing assets as a percentage of total assets	2.6		%	1.8		%
NPLs as a percentage of total loans	3.5		%	2.4		%
ALLL as a percentage of total NPLs	132.6		%	178.6		%

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 $112.3 million and $120.7 million at December 31, 2017 and December 31, 2016, respectively. Potential problem consumer loans amounted to $4.2 billion at both December 31, 2017 and December 31, 2016. Management has included these loans in its evaluation and reserved for them during the respective periods.

Non-performing assets increased during the period to $3.3 billion, or 2.6% of total assets, at December 31, 2017, compared to $2.5 billion, or 1.8% of total assets, at December 31, 2016, primarily attributable to an increase in NPLs in the commercial and industrial and RIC portfolios. The increase in the non-accrual commercial and industrial NPL portfolio was driven by obligors that experienced credit difficulties during the year. The increase in the Other Commercial NPL portfolio was primarily driven by one obligor located in Puerto Rico that experienced business disruptions due to Hurricane Maria.

84

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The increase in RIC non-accrual loans as of December 31, 2017, was the result of the Company classifying $659.8 million of RIC TDR loans that were less than 60 days past due, but for which repayment was not reasonably assured, as non-accrual. Until repayment is reasonably assured, the Company is applying the cost recovery method to this RIC portfolio, which accelerated the reduction of the outstanding RIC balance and correspondingly reduces the required allowance and decreases the allowance for loan losses as a percentage of the NPL ratio. In addition, the purchased RIC ALLL/NPL portfolio decreased primarily due to a $1.6 billion or 47.1% decline in the portfolio as it is in run-off.

General

Non-performing assets consist of NPLs, which represent loans and leases no longer accruing interest, other real estate owned OREO 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 they are greater 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 increased$83.7 million from December 31, 2016 to December 31, 2017. Commercial NPLs accounted for 1.2% and 0.9% of Commercial LHFI at December 31, 2017 and December 31, 2016, respectively. The increase in commercial NPLs was comprised of a $120.5 million increase in commercial and industrial NPLs, offset by a $40.0 million decrease in the CRE 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 certain RICs originated prior to January 1, 2017, the Company considers 50% of a single payment due sufficient to qualify as a payment for past due classification purposes. For RICs originated after January 1, 2017, the required minimum payment is 90% of the scheduled payment, regardless of through which origination channel the receivable was originated. The Company aggregates partial payments in determining whether a full payment has been missed in computing past due status.

85

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

NPLs in the RIC and auto loan portfolio increased$742.8 million from December 31, 2016 to December 31, 2017. This increase was comprised of a $770.6 millionincrease in RICs and auto loans-originated offset by a $27.9 milliondecrease in RICs - purchased. At December 31, 2017, non-performing RICs and auto loans accounted for 8.3% of total RIC and auto LHFI, compared to 5.2% of total RICs and auto loans at December 31, 2016. NPLs in the unsecured and other consumer loan portfolio decreased$4.9 million from December 31, 2016 to December 31, 2017. At December 31, 2017 and December 31, 2016, non-performing personal unsecured and other consumer loans accounted for 0.7% and 0.9% 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 December 31, 2017 and December 31, 2016, respectively:

	December 31, 2017						December 31, 2016
(dollars in thousands)	Residential mortgages			Home equity loans and lines of credit			Residential mortgages			Home equity loans and lines of credit
NPLs	$	265,436		$	134,162		$	287,140		$	120,065
Total LHFI	8,846,765			5,907,733			7,775,272			6,001,192
NPLs as a percentage of total LHFI	3.0		%	2.3		%	3.7		%	2.0		%
NPLs in foreclosure status	48.8		%	52.2		%	58.6		%	38.4		%

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

The percentage of NPLs in foreclosure status decreased from 58.6% at December 31, 2016 to 48.8% at December 31, 2017 for residential mortgages and increased from 38.4% at December 31, 2016 to 52.2% at December 31, 2017 for home equity loans.

The dollar value of residential mortgage NPLs in foreclosure status decreased from $168.2 million at December 31, 2016 to $129.4 million at December 31, 2017.

The value of home equity loans NPLs in foreclosure status increased from $46.2 million at December 31, 2016 to $70.0 million at December 31, 2017. This increase was mainly due to home equity loans on properties in Puerto Rico.

In recent years, select states within the Bank’s footprint have experienced delays in the foreclosure process and therefore, impact NPL volume. Counties in New Jersey have historically displayed significant delays in foreclosure sale timelines and New York has been experiencing similar court delays which impacts foreclosure inventory outflow.

Puerto Rico’s economy remains in an economic and fiscal crisis that has already extended for 11 years. The island’s economy continues experiencing adjustments related to the aftermath of the housing market crisis, the banking industry consolidation in 2010 and multiple rounds of austerity measures implemented in recent years in an attempt to stabilize the public sector fiscal crisis. These circumstances have eroded confidence and prolonged the contraction in economic activity. Refer to the "Economic and Business Environment" section of 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 December 31, 2017 and December 31, 2016, respectively:

	December 31, 2017	December 31, 2016
Puerto Rico	53.5%	60.0%
New Jersey	13.7%	9.1%
New York	6.4%	10.7%
Pennsylvania	10.9%	4.7%
Massachusetts	5.8%	7.0%
All other states(1)	9.7%	8.5%

(1) States included in this category individually represent less than 10% of total foreclosures.

86

Item 7.    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 97.2% of the 90+ day delinquent loan balances in the residential mortgage portfolio are secured by a first lien, while only 52.8% of the 90+ day delinquent loan balances in the consumer real estate secured portfolio are secured by a first lien. Consumer real estate secured NPLs may get charged off more quickly due to the lack of equity to foreclose from a second lien position.

Alt-A Loans

The Alt-A segment consists of loans with limited documentation requirements and a portion of which were originated through independent parties ("Brokers") outside the Bank's geographic footprint. At December 31, 2017 and December 31, 2016, the residential mortgage portfolio included the following Alt-A loans:

(dollars in thousands)	December 31, 2017			December 31, 2016
Alt-A loans	$	386,412		$	476,229
Alt-A loans as a percentage of the residential mortgage portfolio(1)	4.3		%	5.8		%
Alt-A loans in NPL status	$	33,534		$	48,189
Alt-A loans in NPL status as a percentage of residential mortgage NPLs	12.6		%	16.8		%

(1) Includes residential mortgage held for sale

The performance of the Alt-A segment has remained poor, averaging an 8.7% NPL ratio in 2017. Alt-A mortgage originations were discontinued in 2008 and have continued to run off at an average rate of 1.8% per month. Alt-A NPL balances represented 64.6% of the total residential mortgage loan portfolio NPL balance at the end of the first quarter of 2009, when the portfolio was placed in run-off, compared to 12.6% at December 31, 2017. As the Alt-A segment runs off and higher quality residential mortgages are added to the portfolio, the shift in product mix is expected to lower NPL balances as a percentage of the residential mortgage portfolio.

Troubled Debt Restructurings ("TDRs")

TDRs are loans that have been modified as the Company has agreed to make certain concessions to both meet the needs of the customers and maximize its ultimate recovery on the loans. TDRs occur when a borrower is experiencing, or is expected to experience, financial difficulties and the loan is modified with terms that would otherwise not be granted to the borrower. The types of concessions granted are generally interest rate reductions, limitations on accrued interest charged, term extensions, and deferments of principal.

TDRs are generally placed in nonaccrual status upon modification, unless the loan was performing immediately prior to modification. For most portfolios, TDRs may return to accrual status after demonstrating at least six consecutive months of sustained payments following modification, as long as the Company believes the principal and interest of the restructured loan will be paid in full. 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.

87

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following table summarizes TDRs at the dates indicated:

	Year Ended 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		31.6		%
(1) Includes LHFS
	Year Ended December 31, 2016
(in thousands)	Commercial			%		Consumer loans secured by real estate			%		RICs and auto loans			%		Other consumer			%		Total TDRs
Performing	$	214,474		59.2	%	$	268,777		65.9	%	$	4,556,770		88.3	%	$	129,767		74.3	%	$	5,169,788
Non-performing	148,038			40.8	%	139,274			34.1	%	604,864			11.7	%	44,951			25.7	%	937,127
Total	$	362,512		100.0	%	$	408,051		100.0	%	$	5,161,634		100.0	%	$	174,718		100.0	%	$	6,106,915
% of loan portfolio	0.8		%	n/a		2.9		%	n/a		19.5		%	n/a		5.6		%	n/a		28.8		%

(1) Includes LHFS.

The following table provides a summary of TDR activity:

	Year Ended December 31, 2017						Year Ended December 31, 2016
(in thousands)	RICs and auto loans			All other loans			RICs and auto loans			All other loans(1)
TDRs, beginning of period	$	5,161,634		$	945,281		$	3,866,236		$	833,308
New TDRs(1)	4,115,154			246,729			3,483,890			209,605
Charged-Off TDRs	(2,211,027		)	(270,218		)	(1,599,828		)	(27,977		)
Sold TDRs	(3,141		)	(10,410		)	—			(14,686		)
Payments on TDRs	(1,091,652		)	(75,178		)	(588,664		)	(54,969		)
TDRs, end of period	$	5,970,968		$	836,204		$	5,161,634		$	945,281

(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.

At the time a deferral is granted, all delinquent amounts may be deferred or paid, resulting in the classification of the loan as current and therefore not considered a delinquent account. Thereafter, the account is aged based on the timely payment of future installments in the same manner as any other account. TDRs are placed on nonaccrual status when the Company believes repayment under the revised terms is not reasonably assured, and considered for return to accrual when a sustained period of repayment performance has been achieved.

The Company evaluates the results of its deferral strategies based upon the amount of cash installments that are collected on accounts after they have been deferred compared to the extent to which the collateral underlying the deferred accounts has depreciated over the same period of time. Based on this evaluation, the Company believes that payment deferrals granted according to its policies and guidelines are an effective portfolio management technique and result in higher ultimate cash collections from the portfolio.

88

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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.

Delinquencies

At December 31, 2017 and December 31, 2016, the Company's delinquencies consisted of the following:

	December 31, 2017					December 31, 2016
(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	$571,229	$4,225,517	$229,547	$295,138	$5,321,431	$568,517	$4,261,192	$245,588	$257,153	$5,332,450
Total loans(1)	$14,964,668	$26,017,340	$2,965,442	$39,315,888	$83,263,338	$14,239,357	$26,498,469	$3,107,074	$44,561,193	$88,406,093
Delinquencies as a % of Loans	3.8%	16.2%	7.7%	0.8%	6.4%	4.0%	16.1%	7.9%	0.6%	6.0%

(1) Includes LHFS.

Overall, total delinquencies decreased by $11.0 million, or 0.2%, from December 31, 2016 to December 31, 2017. RICs and auto loan and other consumer loan delinquencies decreased$35.7 million. Delinquencies at December 31, 2016 were primarily a result of a decline in the credit quality of the 2015 vintage RICs, which have a higher percentage of loans with no FICO scores. Due to payments and charge-offs on 2015 vintage RICs during 2017, the 2015 vintage RICs had a lower impact on delinquencies at December 31, 2017 than December 31, 2016. Commercial loan delinquencies increased by $38.0 million from December 31, 2016 to December 31, 2017, primarily related to commercial and industrial loans located in Puerto Rico due to overall economic conditions on the island.

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:

	December 31, 2017				December 31, 2016
(dollars in thousands)	Amount		% of Loans to Total LHFI		Amount		% of Loans to Total LHFI
Allocated allowance:
Commercial loans	$	443,796	48.4	%	$	449,837	51.8	%
Consumer loans	3,420,756		51.6	%	3,317,604		48.2	%
Unallocated allowance	47,023		n/a		47,023		n/a
Total ALLL	3,911,575		100.0	%	3,814,464		100.0	%
Reserve for unfunded lending commitments	109,111				122,418
Total ACL	$	4,020,686			$	3,936,882

89

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

The ACL increased $83.8 million from December 31, 2016 to December 31, 2017. The increase in the overall ACL was primarily attributable to the increased amount of TDR's within SC's RIC and auto loan portfolio.

Management regularly monitors the condition of the Company's portfolio, considering factors such as historical loss experience, trends in delinquencies and NPLs, changes in risk composition and underwriting standards, the experience and ability of staff, and regional and national economic conditions and trends.

Generally, the Company’s LHFI are carried at amortized cost, net of ALLL, which includes the estimate of any related net discounts that are expected at the time of charge-off. In the case of loans purchased 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.

90

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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 $443.8 million at December 31, 2017 (1.1% of commercial LHFI) and $449.8 million at December 31, 2016 (1.0% of commercial LHFI). The primary factor resulting in the decreased ACL allocated to the commercial portfolio is, in part, due to a decline in the overall balance of the commercial loan portfolio. During 2016, management recorded additional reserves for loans within the energy sector.

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 24.8% of its junior lien home equity principal balances. Of the junior lien home equity loan and line of credit balances that are current, 1.0% 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.

91

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Depository and lending institutions in the U.S. generally are expected to experience a significant volume of home equity lines of credit that will be approaching the end of their draw periods over the next several years, following the growth in home equity lending experienced during 2003 through 2007. As a result, many of these home equity lines of credit will either convert to amortizing loans or have principal due as balloon payments. The Company's home equity lines of credit generated after 2007 are generally open-ended, revolving loans with fixed-rate lock options and draw periods of up to 10 years, along with amortizing repayment periods of up to 20 years. The Company currently monitors delinquency rates for amortizing and non-amortizing lines, as well as other credit quality metrics, including FICO credit scoring model scores and LTV ratios. The Company's home equity lines of credit are generally underwritten considering fully drawn and fully amortizing levels. As a result, the Company currently does not anticipate a significant deterioration in credit quality when these home equity lines of credit begin to amortize.

For RICs and personal unsecured loans at SC, the Company 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 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 $3.4 billion and $3.3 billion at December 31, 2017 and December 31, 2016, respectively. The allowance as a percentage of held-for-investment consumer loans was 8.2% at December 31, 2017 and 8.0% at December 31, 2016. The increase in the allowance for consumer loans was primarily attributable to SC's RIC and auto loan portfolio growth.

The Company's allowance models and reserve levels are back-tested on a quarterly basis to ensure that both remain within appropriate ranges. As a result, management believes that the current ALLL is maintained at a level sufficient to absorb inherent losses in the consumer portfolios.

Unallocated

Additionally, the Company reserves for certain inherent but undetected, losses that are probable within the loan and lease portfolios. This is considered to be reasonably sufficient to absorb imprecisions of models or to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolios. These imprecisions may include loss factors inherent in the loan portfolio that may not have been discreetly contemplated in the general and specific components of the allowance, as well as potential variability in estimates. Period-to-period changes in the Company's historical unallocated ALLL positions are considered in light of these factors. The unallocated ALLL was $47.0 million at December 31, 2017 and December 31, 2016.

Reserve for Unfunded Lending Commitments

In addition to the ALLL, the Company estimates probable losses related to unfunded lending commitments. The reserve for unfunded lending commitments consists of two elements: (i) an allocated reserve, which is determined by an analysis of historical loss experience and risk factors, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information, and (ii) an unallocated reserve to account for a level of imprecision in management's estimation process. Additions to the reserve for unfunded lending commitments are made by charges to the provision for credit losses, and this reserve is classified within Other liabilities on the Company's Consolidated Balance Sheets. Once an unfunded lending commitment becomes funded and is carried as a loan, the corresponding reserves are transferred to the ALLL.

92

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The reserve for unfunded lending commitments decreased from $122.4 million at December 31, 2016 to $109.1 million at December 31, 2017. During the year ended December 31, 2016, SBNA transferred $6.4 billion of unfunded commitments to extend credit to an unconsolidated related party, which reduced the required reserve for unfunded commitments. The net impact of the change in the reserve for unfunded lending commitments to the overall ACL was immaterial.

INVESTMENT SECURITIES

Investment securities consist primarily of U.S. Treasuries, MBS, ABS and stock in the FHLB and FRB. MBS consist of pass-through, CMOs, and adjustable rate mortgages issued by federal agencies. The Company’s MBS are either guaranteed as to principal and interest by the issuer or have ratings of “AAA” by S&P and Moody’s Investor Service at the date of issuance. The Company’s AFS investment strategy is to purchase liquid fixed-rate and floating-rate investments to manage the Company's liquidity position and interest rate risk adequately.

Total investment securities AFS decreased$2.6 billion to $14.4 billion at December 31, 2017, compared to $17.0 billion at December 31, 2016. During the year endedDecember 31, 2017, the composition of the Company's investment portfolio changed due to a decrease in MBS, U.S. Treasuries and ABS. MBS decreased by $1.1 billion primarily due to investment purchases of $4.5 billion, offset by $5.5 billion of principal paydowns and maturities. U.S. Treasuries decreased by $858.7 million primarily due to investment purchases of $599.0 million, offset by sales and maturities of $1.4 billion. ABS decreased $703.6 million, primarily due to $461.1 million of principal paydowns. For additional information with respect to the Company’s investment securities, see Note 3 to the Consolidated Financial Statements.

Debt securities for which the Company has the positive intent and ability to hold the securities until maturity are classified as held-to-maturity securities. Held-to-maturity securities are reported at cost and adjusted for amortization of premium and accretion of discount. Total investment securities held-to-maturity were $1.8 billion at December 31, 2017. The Company had 28 investment securities classified as held-to-maturity as of December 31, 2017.

Total trading securities decreased by $1.6 million to $1,000 at December 31, 2017, compared to $1.6 million at December 31, 2016.

Total gross unrealized losses increased by $0.8 million to $234.3 million during the year endedDecember 31, 2017. Refer to Note 3 to the Consolidated Financial Statements for additional details.

Other investments, which consists primarily of FHLB stock and FRB stock, decreased from $730.8 million at December 31, 2016 to $658.9 million at December 31, 2017, primarily due to the Company redeeming $327.6 million of FHLB stock at par, partially offset by the Company's purchase of $163.0 million of FHLB stock at par. There was no gain or loss associated with these redemptions. During the period ended December 31, 2017, the Company did not purchase any FRB stock.

The average life of the AFS investment portfolio (excluding certain ABS) at December 31, 2017 was approximately 4.48 years. The average effective duration of the investment portfolio (excluding certain ABS) at December 31, 2017 was approximately 3.03 years. The actual maturities of MBS AFS will differ from contractual maturities because borrowers have the right to prepay obligations without prepayment penalties.

93

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following table presents the fair value of investment securities by obligor at the dates indicated:

(in thousands)	December 31, 2017		December 31, 2016
Investment securities AFS:
U.S. Treasury securities and government agencies	$	7,042,828	$	8,163,027
FNMA and FHLMC securities	6,840,696		7,639,823
State and municipal securities	23		30
Other securities (1)	529,636		1,221,345
Total investment securities AFS	14,413,183		17,024,225
Investment securities held-to-maturity:
U.S. government agencies	1,799,808		1,658,644
Total investment securities held-to-maturity (2)	1,799,808		1,658,644
Trading securities	1		1,630
Other investments	658,863		730,831
Total investment portfolio	$	16,871,855	$	19,415,330

(1) Other securities primarily include corporate debt securities and ABS.

(2) Held-to-maturity 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 December 31, 2017:

	December 31, 2017
(in thousands)	Amortized Cost		Fair Value
FNMA	$	3,751,476	$	3,684,371
FHLMC	3,229,960		3,156,325
Government National Mortgage Association (1)	7,923,255		7,818,654
Total	$	14,904,691	$	14,659,350

(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 December 31, 2017, goodwill totaled $4.4 billion and represented 3.5% of total assets and 18.7% of total stockholder's equity. The following table shows goodwill by reporting units at December 31, 2017:

(in thousands)	Consumer and Business Banking		CRE		Commercial Banking		GCB		SC		Santander BanCorp		Total
Goodwill at December 31, 2017	$	1,880,304	$	870,411	$	542,584	$	131,130	$	1,019,960	$	—	$	4,444,389

During the fourth quarter of 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 effect of Hurricane Maria. There were no other additions or re-allocations of goodwill for the year endedDecember 31, 2017. There were no additions, re-allocations, or impairments of goodwill for the year ended December 31, 2016.

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 fourth 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.

94

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

For the Consumer and Business Banking reporting unit's fair valuation analysis, an equal weighting of the market approach ("market approach") and income approach was applied. For the market approach, the Company selected a 35.0% control premium based on the Company's review of transactions observable in the market place that were determined to be comparable. The projected tangible book value ("TBV") of 1.6x was selected based on publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate of 9.9%, which was most representative of the reporting unit's cost of equity at the time of the analysis. Long-term growth rates of 4.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the Consumer and Business Banking reporting unit by 45.2%, indicating the reporting unit was not considered to be impaired or at risk for impairment.

For the CRE reporting unit's fair valuation analysis, an equal weighting of the market and income approach was applied. For the market approach, the Company selected a 35.0% control premium based on the Company's review of transactions observable in the market-place that were determined to be comparable. The projected TBV of 1.7x was selected based on the selected publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate of 10.2%, which was most representative of the business' cost of equity at the time of the analysis. Long-term growth rates 3.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the Commercial Real Estate reporting unit by 39.7% indicating the Commercial Real Estate reporting unit was not considered to be impaired or at risk for impairment

For the Commercial Banking reporting unit's fair valuation analysis, an equal weighting of the market and income approach was applied. For the market approach, the Company selected a 35.0% control premium based on the Company's review of transactions observable in the market place that were determined to be comparable. The projected TBV of 1.8x was selected based on the selected publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate 10.5%, which was most representative of the business' cost of equity at the time of the analysis. Long-term growth rates of 4.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the Commercial Banking reporting unit by 63.1%, indicating the Commercial Banking reporting unit was not considered to be impaired or at risk for impairment.

For the GCB reporting unit's fair valuation analysis, an equal weighting of the market and income approach was applied. For the market approach, the Company selected a 35.0% control premium based on the Company's review of transactions observable in the market place that were determined to be comparable. The projected TBV of 1.6x was selected based on the selected publicly traded peers of the reporting unit. For the income approach, the Company selected a discount rate of 11.3% which is most representative of the reporting unit's cost of equity at the time of the analysis. Long-term growth rates of 3.0% were applied in determining the terminal value. The results of the equally weighted fair value analyses exceeded the carrying value for the GCB reporting unit by 77.5%, indicating that the GCB reporting unit was not considered to be impaired or at risk for impairment.

For the SC reporting unit's fair valuation analysis, the Company used only the market capitalization approach. For the market capitalization approach, SC's stock price from October 1, 2017 of $15.37 was used and a 35.0% control premium was used based on the Company's review of transactions observable in the market-place that were determined to be comparable. The results of the fair value analyses exceeded the carrying value of the SC reporting unit by 34.1%, indicating that the SC reporting unit was not considered to be impaired. Management continues to monitor SC's stock price, along with changes in the financial position and results of operations that would impact the reporting unit's carrying value on a regular basis. Through the date of this filing, there have been no indicators which would change management's assessment as of October 1, 2017.

PREMISES AND EQUIPMENT

Total premises and equipment, net, was $849.1 million at December 31, 2017, compared to $996.5 million at December 31, 2016. The decrease in total premises and equipment was primarily due to accumulated depreciation which increased $217.1 million from December 31, 2016 to December 31, 2017. The increase in accumulated depreciation was offset by increases in computer software of $81.0 million related to software and license purchases and increased IT services as well as increases in leasehold improvements of $21.3 million.

During the year endedDecember 31, 2017 the Company sold and leased back ten properties owned by SBNA. The Company received net proceeds of $58.0 million in connection with these sales. The carrying value of the properties sold was $15.3 million. The Company accounted for the transactions as sale-leasebacks, resulting in recognition of $31.2 million in gains on the date of the transactions and deferral of the remaining $11.5 million that will be amortized over the period of the lease terms. Gain on sale of premises and equipment are included within Miscellaneous income in the Consolidated Statements of Operations.

95

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

DEFERRED TAXES AND OTHER TAX ACTIVITY

The Company had 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), compared to a net deferred tax liability balance of $430.5 million at December 31, 2016 (consisting of a deferred tax asset balance of $989.8 million and a deferred tax liability balance of $1.4 billion). The $232.2 million decrease of net deferred liabilities for the year endedDecember 31, 2017 was primarily due to a decrease in the net deferred tax liability of $427.3 million as a result of the remeasurement of the Company’s deferred tax balances due to the TCJA which was partially offset by an increase in the net deferred tax liability of $195.1 million, primarily related to accelerated depreciation on leasing transactions.

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

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 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 has been remanded to the Federal District Court for further proceedings to determine, among other issues, whether penalties should be sustained. On remand, the parties are awaiting the Court’s decision on motions for summary judgment filed by the Company regarding the remaining issues.

In response to the First Circuit's decision, the Company, at December 31, 2016, used its previously established $230.1 million tax reserve to write off the deferred tax assets and a portion of the receivable that would not be realized under the Court's decision. Additionally, the Company established a $36.8 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.

OTHER ASSETS

Other assets at December 31, 2017 were $3.6 billion compared to $3.8 billion at December 31, 2016. The decrease in other assets was primarily due to a decrease in deferred tax assets of $218.1 million and equity method investments of $60.9 million from December 31, 2016 to December 31, 2017. These decreases were offset by an increase in activity in miscellaneous assets and receivables of $128.8 million.

DEPOSITS AND OTHER CUSTOMER ACCOUNTS

The Company's banking subsidiaries attract deposits within their primary market areas by offering a variety of deposit instruments, including demand and interest-bearing demand deposit accounts, money market accounts, savings accounts, customer repurchase agreements, CDs and retirement savings plans. In addition, the Bank issues wholesale deposit products such as brokered deposits and government deposits on a periodic basis, which serve as an additional source of liquidity for the Company.

Total deposits and other customer accounts decreased$6.4 billion from December 31, 2016 to December 31, 2017. This decrease was primarily comprised of decreases in CDs of $3.8 billion due to the maturity of wholesale CDs, a product that is currently in run-off. Interest-bearing demand deposits decreased $2.5 billion, which is attributable to the withdrawal of several government and large commercial deposits. The Company continues to focus its effort on attracting and increasing lower-cost deposits.

The cost of deposits was 0.50% and 0.53% for the years endedDecember 31, 2017 and December 31, 2016, respectively.

96

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

BORROWINGS AND OTHER DEBT OBLIGATIONS

The Company has term loans and lines of credit with Santander and other lenders. The Bank utilizes borrowings and other debt obligations as a source of funds for its asset growth and asset/liability management. The Bank also utilizes repurchase agreements, which are short-term obligations collateralized by securities. In addition, SC has warehouse lines of credit and securitizes some of its RICs and operating leases, which are structured secured financings. Total borrowings and other debt obligations at December 31, 2017 were $39.0 billion, compared to $43.5 billion at December 31, 2016. Total borrowings decreased$4.5 billion, primarily due to a decrease of $4.0 billion in FHLB advances at the Bank and an overall decrease of $2.9 million in SC debt. This was offset by $2.6 billion of new debt issued by SHUSA. See further detail on borrowings activity in Note 11 to the Consolidated Financial Statements.

	Year Ended December 31,
(Dollars in thousands)	2017		2016
Parent Company & other IHC entities borrowings and other debt obligations
Parent Company senior notes:
Balance	$7,995,462		$4,184,644
Weighted average interest rate at year-end	3.67	%	3.35	%
Maximum amount outstanding at any month-end during the year	$7,995,462		$5,680,872
Average amount outstanding during the year	$5,965,006		$4,215,926
Weighted average interest rate during the year	3.40	%	3.40	%
IHC entity subordinated notes:
Balance	$40,842		$40,457
Weighted average interest rate at year-end	2.02	%	2.00	%
Maximum amount outstanding at any month-end during the year	$40,842		$40,457
Average amount outstanding during the year	$40,650		$40,503
Weighted average interest rate during the year	2.02	%	2.00	%
Junior subordinated debentures to capital trusts:
Balance	$154,102		$233,871
Weighted average interest rate at year-end	3.14	%	4.34	%
Maximum amount outstanding at any month-end during the year	$233,902		$233,871
Average amount outstanding during the year	$203,502		$233,845
Weighted average interest rate during the year	4.27	%	4.35	%
Short-term borrowings:
Balance	$78,669		$279,004
Weighted average interest rate at year-end	1.97	%	0.35	%
Maximum amount outstanding at any month-end during the year	$78,669		$701,930
Average amount outstanding during the year	$178,836		$490,467
Weighted average interest rate during the year	1.97	%	0.35	%

97

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Year Ended December 31,
(Dollars in thousands)	2017		2016
Bank borrowings and other debt obligations
REIT preferred:
Balance	$144,167		$156,457
Weighted average interest rate at year-end	13.35	%	13.46	%
Maximum amount outstanding at any month-end during the year	$156,970		$156,457
Average amount outstanding during the year	$148,808		$155,678
Weighted average interest rate during the year	13.35	%	13.46	%
Bank senior notes:
Balance	$0		$997,848
Weighted average interest rate at year-end	—	%	2.18	%
Maximum amount outstanding at any month-end during the year	$998,192		$997,848
Average amount outstanding during the year	$321,905		$996,769
Weighted average interest rate during the year	2.25	%	2.12	%
Bank subordinated notes:
Balance	$192,018		$498,882
Weighted average interest rate at year-end	8.92	%	8.92	%
Maximum amount outstanding at any month-end during the year	$499,456		$498,882
Average amount outstanding during the year	$436,043		$498,504
Weighted average interest rate during the year	8.94	%	8.92	%
Term loans:
Balance	$139,794		$151,515
Weighted average interest rate at year-end	7.47	%	7.08	%
Maximum amount outstanding at any month-end during the year	$151,616		$161,352
Average amount outstanding during the year	$143,838		$154,412
Weighted average interest rate during the year	6.03	%	6.07	%
Securities sold under repurchase agreements:
Balance	$150,000		$0
Weighted average interest rate at year-end	1.56	%	—	%
Maximum amount outstanding at any month-end during the year	$150,000		$0
Average amount outstanding during the year	$35,847		$0
Weighted average interest rate during the year	1.56	%	—	%
Federal funds purchased:
Balance	$0		$0
Weighted average interest rate at year-end	—	%	—	%
Maximum amount outstanding at any month-end during the year	$0		$100,000
Average amount outstanding during the year	$0		$273
Weighted average interest rate during the year	—	%	0.36	%
FHLB advances:
Balance	$1,950,000		$5,950,000
Weighted average interest rate at year-end	1.53	%	0.85	%
Maximum amount outstanding at any month-end during the year	$5,550,000		$13,785,000
Average amount outstanding during the year	$4,222,603		$9,465,970
Weighted average interest rate during the year	1.53	%	1.34	%

98

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Year Ended December 31,
(Dollars in thousands)	2017		2016
SC borrowings and other debt obligations
Revolving credit facilities:
Balance	$5,598,316		$9,414,817
Weighted average interest rate at year-end	2.73	%	2.36	%
Maximum amount outstanding at any month-end during the year	$6,449,441		$10,864,269
Average amount outstanding during the year	$5,932,121		$9,920,858
Weighted average interest rate during the year	4.28	%	2.36	%
Public securitizations:
Balance	$14,995,304		$13,444,543
Weighted average interest rate range at year-end	0.89% - 2.80%		0.89% - 2.46%
Maximum amount outstanding at any month-end during the year	$15,222,575		$14,202,169
Average amount outstanding during the year	$15,091,799		$13,146,712
Weighted average interest rate during the year	2.64	%	2.53	%
Privately issued amortizing notes:
Balance	$7,564,637		$8,172,407
Weighted average interest rate range at year-end	0.88% - 4.09%		0.88% - 2.86%
Maximum amount outstanding at any month-end during the year	$8,529,281		$8,786,543
Average amount outstanding during the year	$8,238,435		$8,263,205
Weighted average interest rate during the year	2.39	%	2.34	%

ACCRUED EXPENSES AND OTHER LIABILITIES

Accrued Expenses

(in thousands)	December 31, 2017		December 31, 2016
Accrued interest	$	151,060	$	130,098
Accrued federal/foreign/state tax credits	144,850		122,843
Deposits payable	117,259		96,596
Expense accruals	651,300		653,938
Payroll/tax benefits payable	379,011		353,790
Accounts payable	113,930		291,768
Miscellaneous payable	1,267,853		1,172,679
Total accrued expenses	$	2,825,263	$	2,821,712

Accrued expenses increased$3.6 million, or 0.1%, from December 31, 2016 to December 31, 2017. The increase in accrued expenses was primarily due to increases of $95.2 million in miscellaneous payables to customers, broker-dealers and financial institutions, a $25.2 million increase in payroll accruals and a $21.0 million increase in accrued interest expense. This was offset by a $177.8 million decrease in accounts payable and customer money payable accounts at December 31, 2017 compared to December 31, 2016.

99

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Other Liabilities

(in thousands)	December 31, 2017		December 31, 2016
Total derivative activity	$	471,780	$	348,941
Official checks and money orders in process	134,949		140,607
Deferred gains/credits	69,328		30,096
Reserve for unfunded commitments	109,111		122,417
Nostro credit	1,088		128,524
Miscellaneous liabilities	13,147		40,287
Total other liabilities	$	799,403	$	810,872

Other liabilities decreased$11.5 million, or 1.4%, from December 31, 2016 to December 31, 2017. The decrease in other liabilities was primarily related to a decrease in Nostro credit, which is a clearing account for securities transactions entered into on behalf of customers of $127.4 million, and was partially offset by an increase in total derivative activity of $122.8 million.

OFF-BALANCE SHEET ARRANGEMENTS

See further discussion of the Company's off-balance sheet arrangements in Note 7 and Note 19 to the Consolidated Financial Statements, and the Liquidity and Capital Resources section of this MD&A.

PREFERRED STOCK

SHUSA Series C Preferred Stock

In April 2006, the Company’s Board of Directors authorized 8,000 shares of Series C Preferred Stock, and granted the Company authority to issue fractional shares of the Series C Preferred Stock. Dividends on each share of Series C Preferred Stock are payable quarterly, on a non-cumulative basis, at an annual rate of 7.30%, when and if declared by the Company's Board of Directors. In May 2006, the Company issued 8,000,000 depository shares of Series C Preferred Stock for net proceeds of $195.4 million. Each depository share represents 1/1000th ownership interest in a share of Series C Preferred Stock. As a holder of depository shares, the depository shareholder is entitled to all proportional rights and preferences of the Series C Preferred Stock. The Company’s Board of Directors approved cash dividends to preferred stockholders totaling $14.6 million, $15.1 million and $21.2 million for the years endedDecember 31, 2017, 2016 and 2015, respectively.

The shares of Series C Preferred Stock are redeemable in whole or in part for cash, at the Company’s option, at a redemption price of $25,000 per share (equivalent to $25 per depository share), subject to the prior approval of the FRB. As of December 31, 2017, no shares of the Series C Preferred Stock had been redeemed.

Santander BanCorp Series B Preferred Stock

In August 2010, Santander BanCorp, a subsidiary of the Company, issued 3.0 million shares of Series B preferred stock, $25 par value, designated as 8.75% noncumulative preferred stock, to an affiliate. The shares of the Series B preferred stock were redeemable in whole or in part for cash on or after September 30, 2015, and semiannually thereafter on each March 31 and September 30 at the option of Santander BanCorp, with the consent of the FDIC and any other applicable regulatory authority. Dividends on the Series B preferred stock were payable when, as and if declared by the Board of Directors of Santander BanCorp.

On January 29, 2016, BSPR redeemed the outstanding $75.0 million of Series B preferred stock. In accordance with the notice of full redemption, each share of preferred stock was redeemed at the redemption price, corresponding to $25 per preference share, plus any unpaid dividends in respect of the most recent dividend period.

BANK REGULATORY CAPITAL

The Company's capital priorities are to support client growth and business investment while maintaining appropriate capital in light of economic uncertainty and the Basel III framework. The Company continues to improve its capital levels and ratios through the retention of quarterly earnings and RWA optimization.

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Item 7.    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 December 31, 2017 and December 31, 2016, 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 December 31, 2017 and December 31, 2016, based on the Company’s capital calculations, exceeded the required capital ratios for BHCs.

For a discussion of Basel III, which became effective for SHUSA and the Bank on January 1, 2015, including the standardized approach and related future changes to the minimum U.S. regulatory capital ratios, see the section captioned "Regulatory Matters" in this MD&A.

Federal banking laws, regulations and policies also limit the Bank's ability to pay dividends and make other distributions to the Company. The Bank must obtain prior OCC approval to declare a dividend or make any other capital distribution if, after such dividend or distribution: (1) the Bank's total distributions to SHUSA within that calendar year would exceed 100% of its net income during the year plus retained net income for the prior two years; (2) the Bank would not meet capital levels imposed by the OCC in connection with any order; or (3) the Bank is not adequately capitalized at the time. The OCC's prior approval would be required if the Bank were notified by the OCC that it is a problem institution or in troubled condition.

Any dividend declared and paid or return of capital has the effect of reducing capital ratios. During the year, the Company paid cash dividends of $10.0 million to its common stock shareholder, while no dividends were declared or paid to its common stock shareholder in 2016 or 2015. During the year, the Company also paid cash dividends to preferred shareholders of $14.6 million. The Company paid cash dividends to preferred shareholders of $15.1 million and $21.2 million in 2016 and 2015, respectively.

The following schedule summarizes the actual capital balances of SHUSA and the Bank at December 31, 2017:

	SHUSA
	December 31, 2017		Well-capitalized Requirement(1)		Minimum Requirement(1)
CET1 capital ratio	16.38	%	6.50	%	4.50	%
Tier 1 capital ratio	17.84	%	8.00	%	6.00	%
Total capital ratio	19.50	%	10.00	%	8.00	%
Leverage ratio	14.17	%	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
	December 31, 2017		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	19.36	%	10.00	%	8.00	%
Leverage ratio	13.86	%	5.00	%	4.00	%

(2) As defined by OCC regulations. The Bank's ratios are presented under a Basel III phasing in basis.

In June 2017, the Company announced that the Federal Reserve did not object to the planned capital actions described in the Company’s capital plan submitted as part of the CCAR process. That capital plan included planned capital distributions across the following categories: (1) common stock dividends from SHUSA to Santander, (2) common stock dividends from SC, (3) redemption of the remaining balance of SHUSA’s 7.908% trust preferred securities, and (4) dividends on the Company’s preferred stock and payments on its trust preferred securities.

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Item 7.    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, require it to replace funding lost due to the downgrade, which may include the loss of customer deposits, and limit its access to capital and money markets and trigger additional collateral requirements in derivatives contracts and other secured funding arrangements. See further discussion on the impacts of credit ratings actions in the Economic and Business Environment section of this MD&A.

Sources of Liquidity

Company and Bank

The Company and the Bank have several sources of funding to meet liquidity requirements, including the Bank's core deposit base, liquid investment securities portfolio, ability to acquire large deposits, FHLB borrowings, wholesale deposit purchases, and federal funds purchased, as well as through securitizations in the ABS market and committed credit lines from third-party banks and Santander. The Company has the following major sources of funding to meet its liquidity requirements: dividends and returns of investments from its subsidiaries, short-term investments held by non-bank affiliates, and access to the capital markets.

On 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 over $6.4 billion of stockholders’ equity that supports its access to the securitization markets, credit facilities, and flow agreements.

During the year endedDecember 31, 2017, SC completed on-balance sheet funding transactions totaling approximately $15.0 billion, including:

• three securitizations on its Santander Drive Auto Receivables Trust ("SDART") platform for $3.1 billion;

• issuance of two retained bonds on its SDART platform for $155.0 million;

• five securitizations on its Drive Auto Receivables Trust (“DRIVE"), deeper subprime platform for $5.0 billion;

• issuance of one retained bond on its DRIVE platform for $339.0 million;

• four private amortizing lease facilities for $1.6 billion;

• ten top-ups and two re-levers of private amortizing loan and lease facilities for $3.5 billion; and

• one lease securitization on our Santander Retail Auto Lease Trust ("SRT") platform for $1.0 billion.

SC also completed $3.0 billion in asset sales, which consisted of $300.0 million of recurring monthly sales with its third-party flow partners and $2.5 billion in sales to Santander and $100.0 million in sales to SBNA.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

For information regarding SC's debt, see Note 11 to the Consolidated Financial Statements.

IHC

SIS entered into a two-year revolving subordinated loan agreement with Santander effective June 8, 2015, not to exceed $290.0 million in the aggregate, which matured on June 8, 2017. On June 6, 2017, SIS entered into a revolving subordinated loan agreement with SHUSA not to exceed $290.0 million for a two-year term to mature in 2019. On September 13, 2017, 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 December 31, 2017, 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 December 31, 2017, the Bank had approximately $20.6 billion in committed liquidity from the FHLB and the FRB. Of this amount, $17.8 billion was unused and therefore provides additional borrowing capacity and liquidity for the Company. At December 31, 2017 and December 31, 2016, liquid assets (cash and cash equivalents and LHFS), and securities AFS exclusive of securities pledged as collateral) totaled approximately $18.4 billion and $21.1 billion, respectively. These amounts represented 30.3% and 31.4% of total deposits at December 31, 2017 and December 31, 2016, respectively. As of December 31, 2017, the Bank, BSI and BSPR had $1.1 billion, $1.9 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 $836.0 million in committed liquidity from the FHLB, all of which was unused as of December 31, 2017, as well as $308.6 million in liquid assets aside from cash unused as of December 31, 2017.

Cash and cash equivalents

	Year Ended December 31,
(in thousands)	2017			2016			2015
Net cash flows from operating activities	$	4,826,346		$	5,289,994		$	5,082,953
Net cash flows from investing activities	2,620,917			168,432			(16,675,016		)
Net cash flows from financing activities	(10,963,155		)	(4,869,574		)	14,148,948

Cash flows from operating activities

Net cash flow from operating activities was $4.8 billion for the year endedDecember 31, 2017, which was primarily comprised of net income of $972.8 million, $4.6 billion in proceeds from sales of LHFS, $1.6 billion in depreciation, amortization and accretion, and $2.7 billion of provision for credit losses, partially offset by $4.9 billion of originations of LHFS, net of repayments.

Net cash flow from operating activities was $5.3 billion for the year endedDecember 31, 2016, which was comprised of net income of $640.8 million, $5.9 billion in proceeds from sales of LHFS, $1.3 billion in depreciation, amortization and accretion, and $3.0 billion of provisions for credit losses, partially offset by $6.2 billion of originations of LHFS, net of repayments.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Net cash flow from operating activities was $5.1 billion for the year endedDecember 31, 2015, which was comprised of $4.1 billion of provisions for credit losses, $4.5 billion of impairment of goodwill, $6.9 billion in proceeds from sales of LHFS, and $1.7 billion in proceeds from sales of trading securities, partially offset by a net loss of $3.1 billion, $1.2 billion of purchases of trading securities, and $7.7 billion of originations of LHFS, net of repayments.

Cash flows from investing activities

For the year endedDecember 31, 2017, net cash flow from investing activities was $2.6 billion, primarily due to $2.8 billion in normal loan activity, $8.4 billion of AFS investment securities sales, maturities and prepayments, and $3.1 billion in proceeds from sales and terminations of operating leases, partially offset by $6.2 billion of purchases of investment securities AFS and $6.0 billion in operating lease purchases and originations.

For the year endedDecember 31, 2016, net cash flow from investing activities was $168.4 million, primarily due to $17.0 billion of AFS investment securities sales, maturities and prepayments, $1.7 billion in proceeds from sales of LHFI, and $2.2 billion in proceeds from sales and terminations of operating leases, partially offset by $12.2 billion of purchases of investment securities AFS, $5.6 billion in operating lease purchases and originations, and $1.8 billion in normal loan activity.

For the year endedDecember 31, 2015, net cash flow from investing activities was $(16.7) billion, primarily due to $13.6 billion of purchases of investment securities AFS, $9.4 billion in normal loan activity, and $5.8 billion in originations and purchases of operating leases, partially offset by $8.8 billion of investment sales, maturities and prepayments and $2.0 billion in proceeds from the sales and termination of operating leases.

Cash flows from financing activities

For the year endedDecember 31, 2017, net cash flow from financing activities was $(11.0) billion, which was primarily due to a decrease in net borrowing activity of $4.7 billion and a $6.2 billion decrease in deposits.

Net cash flow from financing activities for the year endedDecember 31, 2016 was $(4.9) billion, which was primarily due to a decrease in net borrowing activity of $6.4 billion, partially offset by a $1.7 billion increase in deposits.

Net cash flow from financing activities for the year endedDecember 31, 2015 was $14.1 billion, which was primarily due to an increase in deposits of $3.4 billion and an increase in net borrowing activity of $10.6 billion.

See the Consolidated Statements of Cash Flows ("SCF") for further details on the Company's sources and uses of cash.

Credit Facilities

Third-Party Revolving Credit Facilities

Warehouse Facilities

SC uses warehouse lines to fund its originations. Each line specifies the required collateral characteristics, collateral concentrations, credit enhancement, and advance rates. SC's warehouse lines generally are backed by auto RICs and, in some cases, leases or personal loans. These credit lines generally have one- or two-year commitments, staggered maturities and floating interest rates. SC maintains daily funding forecasts for originations, acquisitions, and other large outflows, such as tax payments in order to balance the desire to minimize funding costs with its liquidity needs.

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.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

SC has two credit facilities with eight 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 December 31, 2017 and December 31, 2016, there were outstanding balances on these facilities of $2.0 billion and $3.7 billion, respectively. One of the facilities can be used exclusively for loan financing, and the other for lease financing. Both facilities require reduced advance rates in the event of delinquency, credit loss, or residual loss ratios exceeding specified thresholds.

Repurchase Facilities

SC also obtains financing through four investment management agreements under which it pledges retained subordinated bonds on its own securitizations as collateral for repurchase agreements with various borrowers and at renewable terms ranging up to 365 days. As of December 31, 2017 and December 31, 2016, there were outstanding balances of $744.5 million and $743.3 million, respectively, under these repurchase facilities.

Santander Credit Facilities

Santander historically has provided, and continues to provide, SC's business with significant funding support in the form of committed credit facilities. Through Santander’s New York branch ("Santander NY"), Santander provides SC with $1.8 billion of long-term committed revolving credit facilities.

The facilities offered through Santander NY are structured as three- and five-year floating rate facilities, with 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.

The Company also provides SC with $3.0 billion of committed revolving credit that can be drawn on an unsecured basis maturing in March 2019. The Company also provides SC with $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 August 2015, under a new agreement with Santander, SC agreed to begin paying Santander a fee of 12.5 basis points per annum on certain warehouse facilities, as they renew, for which Santander provides a guarantee of SC's servicing obligations. For revolving commitments, the guarantee fee will be paid on the total committed amount and for amortizing commitments, the guarantee fee will be paid against each month's ending balance. The guarantee fee will be applicable only for additional facilities upon the execution of the counter-guaranty agreement related to a new facility or if reaffirmation is required on existing revolving or amortizing commitments as evidenced by an executed counter-guaranty agreement. SC recognized guarantee fee expense of $6.0 million and $6.4 million for the years ended December 31, 2017 and 2016, respectively.

Secured Structured Financings

SC's secured structured financings primarily consist of public, SEC-registered securitizations. SC also executes private securitizations under Rule 144A of the Securities Act of 1933, as amended (the “Securities Act”), and privately issues amortizing notes. SC completed 12 securitizations in 2017, and currently has 33 securitizations outstanding in the market with a cumulative ABS balance of approximately $15.3 billion.

Flow Agreements

In addition to SC's credit facilities and secured structured financings, SC has a flow agreement in place with a third party for charged-off assets. Previously, SC also had flow agreements with Bank of America and CBP. However, those agreements were terminated effective January 31 and May 1, 2017, respectively.

Loans and leases sold under these flow agreements are not on SC's balance sheet but provide a stable stream of servicing fee income, and may also provide a gain or loss on sale. SC continues to actively seek additional such flow agreements.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

Off-Balance Sheet Financing

Beginning in March 2017, SC has the option to sell a contractually determined amount of eligible prime loans to Santander, through the Santander Prime Auto Issuing Note securitization platform. As all of the notes and residual interests in the securitization are acquired by Santander, SC recorded these transactions as true sales of the RICs securitized, and removed the sold assets from its Consolidated Balance Sheets.

SC also continues to periodically execute Chrysler Capital-branded securitizations under Rule 144A of the Securities Act. Historically, as all of the notes and residual interests in these securitizations were issued to third parties, SC recorded these transactions as true sales of the RICs securitized, and removed the sold assets from its Consolidated Balance Sheets.

Uses of Liquidity

The Company uses liquidity for debt service and repayment of borrowings, as well as for funding loan commitments and satisfying deposit withdrawal requests.

SIS uses liquidity primarily to support underwriting transactions.

The primary use of liquidity for BSI is to meet customer liquidity requirements, such as loan financing, maturing deposits, investment activities, fund transfers, and payment of its operating expenses.

BSPR uses liquidity for funding loan commitments, satisfying deposit withdrawal requests, and repayments of borrowings.

Dividends and Stock Issuances

At December 31, 2017, the Company's liquidity to meet debt payments, debt service and debt maturities was in excess of 12 months.

During the year endedDecember 31, 2017, the Company paid dividends of $10.0 million to its sole shareholder, Santander.

As of December 31, 2017, the Company had 530,391,043 shares of common stock outstanding.

During the year endedDecember 31, 2017 the Company paid dividends of $14.6 million, on its preferred stock.

During the 2017, SHUSA's subsidiaries had the following dividend activity which eliminated in consolidation:

• The Bank declared and paid $100.0 million in dividends to SHUSA;

• BSI declared and paid $35.0 million in dividends to SHUSA; and

• Services and Promotions, LLC declared and paid $9.0 million in dividends to SHUSA.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

CONTRACTUAL OBLIGATIONS

The Company enters into contractual obligations in the normal course of business as a source of funds for its asset growth and asset/liability management and to meet required capital needs. These obligations require the Company to make cash payments over time as detailed in the table below.

	Payments Due by Period
(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)	$	1,982,138	$	1,427,205	$	554,933	$	—	$	—
Notes payable - revolving facilities	6,498,316		3,428,233		2,570,083		500,000		—
Notes payable - secured structured financings	22,608,549		226,046		6,772,458		11,404,667		4,205,378
Other debt obligations (1) (2)	12,049,532		1,666,767		4,759,528		3,063,536		2,559,701
Junior subordinated debentures due to capital trust entities (1) (2)	151,922		151,710		44		45		123
CDs (1)	5,537,425		2,621,743		1,955,793		952,490		7,399
Non-qualified pension and post-retirement benefits	131,197		13,918		26,123		26,330		64,826
Operating leases(3)	699,869		127,692		210,845		155,121		206,211
Total contractual cash obligations	$	49,658,948	$	9,663,314	$	16,849,807	$	16,102,189	$	7,043,638

(1) Includes interest on both fixed and variable rate obligations. The interest associated with variable rate obligations is based on interest rates in effect at December 31, 2017. 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 $55.4 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 14 and Note 19 to the Consolidated Financial Statements.

Lending Arrangements

SC is obligated to make purchase price holdback payments to a third-party originator of auto loans SC has purchased, when losses are lower than originally expected. SC is also obligated to make total return settlement payments to this third-party originator in 2017 if returns on the purchased loans are greater than originally expected. These obligations are accounted for as derivatives.

As a result of the strategic evaluation of its personal lending portfolio, in the third quarter of 2015, SC began reviewing strategic alternatives for exiting the personal loan portfolios. On February 1, 2016, SC completed the sale of substantially all LendingClub loans to a third-party buyer at an immaterial premium to par value. On April 14, 2017, SC sold 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 SC's Consolidated Financial Statements. Accordingly, SC has recorded $386.4 million in 2017 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 $1.1 billion at December 31, 2017.

Employment and Other Agreements

On July 2, 2015, the Company announced the departure of Mr. Dundon from his roles as Chairman of SC’s Board and CEO of SC, effective as of the close of business on July 2, 2015. On the date of Mr. Dundon's departure, among other things, he entered into a separation agreement with SC, DDFS LLC (“DDFS”), the Company, Santander Consumer USA Inc. and Santander (as subsequently amended, the “Separation Agreement”).

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Separation Agreement provided for certain payments and benefits to Mr. Dundon, as well as the delivery by the Company of an irrevocable notice to exercise the call option with respect to the shares of SC Common Stock owned by DDFS and consummate the transactions contemplated by that call option notice, subject to required bank regulatory approvals and any other approvals required by law being obtained. On August 31, 2016, Santander exercised its option to assume the Company’s obligation to purchase the shares of SC Common Stock in respect of that call transaction.

On November 15, 2017, the parties to the Separation Agreement entered into a settlement and release that, among other things, altered certain of the economic arrangements in the Separation Agreement. Pursuant to the settlement agreement, (i) the amounts payable by SC to Mr. Dundon were reduced by $50.0 million to $66.1 million and (ii) Santander affirmed its prior commitment to complete the call transaction. The call transaction was consummated at the aggregate price of $941.9 million, representing the aggregate of the previously agreed price per share of SC Common Stock of $26.17, plus accrued interest. The settlement agreement included mutual releases. All transactions contemplated by the settlement agreement, including the call transaction, were completed on November 15, 2017.

Pursuant to the Separation Agreement, concurrently with the completion of the call transaction, $294.5 million of the net proceeds payable to DDFS in that transaction were used to pay off all outstanding principal, interest and fees under a loan agreement between Santander and DDFS.

On November 15, 2017, Santander contributed the 34,598,506 shares of SC Common Stock purchased from DDFS in the call transaction to the Company. As a result, the Company currently owns a total of 245,593,555 shares of SC Common Stock, representing approximately 68% of SC’s outstanding shares.

ASSET AND LIABILITY MANAGEMENT

Interest Rate Risk

Interest rate risk arises primarily through the Company’s traditional business activities of extending loans and accepting deposits. Many factors, including economic and financial conditions, movements in market interest rates, and consumer preferences, affect the spread between interest earned on assets and interest paid on liabilities. Interest rate risk is managed by the Company's Treasury group and measured by its Market Risk Department, with oversight by the Asset/Liability Committee. In managing interest rate risk, the Company seeks to minimize the variability of net interest income across various likely scenarios, while at the same time maximizing net interest income and the net interest margin. To achieve these objectives, the Treasury group works closely with each business line in the Company. The Treasury group also uses various other tools to manage interest rate risk, including wholesale funding maturity targeting, investment portfolio purchase strategies, asset securitizations/sales, and financial derivatives.

Interest rate risk focuses on managing four elements of risk associated with interest rates: basis risk, repricing risk, yield curve risk and option risk. Basis risk stems from rate index timing differences with rate changes, such as differences in the extent of changes in Federal funds rates compared with the three-month London Interbank Offered Rate ("LIBOR"). Repricing risk stems from the different timing of contractual repricing, such as one-month versus three-month reset dates, as well as the related maturities. Yield curve risk stems from the impact on earnings and market value resulting from different shapes and levels of yield curves. Option risk stems from prepayment or early withdrawal risk embedded in various products. These four elements of risk are analyzed through a combination of net interest income and balance sheet valuation simulations, shocks to those simulations, and scenario and market value analyses, and the subsequent results are reviewed by management. Numerous assumptions are made to produce these analyses, including assumptions about new business volumes, loan and investment prepayment rates, deposit flows, interest rate curves, economic conditions and competitor pricing.

Net Interest Income Simulation Analysis

The Company utilizes a variety of measurement techniques to evaluate the impact of interest rate risk, including simulating the impact of changing interest rates on expected future interest income and interest expense, to estimate the Company's net interest income sensitivity. This simulation is run monthly and includes various scenarios that help management understand the potential risks in the Company's net interest income sensitivity. These scenarios include both parallel and non-parallel rate shocks as well as other scenarios that are consistent with quantifying the four elements of risk described above. This information is used to develop proactive strategies to ensure that the Company’s risk position remains within SHUSA Board of Directors-approved limits so that future earnings are not significantly adversely affected by future interest rates.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

The table below reflects the estimated sensitivity to the Company’s net interest income based on interest rate changes at December 31, 2017 and December 31, 2016:

	The following estimated percentage increase/(decrease) to net interest income would result
If interest rates changed in parallel by the amounts below	December 31, 2017		December 31, 2016
Down 100 basis points	(3.33	)%	(2.14	)%
Up 100 basis points	2.88	%	2.36	%
Up 200 basis points	5.48	%	4.36	%

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 December 31, 2017 and December 31, 2016.

	The following estimated percentage increase/(decrease) to MVE would result
If interest rates changed in parallel by the amounts below	December 31, 2017		December 31, 2016
Down 100 basis points	(2.55	)%	(1.23	)%
Up 100 basis points	(0.04	)%	(0.76	)%
Up 200 basis points	(1.62	)%	(2.50	)%

As of December 31, 2017, the Company’s MVE profile showed a decrease of 2.55% for downward parallel interest rate shocks of 100 basis points and a decrease of 0.04% for upward parallel interest rate shocks of 100 basis points. The asymmetrical sensitivity between up 100 and down 100 shock is due to the negative convexity as a result of the prepayment option embedded in mortgage-related products, the impact of which is not fully offset by the behavior of the funding base (largely non-maturity deposits ("NMDs")).

In downward parallel interest rate shocks, mortgage-related products’ prepayments increase, their duration decreases and their market value appreciation is therefore limited. At the same time, with deposit rates already close to zero, the Company cannot effectively transfer interest rate declines to its NMD customers. For upward parallel interest rate shocks, extension risk weighs on a sizable portion of the Company’s mortgage-related products, which are predominantly long-term and fixed-rate; and for larger shocks, the loss in market value is not offset by the change in NMD.

Limitations of Interest Rate Risk Analyses

Since the assumptions used are inherently uncertain, the Company cannot predict precisely the effect of higher or lower interest rates on net interest income or MVE. Actual results will differ from simulated results due to the timing, magnitude and frequency of interest rate changes, the difference between actual experience and the assumed volume, characteristics of new business, behavior of existing positions, and changes in market conditions and management strategies, among other factors.

Uses of Derivatives to Manage Interest Rate and Other Risks

To mitigate interest rate risk and, to a lesser extent, foreign exchange, equity and credit risks, the Company uses derivative financial instruments to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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

Management uses derivative instruments to mitigate the impact of interest rate movements on the fair value of certain liabilities, assets and highly probable forecasted cash flows. These instruments primarily include interest rate swaps that have underlying interest rates based on key benchmark indices and forward sale or purchase commitments. The nature and volume of the derivative instruments used to manage interest rate risk depend on the level and type of assets and liabilities on the balance sheet and the risk management strategies for the current and anticipated interest rate environments.

Prior to 2017, the Company entered into cross-currency swaps to hedge its foreign currency exchange risk on certain Euro-denominated investments, which were sold in 2016.

The Company's 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 fixed-rate residential mortgages. It sells a portion of this production to the FHLMC, the FNMA, and private investors. The Company uses forward sales as a means of hedging against the economic impact of changes in interest rates on the mortgages that are originated for sale and on interest rate lock commitments.

The Company typically retains the servicing rights related to residential mortgage loans that are sold. The majority of the Company's residential MSRs are accounted for at fair value. As deemed appropriate, the Company economically hedges MSRs, using interest rate swaps and forward contracts to purchase MBS. For additional information on MSRs, see Note 9 to the Consolidated Financial Statements.

The Company uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. Foreign exchange contracts, which include spot and forward contracts, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date. Exposure to gains and losses on these contracts 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 14 to the Consolidated Financial Statements.

110

Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

SELECTED QUARTERLY CONSOLIDATED FINANCIAL DATA

The following table presented selected quarterly consolidated financial data (unaudited):

	THREE MONTHS ENDED
(in thousands)	December 31, 2017			September 30, 2017		June 30, 2017		March 31, 2017		December 31, 2016			September 30, 2016			June 30, 2016		March 31, 2016
Total interest income	$	1,877,196		$	1,953,900	$	1,999,445	$	1,955,593	$	1,931,625		$	1,970,948		$	2,029,409	$	2,057,769
Total interest expense	361,564			379,840		357,696		353,029		348,738			349,832			364,522		361,967
Net interest income	1,515,632			1,574,060		1,641,749		1,602,564		1,582,887			1,621,116			1,664,887		1,695,802
Provision for credit losses	658,161			652,120		604,768		735,445		779,585			687,913			613,778		898,449
Net interest income after provision for credit loss	857,471			921,940		1,036,981		867,119		803,302			933,203			1,051,109		797,353
Gain/(loss) on investment securities, net	(18,719		)	6,707		9,049		519		(376		)	(179		)	30,798		27,260
Total fees and other income	696,933			788,772		720,761		725,554		616,948			726,507			688,839		665,908
General and administrative expenses	1,575,140			1,343,545		1,341,636		1,309,838		1,352,618			1,279,340			1,264,872		1,225,381
Other expenses	92,971			43,400		45,408		40,709		64,258			45,970			77,169		76,586
Total expenses	1,668,111			1,386,945		1,387,044		1,350,547		1,416,876			1,325,310			1,342,041		1,301,967
Income/(loss) before income taxes	(132,426		)	330,474		379,747		242,645		2,998			334,221			428,705		188,554
Income tax provision/(benefit)	(416,702		)	93,448		91,983		78,937		(26,977		)	108,576			153,256		78,860
Net income before noncontrolling interest	284,276			237,026		287,764		163,708		29,975			225,645			275,449		109,694
Less: Net income attributable to NCI	181,160			75,195		104,724		50,628		20,460			77,672			108,472		71,275
Net income attributable to SHUSA	$	103,116		$	161,831	$	183,040	$	113,080	$	9,515		$	147,973		$	166,977	$	38,419

Operating Lease Cash Flow Classification

As discussed further in Note 1 to the Consolidated Financial Statements, 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 Statement of Cash Flows.

The interim period impacts of this error were overstatement of cash flows from investing activities (Proceeds from the sale and termination of operating leases) and understatement of cash flows from operating activities (Depreciation, amortization and accretion) in the amounts of $383.5 million, $288.0 million, $149.9 million, $129.8 million, $86.6 million, and $37.4 million for the year-to-date periods ended September 30, 2017, June 30, 2017, March 31, 2017, September 30, 2016, June 30, 2016, and March 31, 2016, respectively. There was no net impact to cash provided by financing activities, net change in cash and cash equivalents, or total cash and cash equivalents. There was no impact to the Company’s Condensed Consolidated Balance Sheets, Condensed Consolidated Statements of Operations, Condensed Consolidated Statements of Other Comprehensive Income, or Condensed Consolidated Statements of Equity for any period as a result of the error. Management has evaluated the errors and determined they are immaterial to previously issued financial statements. In future filings, the Company will correct the statement of cash flows disclosures for the comparative prior periods when presented.

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Item 7.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

2017 FOURTH QUARTER RESULTS

SHUSA reported net income for the fourth quarter of 2017 of $284.3 million, compared to a net income of $237.0 million for the third quarter of 2017 and net income of $30.0 million for the fourth quarter of 2016. The increase in net income between the third and fourth quarters of 2017 was primarily related to a tax benefit recorded in the fourth quarter as a result of re-measuring our net deferred tax liabilities due to the federal rate reduction. The increase in net income between the fourth quarter of 2017 and the fourth quarter of 2016 is primarily the result of a decrease in the provision for credit losses and a tax benefit recorded in the fourth quarter 2017.

During the fourth quarter of 2017, the Company had a net loss on investment securities of $18.7 million, compared to a net gain of $6.7 million during the third quarter of 2017 and a net loss of $0.4 million during the fourth quarter of 2016. The net loss on investment securities for the fourth quarter of 2017 was primarily due to losses incurred on the sale of CMOs.

The provision for credit losses was $658.2 million during the fourth quarter of 2017, compared to $652.1 million during the third quarter of 2017 and $779.6 million during the fourth quarter of 2016. The increase in the provision for credit losses from the third quarter of 2017 to the fourth quarter of 2017 was primarily to replenish the allowance for charge-offs incurred during the fourth quarter, as the ALLL remained consistent quarter over quarter. The decrease in the provision from the fourth quarter of 2016 to the fourth quarter of 2017 was primarily due to a decrease in the outstanding loan portfolio.

Total fees and other income during the fourth quarter of 2017 were $696.9 million, compared to $788.8 million for the third quarter of 2017 and $616.9 million for the fourth quarter of 2016. The decrease from the third quarter of 2017 to the fourth quarter of 2017 was primarily due to subsequent markdowns to the fair value of the personal unsecured LHFS portfolio during the fourth quarter of 2017.

General and administrative expenses for the fourth quarter of 2017 were $1.6 billion, compared to $1.3 billion for the third quarter of 2017 and $1.4 billion for the fourth quarter of 2016. The increase in the fourth quarter of 2017 compared to the third quarter of 2017 and the fourth quarter of 2016, was primarily due to an increase in legal expenses and compensation and benefits expenses in the fourth quarter of 2017 compared to the third quarter of 2017 and the fourth quarter of 2016. In addition, there was an increase in lease expenses from the continued growth in the Company's lease portfolio over the year.

Other expenses for the fourth quarter of 2017 were $93.0 million, compared to $43.4 million for the third quarter of 2017 and $64.3 million for the fourth quarter of 2016. The increase in other expenses in the fourth quarter of 2017 compared to the third quarter of 2017 relates to a loss on debt extinguishment, an impairment on long-lived assets and an impairment of goodwill recorded in the fourth quarter 2017. The increase from the fourth quarter of 2016 to the fourth quarter of 2017 was primarily related to the impairments on long-lived assets and goodwill recorded in the fourth quarter of 2017.

Income tax benefit for the fourth quarter of 2017 was $416.7 million, compared to an income tax provision of $93.4 million in the third quarter of 2017 and an income tax benefit of $27.0 million in the fourth quarter of 2016. The variance between the income tax provision for the third quarter of 2017 and the fourth quarter of 2017 and the variance between the fourth quarter of 2017 and the fourth quarter of 2016 is primarily due to a reduction in our income tax provision as a result of remeasuring our net deferred tax liabilities due to the federal rate reduction.

ITEM 7A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Incorporated by reference from Part I, Item 7, MD&A — "Asset and Liability Management" above.

112

ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS

Index to Consolidated Financial Statements and Supplementary Data	Page
Reports of Independent Registered Public Accounting Firms	114
Consolidated Balance Sheets	117
Consolidated Statements of Operations	118
Consolidated Statements of Comprehensive Income/(Loss)	119
Consolidated Statements of Stockholder's Equity	120
Consolidated Statements of Cash Flows	121
Notes to Consolidated Financial Statements	122

113

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Tothe Board of Directors and Stockholder of

Santander Holdings USA, Inc.

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Santander Holdings USA, Inc. and its subsidiaries (the "Company") as of December 31, 2017 and December 31, 2016, and the related consolidated statements of operations, comprehensive income, stockholder’s equity and cash flows for each of the two years in the period ended December 31, 2017, including the related notes (collectively referred to as the “consolidatedfinancial statements”).We also have audited the Company's internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, 2017 and December 31, 2016, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2017in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company did not maintain, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the COSO becausematerial weaknesses in internal control over financial reporting existed as of that date related to the Company’s control environment, as well as material weaknesses related to the control environment, risk assessment, control activities and monitoring at the Company’s consolidated subsidiary Santander Consumer USA Holdings Inc. (“SC”);development, approval, and monitoring of models used to estimate the credit loss allowance at SC; and identification, governance, and monitoring of models used to estimate accretion at SC. In addition, a material weakness existed as of that date related to the Company’s management review of its statement of cash flows and footnotes.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses referred to above are described in Management's Annual Report on Internal Control over Financial Reporting appearing under Item 9A. We considered these material weaknesses in determining the nature, timing, and extent of audit tests applied in our audit of the December 31, 2017 consolidatedfinancial statements, and our opinion regarding the effectiveness of the Company’s internal control over financial reporting does not affect our opinion on these consolidatedfinancial statements.

Basis for Opinions

The Company's management is responsible for these consolidatedfinancial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in management's report referred to above. Our responsibility is to express opinions on the Company’s consolidatedfinancial statements and on the Company's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the consolidatedfinancial statements included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidatedfinancial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based

114

on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ PricewaterhouseCoopers LLP

Boston, Massachusetts

March 19, 2018

We have served as the Company’s auditor since 2016.

115

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholder of

Santander Holdings USA, Inc.

We have audited the accompanying consolidated statements of operations, comprehensive income/(loss), stockholder’s equity, and cash flows of Santander Holdings USA, Inc. and subsidiaries (the “Company”) for the year ended December 31, 2015. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the results of operations and cash flows of Santander Holdings USA, Inc. and subsidiaries for the year ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 1 to the consolidated financial statements, in 2016 the Company recognized a change in reporting entity due to a merger of entities under common control and the 2015 consolidated financial statements reflect retrospective application for the change in reporting entity. As discussed in Note 24 to the consolidated financial statements, the accompanying 2015 consolidated financial statements have been restated to correct misstatements.

/s/ Deloitte & Touche LLP

Boston, Massachusetts

April 14, 2016 (December 7, 2016 as to the effects of the restatement discussed in Note 24 and March 20, 2017 as to the effects of a change in reporting entity for a merger of entities under common control discussed in Note 1, a change in reportable segments, and the retrospective adoption of ASU 2015-07, Fair Value Measurement (Topic 820): Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent)

116

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

	December 31, 2017			December 31, 2016
	(in thousands)
ASSETS
Cash and cash equivalents	$	6,519,967		$	10,035,859
Investment securities:
Available-for-sale ("AFS") at fair value	14,413,183			17,024,225
Trading securities	1			1,630
Held-to-maturity (fair value of $1,773,938 and $1,635,413 as of December 31, 2017 and December 31, 2016, respectively)	1,799,808			1,658,644
Other investments	658,863			730,831
Loans held-for-investment ("LHFI")(1) (5)	80,740,852			85,819,785
Allowance for loan and lease losses ("ALLL") (5)	(3,911,575		)	(3,814,464		)
Net LHFI	76,829,277			82,005,321
Loans held-for-sale ("LHFS") (2)	2,522,486			2,586,308
Premises and equipment, net (3)	849,061			996,498
Operating lease assets, net (5)(6)	10,474,308			9,689,231
Goodwill	4,444,389			4,454,925
Intangible assets, net	535,753			597,244
Bank-owned life insurance ("BOLI")	1,795,700			1,767,101
Restricted cash (5)	3,818,807			3,016,948
Other assets (4) (5)	3,632,427			3,795,525
TOTAL ASSETS	$	128,294,030		$	138,360,290
LIABILITIES
Accrued expenses and payables	$	2,825,263		$	2,821,712
Deposits and other customer accounts	60,831,103			67,240,690
Borrowings and other debt obligations (5)	39,003,313			43,524,445
Advance payments by borrowers for taxes and insurance	159,321			163,498
Deferred tax liabilities, net	969,996			1,420,315
Other liabilities (5)	799,403			810,872
TOTAL LIABILITIES	104,588,399			115,981,532
STOCKHOLDER'S EQUITY
Preferred stock (no par value; $25,000 liquidation preference; 7,500,000 shares authorized; 8,000 shares outstanding at both December 31, 2017 and December 31, 2016)	195,445			195,445
Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 shares outstanding at both December 31, 2017 and December 31, 2016)	17,723,010			16,599,497
Accumulated other comprehensive loss	(198,431		)	(193,208		)
Retained earnings	3,462,674			3,020,149
TOTAL SHUSA STOCKHOLDER'S EQUITY	21,182,698			19,621,883
Noncontrolling interest ("NCI")	2,522,933			2,756,875
TOTAL STOCKHOLDER'S EQUITY	23,705,631			22,378,758
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY	$	128,294,030		$	138,360,290

(1) LHFI includes $186.5 million and $217.2 million of loans recorded at fair value at December 31, 2017 and December 31, 2016, respectively.

(2) Includes $197.7 million and $453.3 million of loans recorded at the fair value option ("FVO") at December 31, 2017 and December 31, 2016.

(3) Net of accumulated depreciation of $1.4 billion and $1.2 billion at December 31, 2017 and December 31, 2016, respectively.

(4) Includes mortgage servicing rights ("MSRs") of $146.0 million and $146.6 million at December 31, 2017 and December 31, 2016, respectively, for which the Company has elected the FVO. See Note 9 to these Consolidated Financial Statements for additional information.

(5) The Company has interests in certain securitization trusts ("Trusts") that are considered variable interest entities ("VIEs") for accounting purposes. The Company consolidates VIEs where it is deemed the primary beneficiary. See Note 7 to these Consolidated Financial Statements for additional information.

(6) Net of accumulated depreciation of $3.4 billion and $2.8 billion at December 31, 2017 and December 31, 2016, respectively.

See accompanying notes to Consolidated Financial Statements.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2017			2016			2015
	(in thousands)
INTEREST INCOME:
Loans	$	7,287,400		$	7,611,347		$	7,732,022
Interest-earning deposits	86,205			57,361			21,745
Investment securities:
AFS	352,601			284,796			331,379
Held-to-maturity	38,609			3,526			—
Other investments	21,319			32,721			52,470
TOTAL INTEREST INCOME	7,786,134			7,989,751			8,137,616
INTEREST EXPENSE:
Deposits and other customer accounts	241,044			277,022			289,145
Borrowings and other debt obligations	1,211,085			1,148,037			947,065
TOTAL INTEREST EXPENSE	1,452,129			1,425,059			1,236,210
NET INTEREST INCOME	6,334,005			6,564,692			6,901,406
Provision for credit losses	2,650,494			2,979,725			4,079,743
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES	3,683,511			3,584,967			2,821,663
NON-INTEREST INCOME:
Consumer and Commercial fees	616,438			689,839			711,784
Mortgage banking income, net	56,659			63,790			108,569
BOLI	66,784			57,796			57,913
Capital market revenue	195,906			190,647			141,667
Lease income	2,017,775			1,839,307			1,482,850
Miscellaneous (loss)/income, net(1)	(21,542		)	(132,123		)	383,425
TOTAL FEES AND OTHER INCOME	2,932,020			2,709,256			2,886,208
Other-than-temporary impairment ("OTTI") recognized in earnings	—			(44		)	(1,092		)
Net (losses)/gains on sale of investment securities	(2,444		)	57,547			19,919
Net (losses)/gains recognized in earnings	(2,444		)	57,503			18,827
TOTAL NON-INTEREST INCOME	2,929,576			2,766,759			2,905,035
GENERAL AND ADMINISTRATIVE EXPENSES:
Compensation and benefits	1,895,326			1,719,645			1,598,497
Occupancy and equipment expenses	669,113			618,597			591,569
Technology, outside service, and marketing expense	581,164			644,079			601,865
Loan expense	386,468			415,267			384,051
Lease expense	1,553,096			1,305,712			1,121,531
Other administrative expenses	484,992			418,911			426,887
TOTAL GENERAL AND ADMINISTRATIVE EXPENSES	5,570,159			5,122,211			4,724,400
OTHER EXPENSES:
Amortization of intangibles	61,491			70,034			79,921
Deposit insurance premiums and other expenses	70,661			77,976			61,503
Loss on debt extinguishment	30,349			114,232			—
Other miscellaneous expenses	33,911			12,795			8,973
Impairment of goodwill	10,536			—			4,507,095
Impairment of long lived assets	15,540			—			—
TOTAL OTHER EXPENSES	222,488			275,037			4,657,492
INCOME/(LOSS) BEFORE INCOME TAX PROVISION	820,440			954,478			(3,655,194		)
Income tax (benefit) / provision	(152,334		)	313,715			(599,758		)
NET INCOME / (LOSS) INCLUDING NCI	972,774			640,763			(3,055,436		)
LESS: NET INCOME / (LOSS) ATTRIBUTABLE TO NCI	411,707			277,879			(1,653,719		)
NET INCOME /(LOSS) ATTRIBUTABLE TO SANTANDER HOLDINGS USA, INC.	$	561,067		$	362,884		$	(1,401,717	)

¹- Includes impact of $386.4 million, $424.1 million, and $243.0 million in 2017, 2016, and 2015 of lower of cost or market adjustments on a portion of the Company's loans held for sale portfolio.

See accompanying notes to Consolidated Financial Statements.

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SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)

	Year Ended December 31,
	2017			2016			2015
	(in thousands)
NET INCOME /(LOSS) INCLUDING NCI	$	972,774		$	640,763		$	(3,055,436	)
OTHER COMPREHENSIVE INCOME, NET OF TAX
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments, net of tax (1)	337			9,856			(2,321		)
Net unrealized losses on available-for-sale investment securities, net of tax	(9,744		)	(34,812		)	(44,102		)
Pension and post-retirement actuarial gains, net of tax	4,184			2,278			4,160
TOTAL OTHER COMPREHENSIVE LOSS, NET OF TAX	(5,223		)	(22,678		)	(42,263		)
COMPREHENSIVE INCOME / (LOSS)	967,551			618,085			(3,097,699		)
NET INCOME / (LOSS) ATTRIBUTABLE TO NCI	411,707			277,879			(1,653,719		)
COMPREHENSIVE INCOME/(LOSS) ATTRIBUTABLE TO SHUSA	$	555,844		$	340,206		$	(1,443,980	)

(1) Excludes $6.0 million and $10.8 million of other comprehensive income attributable to NCI for the year endedDecember 31, 2017 and 2016, respectively. There was no material other comprehensive income attributable to NCI for 2015.

See accompanying notes to Consolidated Financial Statements.

119

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY

FOR THE YEARS ENDED DECEMBER 31, 2017, 2016, AND 2015 (in thousands)

	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, 2015	530,391	$	270,445		$	16,629,878		$	(128,267	)	$	4,095,258		$	4,052,395		$	24,919,709
Comprehensive loss attributable to SHUSA	—	—			—			(42,263		)	(1,401,717		)	—			(1,443,980		)
Net loss attributable to NCI	—	—			—			—			—			(1,653,719		)	(1,653,719		)
Impact of Santander Consumer USA Holdings Inc. ("SC") stock option activity	—	—			(67		)	—			—			46,294			46,227
Issuance of common stock	—	—			(14		)	—			14			—			—
Stock issued in connection with employees benefit and incentive compensation plans	—	—			25			—			—			—			25
Dividends paid on preferred stock	—	—			—			—			(21,162		)	—			(21,162		)
Balance, December 31, 2015	530,391	$	270,445		$	16,629,822		$	(170,530	)	$	2,672,393		$	2,444,970		$	21,847,100
Comprehensive (loss)/income attributable to SHUSA	—	—			—			(22,678		)	362,884			—			340,206
Other comprehensive income attributable to NCI	—	—			—			—			—			10,807			10,807
Net income attributable to NCI	—	—			—			—			—			277,879			277,879
Impact of SC stock option activity	—	—			69			—			—			23,219			23,288
Redemption of preferred stock		(75,000		)	—			—			—			—			(75,000		)
Capital distribution to shareholder	—	—			(30,789		)	—			—			—			(30,789		)
Stock issued in connection with employee benefit and incentive compensation plans	—	—			395			—			—			—			395
Dividends paid on preferred stock	—	—			—			—			(15,128		)	—			(15,128		)
Balance, December 31, 2016	530,391	$	195,445		$	16,599,497		$	(193,208	)	$	3,020,149		$	2,756,875		$	22,378,758
Cumulative-effect adjustment upon adoption of new accounting standards (Note 1)	—	—			(26,457		)	—			14,763			37,401			25,707
Comprehensive income attributable to SHUSA	—	—			—			(5,223		)	561,067			—			555,844
Other comprehensive income attributable to NCI	—	—			—			—			—			6,048			6,048
Net income attributable to NCI	—	—			—			—			—			411,707			411,707
Impact of SC stock option activity	—				—									22,116			22,116
Contribution of Santander Financial Services, Inc. (“SFS”) from shareholder	—				430,783						(108,705		)				322,078
Net contribution from shareholder (Note 12)	—				11,747												11,747
Contribution of incremental SC shares from shareholder (Note 12)	—				707,589									(707,589		)	—
Stock issued in connection with employee benefit and incentive compensation plans	—				(149		)							850			701
Dividends paid on common stock	—										(10,000		)				(10,000		)
Dividends paid to NCI	—													(4,475		)	(4,475		)
Dividends paid on preferred stock	—										(14,600		)				(14,600		)
Balance, December 31, 2017	530,391	$	195,445		$	17,723,010		$	(198,431	)	$	3,462,674		$	2,522,933		$	23,705,631

See accompanying notes to Consolidated Financial Statements.

120

SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2017			2016			2015
	(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income/(loss) including NCI	$	972,774		$	640,763		$	(3,055,436	)
Adjustments to reconcile net income to net cash provided by operating activities:
Impairment of goodwill	10,536			—			4,507,095
Provision for credit losses	2,650,494			2,979,725			4,079,743
Deferred tax (benefit)/expense	(191,908		)	213,949			(830,619		)
Depreciation, amortization and accretion(2)	1,606,862			1,272,415			518,207
Net loss on sale of loans	373,532			455,330			77,219
Net loss/(gain) on sale of investment securities	2,444			(57,547		)	(18,827		)
Gain on residential loan securitizations	—			—			(21,570		)
Net gain on sale of operating leases	(401		)	(473		)	(22,636		)
OTTI recognized in earnings	—			44			1,092
Loss on debt extinguishment	30,349			114,232			—
Net (gain)/loss on real estate owned and premises and equipment	(9,567		)	10,644			(5,250		)
Stock-based compensation	4,674			17,677			(7,261		)
Equity loss on equity method investments	28,323			11,054			8,818
Originations of LHFS, net of repayments	(4,920,570		)	(6,215,770		)	(7,699,805		)
Purchases of LHFS	(4,280		)	(4,730		)	(5,906		)
Proceeds from sales of LHFS	4,601,777			5,883,608			6,876,079
Purchases of trading securities	(3,015		)	(629,947		)	(1,219,268		)
Proceeds from sales of trading securities	18,347			657,494			1,683,719
Net change in:
Revolving personal loans	(329,168		)	(317,506		)	(107,947		)
Other assets and BOLI (1)	(162,006		)	117,256			439,766
Other liabilities (1)	147,149			141,776			(114,260		)
NET CASH PROVIDED BY OPERATING ACTIVITIES	4,826,346			5,289,994			5,082,953
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of AFS investment securities	3,216,595			6,755,299			2,809,779
Proceeds from prepayments and maturities of AFS investment securities	5,231,910			10,209,477			5,994,381
Purchases of AFS investment securities	(6,248,059		)	(12,205,062		)	(13,551,027		)
Proceeds from prepayments and maturities of held to maturity investment securities	200,085			11,784			—
Purchases of held to maturity investment securities	(352,786		)	(1,671,285		)	—
Proceeds from sales of other investments	327,029			492,761			325,594
Proceeds from maturities of other investments	560			45			170
Purchases of other investments	(217,007		)	(172,292		)	(506,476		)
Net change in restricted cash	(696,092		)	(390,902		)	(287,516		)
Proceeds from sales of LHFI	1,227,052			1,737,780			2,710,078
Proceeds from the sales of equity method investments	25,145			—			14,988
Distributions from equity method investments	10,522			4,819			11,881
Contributions to equity method and other investments	(87,267		)	(42,798		)	(101,018		)
Purchases of LHFI	(723,793		)	(278,810		)	(1,978,145		)
Net change in loans other than purchases and sales	2,797,347			(1,843,299		)	(9,448,772		)
Purchases and originations of operating leases	(6,036,193		)	(5,642,120		)	(5,769,802		)
Proceeds from the sale and termination of operating leases(2)	3,119,264			2,163,497			2,020,686
Manufacturer incentives	878,219			1,205,911			1,192,235
Proceeds from sales of real estate owned and premises and equipment	112,497			67,702			96,349
Purchases of premises and equipment	(164,111		)	(234,075		)	(314,401		)
Confirming receivable	—			—			106,000
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES	2,620,917			168,432			(16,675,016		)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits and other customer accounts	(6,218,010		)	1,657,262			3,435,426
Net change in short-term borrowings	(50,331		)	(522,927		)	(5,209,395		)
Net proceeds from long-term borrowings	43,325,311			46,598,213			51,840,502
Repayments of long-term borrowings	(44,009,525		)	(44,563,102		)	(45,669,188		)
Proceeds from Federal Home Loan Bank ("FHLB") advances (with terms greater than 3 months)	1,000,000			5,850,000			16,350,000
Repayments of FHLB advances (with terms greater than 3 months)	(5,000,000		)	(13,799,232		)	(6,670,000		)
Net change in advance payments by borrowers for taxes and insurance	(4,177		)	(7,639		)	4,993
Cash dividends paid to preferred stockholders	(14,600		)	(15,128		)	(21,162		)
Dividends paid on common stock	(10,000		)	—			—
Dividends paid to noncontrolling interest	(4,475		)	—			—
Proceeds from the issuance of common stock	13,652			7,979			87,772
Capital contribution from shareholder	9,000			—			—
Redemption of preferred stock	—			(75,000		)	—
NET CASH (USED IN)/PROVIDED BY FINANCING ACTIVITIES	(10,963,155		)	(4,869,574		)	14,148,948
NET (DECREASE)/INCREASE IN CASH AND CASH EQUIVALENTS	(3,515,892		)	588,852			2,556,885
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	10,035,859			9,447,007			6,890,122
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	6,519,967		$	10,035,859		$	9,447,007
SUPPLEMENTAL DISCLOSURES
Income taxes paid/(received), net	$	3,954		$	(146,132	)	$	(168,529	)
Interest paid	1,442,484			1,439,126			1,270,060
NON-CASH TRANSACTIONS
Loans transferred to other real estate owned	44,650			83,364			108,767
Loans transferred from held-for-investment to ("HFS") held-for-sale, net	202,760			143,825			2,886,766
Unsettled purchases of investment securities	—			230,052			697,057
Unsettled sales of investment securities	39,783			—			—
Residential loan securitizations	18,214			26,736			421,455
Contribution of SFS from shareholder (3)	322,078			—			—
Capital distribution to shareholder	—			30,789			—
Contribution of incremental SC shares from shareholder	707,589			—			—

(1) December 31, 2016 cash flow activity has been updated for the deferred tax classification correction. Refer to Note 1 - Basis of Presentation and Accounting Policies for additional information.

(2) December 31, 2016 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.

(3) The contribution of SFS to SHUSA was accounted for as a non-cash transaction. Refer to Note 1 - Basis of Presentation and Accounting Policies for additional information.

See accompanying notes to Consolidated Financial Statements.

121

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; Santander Securities, LLC ("SSLLC"), a broker-dealer headquartered in Boston, Massachusetts; Banco Santander International ("BSI"), an Edge Act corporation located in Miami, Florida, that offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; and Santander Investment Securities Inc. ("SIS"), a registered broker-dealer located in New York providing services in investment banking, institutional sales, 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 loans and lines of credit, and auto and other consumer loans throughout the Mid-Atlantic and Northeastern areas of the United States, focused throughout Pennsylvania, New Jersey, New York, New Hampshire, Massachusetts, Connecticut, Rhode Island, and Delaware. The Bank uses its deposits, as well as other financing sources, to fund its loan and investment portfolios.

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

In conjunction with a ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC ("FCA") that became effective May 1, 2013 (the "Chrysler Agreement"), SC offers a full spectrum of auto financing products and services to FCA customers and dealers under the Chrysler Capital brand. These products and services include consumer RICs and leases, as well as dealer loans for inventory, construction, real estate, working capital and revolving lines of credit. Refer to Note 19 for additional details.

As of December 31, 2017, SC was owned approximately 68.1% by SHUSA and 31.9% by other shareholders. During 2017, SHUSA increased its ownership in SC; refer to additional details in Note 21. 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. As these entities were solely owned and controlled by Santander prior to July 1, 2016, in accordance with ASC 805, the transaction has been accounted for under the common control guidance, which requires the Company to recognize the assets and liabilities transferred at the historical cost of the transferring entity at the date of the transfer. Additionally, as this transaction represents a change in reporting entity, the guidance requires retrospective combination of the entities for all periods presented in these financial statements as if the combination had been in effect since inception of common control.

122

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

On July 1, 2017, an additional Santander subsidiary, SFS, a finance company located in Puerto Rico, was transferred to the Company. The contribution of SFS to the Company transferred approximately $679 million of assets, which were primarily comprised of cash and cash equivalents and LHFS, approximately $357 million of liabilities and approximately $322 million of equity to the Company. Moreover, the Company is in the process of dissolving the business assets.

SFS is an entity under common control of Santander; however, its results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company. As a result, the Company has determined that it will report the results of SFS on a prospective basis beginning July 1, 2017 rather than, as required by generally accepted accounting principles ("GAAP"), retrospectively restate its financial statements for the contribution of SFS. As a result, SHUSA's net income is understated for the year ended December 31, 2017 by $3.3 million and overstated for the year ended December 31, 2016 by $13.5 million. The Company’s net loss for the year ended December 31, 2015 is understated by $99.9 million. SFS incurred a goodwill impairment charge of $98.3 million during the year ended December 31, 2015. In addition, a contribution to stockholder's equity of $322 million was recorded on July 1, 2017. These amounts are immaterial to the overall presentation of the Company's financial statements for each of the periods presented.

Basis of Presentation

These Consolidated Financial Statements include the assets, liabilities, revenues and expenses accounts of the Company and its consolidated subsidiaries, including the Bank, SC, and certain special purpose financing trusts utilized in financing transactions that are considered VIEs. The Company generally consolidates VIEs for which it is deemed to be the primary beneficiary and generally consolidates voting interest entities ("VOEs") in which the Company has a controlling financial interest. 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 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 to make the information presented not misleading.

Corrections to Previously Reported Amounts

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

Deferred Tax Classification

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

The Company has determined that the impact of the misclassification of deferred tax balances in the Consolidated Balance Sheets for the periods ended March 31, 2017, December 31, 2016, September 30, 2016, June 30, 2016, and March 31, 2016 and the corresponding impact of an overstatement of previously disclosed capital ratios ranging from 8 bps to 17 bps are immaterial for all periods.

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

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

123

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

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 Statements of Cash Flows, 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 $188.3 million for the year ended December 31, 2016. There was no net impact to cash provided by financing activities. The misclassfication 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 Statement of Cash Flows 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 year ended December 31, 2016 in its Consolidated Statements of Cash Flows included herein. In future filings, the Company will correct the Consolidated Statement of Cash Flows disclosures for the comparative periods when presented.

Recently Adopted Accounting Standards

Since January 1, 2017, the Company adopted the following Financial Accounting Standards Board ("FASB") ASUs:

• ASU 2016-09, Compensation - Stock Compensation (Topic 718). This new guidance simplifies certain aspects related to income taxes, the SCF, and forfeitures when accounting for share-based payment transactions. ASU 2016-09 eliminates the requirement to recognize excess tax benefits in accumulated paid-in capital pools, and instead requires companies to record all excess tax benefits and deficiencies at settlement, vesting or expiration in the income statement as provision for income taxes. At adoption of ASU 2016-09 on January 1, 2017, the cumulative effect of previously unrecognized excess tax benefits totaled $27.1 million net of tax, and was recognized through an increase of $14.8 million to beginning retained earnings and $37.4 million to NCI, offset by a decrease of $26.5 million to common stock and paid-in capital. The Company recorded excess tax deficiency, net of tax, of $796 thousand in the provision for income taxes rather than as a decrease to additional paid-in capital for the year ended December 31, 2017, on a prospective basis. All excess tax benefits along with other income tax cash flows will now be classified as an operating activity rather than financing activities in the SCF on a prospective basis. In addition, the Company voluntarily changed its accounting policy on forfeitures from previously recognizing forfeitures based on estimating the number of awards expected to be forfeited to electing to recognize forfeiture of awards as they occur to simplify the accounting for forfeitures.

• In January 2017, the FASB also issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. It removes Step 2 of the goodwill impairment test, which required a hypothetical purchase price allocation. The guidance provides that a goodwill impairment is the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. All other goodwill impairment guidance remains largely unchanged. The same one-step impairment test is applied to goodwill at all reporting units. The Company early adopted this ASU on the date of its annual impairment test, October 1, 2017. The adoption of this ASU did not have a material impact on the Company’s financial position, results of operations or cash flows.

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

• ASU 2016-05, Derivatives and Hedging (Topic 815): Effect of Derivative Contract Novations on Existing Hedge Accounting Relationships.

• ASU 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments.

• ASU 2016-07, Investments-Equity Method and Joint Ventures (Topic 323), Simplifying the Transition to the Equity Method of Accounting.

• ASU 2016-17, Consolidation (Topic 810), Interest Held Through Related Parties That Are Under Common Control.

Consolidation

The purpose of consolidated financial statements is to present the results of operations and the financial position of the Company and its subsidiaries as if the consolidated group were a single economic entity. There is a presumption that consolidated financial statements are more meaningful than separate financial statements and that they are usually necessary for a fair presentation when one of the entities in the consolidated group directly or indirectly has a controlling financial interest in the other entities.

124

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

In accordance with the applicable accounting guidance for consolidations, the Consolidated Financial Statements include any VOEs in which the Company has a controlling financial interest and any VIEs for which the Company is deemed to be the primary beneficiary. The Company consolidates its VIEs if the Company has (i) a variable interest in the entity; (ii) the power to direct activities of the VIE that most significantly impact the entity's economic performance; and (iii) the obligation to absorb losses of the entity or the right to receive benefits from the entity that could potentially be significant to the VIE (i.e., the Company is considered to be the primary beneficiary). The Company generally consolidates its VOEs if the Company, directly or indirectly, owns more than 50% of the outstanding voting shares of the entity and the noncontrolling shareholders do not hold any substantive participating or controlling rights. Interests in VIEs and VOEs can include equity interests in corporations, partnerships and similar legal entities, subordinated debt, securitizations, derivatives contracts, leases, service agreements, guarantees, standby letters of credit, loan commitments, and other contracts, agreements and financial instruments.

Upon the occurrence of certain significant events, as required by the VIE model, the Company reassesses whether a legal entity in which the Company is involved is a VIE. The reassessment process considers whether the Company has acquired or divested the power to direct the activities of the VIE through changes in governing documents or other circumstances. The reassessment also considers whether the Company has acquired or disposed of a financial interest that could be significant to the VIE, or whether an interest in the VIE has become significant or is no longer significant. The consolidation status of the entities with which the Company is involved may change as a result of such reassessments. Changes in consolidation status are applied prospectively, with assets and liabilities of a newly consolidated VIE initially recorded at fair value. A gain or loss may be recognized upon deconsolidation of a VIE, depending on the carrying amounts of deconsolidated assets and liabilities compared to the fair value of retained interests and ongoing contractual arrangements.

The Company uses the equity method to account for unconsolidated investments in VOEs if the Company has significant influence over the entity's operating and financing decisions but does not maintain a controlling financial interest. Unconsolidated investments in VOEs or VIEs in which the Company has a voting or economic interest of less than 20% generally are carried at cost. These investments are included in Other assets on the Consolidated Balance Sheets, and the Company's proportionate share of income or loss is included in Other miscellaneous expenses within the Consolidated Statements of Operations.

Business Combinations

The Company accounts for business combinations using the acquisition method of accounting, and records the identifiable assets, liabilities and any NCI of the acquired business at their acquisition date fair values. The excess of the purchase price over the estimated fair value of the net assets acquired is recorded as goodwill. Any changes in the estimated acquisition date fair values of the net assets recorded prior to the finalization of a more detailed analysis, but not to exceed one year from the date of acquisition, will change the amount of the purchase price allocable to goodwill. Any subsequent changes to any purchase price allocations that are material to the Company’s Consolidated Financial Statements will be adjusted retrospectively. All acquisition related costs are expensed as incurred.

The results of operations of the acquired companies are recorded in the Consolidated Statements of Operations from the date of acquisition. The application of business combination principles including the determination of the fair value of the net assets acquired, requires the use of significant estimates and assumptions. Please see the related discussion under the caption "Goodwill and Intangible Assets" below.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant estimates pertain to fair value measurements, the ALLL and reserve for unfunded lending commitments, accretion of discounts and subvention on RICs, estimates of expected residual values of leased vehicles subject to operating leases, goodwill, and income taxes. Actual results may differ from the estimates, and the differences may be material to the Consolidated Financial Statements.

125

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

Revenue Recognition

The Company primarily earns interest and non-interest income from various sources, including:

• Lending.

• Investment securities.

• Customer deposit and loan fees.

• BOLI.

• Loan sales and servicing.

• Leases.

The principal source of revenue is interest income from loans and investment securities. Interest income is recognized on an accrual basis primarily according to non-discretionary formulas in written contracts, such as loan agreements or securities contracts. Revenue earned on interest-earning assets, including unearned income and the accretion of discounts recognized on acquired or purchased loans, is recognized based on the constant effective yield of such interest-earning assets. Unearned income pertains to the net of fees collected and certain costs incurred from loan originations.

Gains or losses on sales of investment securities are recognized on the trade date.

The Company recognizes revenue from servicing commercial mortgages and consumer loans as earned. Mortgage banking income, net includes fees associated with servicing loans for third parties based on the specific contractual terms and changes in the fair value of MSRs. Gains or losses on sales of residential mortgage, multifamily and home equity loans are included within mortgage banking revenues and are recognized when the sale is complete.

Service charges on deposit accounts are recognized when earned.

Income from BOLI represents increases in the cash surrender value of the policies, as well as insurance proceeds and interest.

Income from finance leases is recognized as part of interest income over the term of the lease using the constant effective yield method, while income arising from operating leases is recognized as part of other non-interest income over the term of the lease on a straight-line basis.

Fair Value Measurements

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

When measuring the fair value of a liability, the Company assumes that the transfer will not affect the nonperformance risk associated with the liability. The Company considers the effect of the credit risk on the fair value for any period in which fair value is measured. There are three valuation approaches for measuring fair value: the market approach, the income approach and the cost approach. Selecting the appropriate technique for valuing a particular asset or liability should consider the exit market for the asset or liability, the nature of the asset or liability being measured, and how a market participant would value the same asset or liability. Ultimately, selecting the appropriate valuation method requires significant judgment.

Valuation inputs refer to the assumptions market participants would use in pricing a given asset or liability. Inputs can be observable or unobservable. Observable inputs are assumptions based on market data obtained from an independent source. Unobservable inputs are assumptions based on the Company's own information or assessment of assumptions used by other market participants in pricing the asset or liability. The unobservable inputs are based on the best and most current information available on the measurement date.

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

Cash and Cash Equivalents

Cash and cash equivalents include cash and amounts due from depository institutions, interest-bearing deposits in other banks, federal funds sold, and securities purchased under agreements to resell. Cash and cash equivalents have original maturities of three months or less and, accordingly, the carrying amount of these instruments is deemed to be a reasonable estimate of fair value. As of December 31, 2017, the Company has maintained balances in various operating and money market accounts in excess of federally insured limits.

Cash deposited to support securitization transactions, lockbox collections, and related required reserve accounts are recorded in the Company's Consolidated Balance Sheet as of December 31, 2017 as restricted cash. Excess cash flows generated by securitization trusts ("Trusts") are added to the restricted cash reserve account, creating additional over-collateralization until the contractual securitization requirement has been reached. Once the targeted reserve requirement is satisfied, additional excess cash flows generated by the Trusts are released to the Company as distributions from the Trusts. Lockbox collections are added to restricted cash and released when transferred to the appropriate warehouse line of credit or Trust. The Company also maintains restricted cash primarily related to cash posted as collateral related to derivative agreements and cash restricted for investment purposes.

Investment Securities and Other Investments

Investment securities are classified as either AFS, held to maturity ("HTM"), trading, or other investments. Management determines the appropriate classification at the time of purchase.

Securities expected to be held for an indefinite period of time are classified as AFS and are carried at fair value, with temporary unrealized gains and losses reported as a component of accumulated other comprehensive income within stockholder's equity, net of estimated income taxes.

Debt securities purchased which the Company has the positive intent and ability to hold until maturity are classified as HTM securities. HTM securities are reported at cost and adjusted for amortization of premium and accretion of discount. Transfers of debt securities into the HTM category from the AFS category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in other comprehensive income (“OCI”) and in the carrying value of the HTM securities. Such amounts are amortized over the remaining lives of the securities. There were no transfers from AFS to HTM during the year ended December 31, 2017 or 2016.

The Company conducts a comprehensive security-level impairment assessment quarterly on all securities with a fair value that is less than their amortized cost basis to determine whether the loss represents other-than-temporary impairment (“OTTI”). The quarterly OTTI assessment takes into consideration whether (i) the Company has the intent to sell or, (ii) it is more likely than not that it will be required to sell the security before the expected recovery of its amortized cost. The Company also considers whether or not it would expect to receive all of the contractual cash flows from the investment based on its assessment of the security structure, recent security collateral performance metrics, external credit ratings, failure of the issuer to make scheduled interest or principal payments, judgment and expectations of future performance, and relevant independent industry research, analysis and forecasts. The Company also considers the severity of the impairment in its assessment. In the event of a credit loss, the credit component of the impairment is recognized within non-interest income as a separate line item, and the non-credit component is recorded within accumulated other comprehensive income.

Realized gains and losses on sales of investment securities are recognized on the trade date and included in earnings within Net gain on sale of investment securities, which is a component of non-interest income. Unamortized premiums and discounts are recognized in interest income over the estimated life of the security using the interest method.

Trading securities are carried at fair value, with changes in fair value recorded in non-interest income. Investments that are purchased principally for the purpose of economically hedging the MSR in the near term are classified as trading securities and carried at fair value, with changes in fair value recorded as a component of the Mortgage banking income, net, line of the Consolidated Statements of Operations.

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

Other investments primarily include the Company's investment in the stock of the FHLB of Pittsburgh and the Federal Reserve Bank ("FRB"). Although FHLB and FRB stock are equity interests in the FHLB and FRB, respectively, it does not have a readily determinable fair value, because its ownership is restricted and it is not readily marketable. FHLB stock can be sold back only at its par value of $100 per share and only to FHLBs or to another member institution. Accordingly, FHLB stock is carried at cost. The Company evaluates this investment for impairment on the ultimate recoverability of the par value rather than by recognizing temporary declines in value.

See Note 3 to the Consolidated Financial Statements for detail on the Company's investments.

LHFI

LHFI include commercial and consumer loans (including RICs) originated by the Company as well as loans acquired by the Company which the Company intends to hold for the foreseeable future or until maturity. RICs consist largely of nonprime automobile finance receivables that are acquired individually from dealers at a nonrefundable discount from the contractual principal amount. RICs also include receivables originated through a direct lending program and loan portfolios purchased from other lenders.

Originated LHFI

Originated LHFI are reported net of cumulative charge offs, unamortized loan origination fees and costs, and unamortized discounts and premiums. Interest on loans is credited to income as it is earned. For most of the Company's originated LHFI, loan origination fees and certain direct loan origination costs and premiums and discounts are deferred and recognized as adjustments to interest income in the Consolidated Statements of Operations over the contractual life of the loan utilizing the effective interest method. For RICs, loan origination fees and costs, premiums and discounts are deferred and amortized over estimated lives as adjustments to interest income utilizing the interest method using estimated prepayment speeds, which are updated on a monthly basis. The Company estimates future principal prepayments specific to pools of homogeneous loans which are based on the vintage, credit quality at origination and term of the loan. Prepayments in our portfolio are sensitive to credit quality, with higher credit quality loans experiencing higher voluntary prepayment rates than lower credit quality loans. The resulting prepayment rate specific to each pool is based on historical experience and is used as an input in the calculation of the constant effective yield. The impact of defaults is not considered in the prepayment rate; the prepayment rate only considers voluntary prepayments. Our estimated weighted average prepayment rates ranged from 6.1% to 10.4% at December 31, 2017 and 6.0% to 10.5% at December 31, 2016.

The Company’s LHFI, including RICs and personal unsecured loans originated by SC since the change in control of SC in the first quarter of 2014 (the "Change in Control"), are carried at amortized cost, net of the ALLL. When a RIC is originated, certain cost basis adjustments (the net discounts) to the principal balance of the loan are recognized in accordance with the accounting guidance for loan origination fees and costs in ASC 310-20. These cost basis adjustments generally include the following:

• Origination costs.

• Dealer discounts - dealer discounts to the principal balance of the loan generally occur in circumstances in which the contractual interest rate on the loan is not sufficient to compensate for the credit risk of the borrower.

• Participation - participation fees, or premiums, paid to the dealer as a form of profit-sharing, rewarding the dealer for originating loans that perform.

• Subvention - payments received from the vehicle manufacturer as compensation (yield enhancement) for the cost of below-market interest rates offered to consumers.

Originated loans are initially recorded at the proceeds paid to fund the loan. Any discount at origination for loans is considered by the Company to reflect yield enhancements and is accreted to income using the effective interest method.

When loans held for investment ("HFI") are re-designated as LHFS, any specific and allocated allowance for credit losses ("ACL") is charged-off to reduce the basis of the loans to the extent the estimated fair value is lower than the loan's recorded investment.

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

Purchased LHFI

Purchased loans are loans acquired in a bulk purchase or business combination. RICs acquired directly from a dealer are considered to be originated loans, not purchased loans. The Company has accounted for its January 2014 consolidation of SC as a business combination. The RIC and personal unsecured loans purchased in the Change in Control were initially recognized at fair value, and no ALLL was recognized at the Change in Control date pursuant to business combination accounting. The purchased portfolio acquired included performing loans as well as those loans acquired with evidence of credit deterioration (defined as those on non-accrual status at the time of the acquisition). All of SC’s performing RICs and personal unsecured loans that were HFI were recorded by the Company at a discount.

Subsequent to the Change in Control, the purchase discounts on the retail installment loans are accreted over the remaining expected lives of the loans to their par values using the retrospective effective interest method, which considers the impact of estimated prepayments that is updated on a quarterly basis. The purchase discount on personal unsecured loans (given their revolving nature) are amortized on a straight-line basis in accordance with ASC 310-20.

The Company irrevocably elected to account for RICs acquired with evidence of credit deterioration at the Change in Control date at fair value in accordance with ASC 825. Accordingly, the Company does not recognize interest income for these RICs and recognizes the fair value adjustments on these loans as part of other non-interest income in the Company’s Consolidated Statements of Operations. For certain of the RICs which the Company has elected to account for at fair value but are not considered non-accrual, the Company separately recognizes interest income from the total fair value adjustment. No ALLL is recognized for loans that the Company has elected to account for at fair value.

ALLL for Originated Loans and Reserve for Unfunded Lending Commitments

The ALLL and reserve for unfunded lending commitments are maintained at levels that management considers adequate to provide for losses on the recorded investment of the loan portfolio, based upon an evaluation of known and inherent risks in the loan portfolio. Management's evaluation takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, economic 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 ALLL consists of two elements: (i) an allocated allowance, which is comprised of allowances established on loans specifically evaluated for impairment, and loans collectively evaluated for impairment, based on historical loan and lease loss experience adjusted for current trends and both general economic conditions and other risk factors in the Company's loan portfolios, and (ii) an unallocated allowance to account for a level of imprecision in management's estimation process. Reserve levels are collectively reviewed for adequacy and approved quarterly by Board-level committees.

The ALLL includes the estimate of credit losses that management expects will be realized during the loss emergence period, including the amount of net discounts that is included in the loans' recorded investment 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.

Management regularly monitors the condition of borrowers and assesses both internal and external factors in determining whether any relationships have deteriorated considering factors such as historical loss experience, trends in delinquency and non-performing loans ("NPLs"), changes in risk composition and underwriting standards, experience and ability of staff and regional and national economic conditions and trends.

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

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

The Company's unallocated allowance is no more than 5% of the overall allowance. This is considered to be reasonably sufficient to absorb imprecisions of models to otherwise provide for coverage of inherent losses in the Company's entire loan and lease portfolio. Imprecisions include loss factors inherent in the loan portfolio that may not have been discreetly contemplated in the general and specific components of the allowance, as well as potential variability in estimates. Period-to-period changes in the Company's historical unallocated ALLL positions are considered in light of these factors.

The Company reserves for certain incurred, but undetected, losses within the loan portfolio. This is due to several factors such as inherent delays in obtaining information regarding a customer's financial condition or changes in its unique business conditions and the interpretation of economic trends. While this analysis is conducted at least quarterly, the Company has the ability to revise the allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a loan pool classification.

Regardless of the extent of the Company's analysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the judgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains an unallocated allowance to recognize the existence of these exposures.

For the commercial loan portfolio segment, the Company has specialized credit officers and workout units that identify and manage potential problem loans. Changes in management factors, financial and operating performance, company behavior, industry factors and external events and circumstances are evaluated on an ongoing basis to determine whether potential impairment is evident and additional analysis is needed. For the commercial loan portfolio segment, risk ratings are assigned to each loan to differentiate risk within the portfolio, and are reviewed on an ongoing basis by Credit Risk Management and revised, if needed, to reflect the borrower's current risk profile and the related collateral positions. The risk ratings consider factors such as financial condition, debt capacity and coverage ratios, market presence and quality of management. Generally, credit officers reassess a borrower's risk rating on no less than an annual basis, and more frequently if warranted. This reassessment process is managed on a continual basis by the Credit Risk Review group to ensure consistency and accuracy in risk ratings as well as appropriate frequency of risk rating review by the Company's credit officers. The Company's Credit Risk Review group regularly performs loan reviews and assesses the appropriateness of assigned risk ratings.

When a loan's risk rating is downgraded beyond a certain level, the Company's Workout Department becomes responsible for managing the credit risk. Risk rating actions are generally reviewed formally by one or more credit committees, depending on the size of the loan and the type of risk rating action being taken. Detailed analyses are completed that support the risk rating and management's strategies for the customer relationship going forward.

The consumer loan portfolio segment and small business loans are monitored for credit risk and deterioration with statistical tools considering factors such as delinquency, loan-to-value ("LTV") ratio, and credit scores. The Bank evaluates the consumer portfolios throughout their life 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 supporting the loans. 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.

Within the consumer loan portfolio segment, for both residential and home equity loans, loss severity assumptions are incorporated into the loan and lease loss reserve models to estimate loan balances that will ultimately charge off. These assumptions are based on recent loss experience for six LTV bands within the portfolios. LTV ratios are updated based on movements in the state-level Federal Housing Finance Agency house pricing indices.

For non-troubled debt restructuring ("TDR") RICs and personal unsecured loans, the Company estimates the ALLL at a level considered adequate to cover probable credit losses in the recorded investment of the portfolio. Probable losses are estimated based on contractual delinquency status and historical loss experience, in addition to the Company’s judgment of estimates of the value of the underlying collateral, bankruptcy trends, economic conditions such as unemployment rates, changes in the used vehicle value index, delinquency status, historical collection rates and other information in order to make the necessary judgments as to probable loan and lease losses.

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

In addition to the ALLL, management estimates probable losses related to unfunded lending commitments. Unfunded lending commitments for commercial customers are analyzed and segregated by risk according to the Company's internal risk rating scale. These risk classifications, in conjunction with an analysis of historical loss experience, current economic conditions, performance trends within specific portfolio segments, and any other pertinent information result in the estimation of the reserve for unfunded lending commitments. Additions to the reserve for unfunded lending commitments are made by charges to the provision for credit losses, and this reserve is classified within Other liabilities on the Company's Consolidated Balance Sheets.

Risk factors are continuously reviewed and revised by management when conditions warrant. A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. In addition, a review of allowance levels based on nationally published statistics is conducted on at least an annual basis.

The factors supporting the ACL do not diminish the fact that the entire ACL is available to absorb losses in the loan and lease portfolio and related commitment portfolio, respectively. The Company's principal focus, therefore, is on the adequacy of the total ACL.

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

Provisions for credit losses are charged to provision expense in amounts sufficient to maintain the ACL at levels considered adequate to cover probable credit losses incurred in the Company’s HFI loan portfolios. The Company uses the incurred loss approach in providing an ACL on the recorded investment of its existing loans. This approach requires that loan loss provisions are recognized and the corresponding allowance recorded when, based on all available information, it is probable that a credit loss has been incurred. The estimate for credit losses for loans that are individually evaluated for impairment is generally determined through an analysis of the present value of the loan’s expected future cash flows, except for those that are deemed to be collateral dependent.  For those loans that are collectively assessed for impairment, the Company utilizes historical loan loss experience information as part of its evaluation. In addition, when establishing the collective ACL for originated loans, the Company’s estimate of losses on recorded investment includes the estimate of the related net discount balance that is expected at the time of charge-off. Although the ACL is established on a collective basis, actual charge-offs are recorded on a loan-by-loan basis when losses are confirmed or when established delinquency thresholds have been met. Additional discussions related to the Company’s charge-off and credit loss provision policies are provided in the “Charge-offs of Uncollectible Loans” and “Allowance for Loan and Lease Losses for Originated Loans and Reserve for Unfunded Lending Commitments” sections below. The Company applies different accounting policies to the treatment of discounts in the ACL specific to loans purchased in a bulk purchase or a business combination versus originated loans. See the “Allowance for Loan and Lease Losses for Purchased Loans” section below.

When a loan in any portfolio or class has been determined to be impaired (e.g., TDRs and non-accrual commercial loans in excess of $1 million) as of the balance sheet date, the Company measures impairment based on the present value of expected future cash flows discounted at the loan's original effective interest rate. However, as a practical expedient, the Company may measure impairment based on a loan's observable market price, or the fair value of the collateral less costs to sell if the loan is a collateral-dependent loan. A specific reserve is established as a component of ACL for these impaired loans. Subsequent to the initial measurement of impairment, if there is a significant change to the impaired loan’s expected future cash flows, the Company recalculates the impairment and appropriately adjusts the specific reserve. This is also the case if there was a significant change in the initial estimate for impaired loans that are measured based on a loan's observable market price or the fair value of the collateral less costs to sell if the loan is a collateral-dependent loan. Some impaired loans have risk characteristics similar to other impaired loans and may be aggregated for the measurement of impairment. For those impaired loans that are collectively assessed for impairment, the Company utilizes historical loan loss experience information as part of its evaluation. When the Company determines that the present value of an impaired loan is less than its carrying amount, the Company recognizes impairment through a provision estimate or a charge-off to the allowance. Management performs these assessments on at least a quarterly basis.

ALLL for Purchased Loans

The Company assesses the collectability of the recorded investment in RICs and personal unsecured loans on a collective basis quarterly and determines the ALLL at levels considered adequate to cover probable credit losses incurred in the portfolio. Purchased loans, including the loans acquired at the Change in Control, were initially recognized at fair value with no allowance. The Company only recognizes an allowance for loan losses on purchased loans through a provision expense when incurred losses in the portfolio exceed the unaccreted purchase discount on the portfolio.

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

Loans purchased in a bulk purchase or business combination are expected to have greater uncertainty in cash flows, which generally results in larger discounts compared to newly originated loans. Purchase discounts on purchased loans are accreted over the remaining expected lives of the loans using the retrospective effective interest method. The unamortized portion of the purchase discount is a reduction to the loans’ recorded investment and therefore reduces allowance requirements. Because the loans purchased in a bulk purchase or in a business combination are initially recognized at fair value with no allowance, the Company considers the entire discount on the purchased portfolio as available to absorb the credit losses in the purchased portfolio when determining the ACL. Except for purchased loan portfolios acquired with evidence of credit deterioration (on which we elected to apply the FVO), this accounting policy is applicable to all loan purchases, including loan portfolio acquisitions or business combinations. Currently, the portfolio acquired in the Change of Control is the only purchased loan portfolio meeting this criteria.

Interest Recognition and Non-accrual loans

Interest from loans is accrued when earned in accordance with the terms of the loan agreement. The accrual of interest is discontinued and accrued but uncollected interest is reversed once a loan is placed in non-accrual status. A loan is determined to be non-accrual when it is probable that scheduled payments of principal and interest will not be received when due according to the contractual terms of the loan agreement. The Company generally places commercial loans and consumer loans on non-accrual status when they become 90 days or more past due. When the collectability of the recorded loan balance of a nonaccrual loan is in doubt, any cash payments received from the borrower are applied first to reduce the carrying value of the loan. Otherwise, interest income may be recognized to the extent cash is received. Generally, a nonaccrual loan is returned to accrual status when, based on the Company’s judgment, the borrower’s ability to make the required principal and interest payments has resumed and collectability of remaining principal and interest is no longer doubtful. Interest income recognition resumes for nonaccrual loans that were accounted for on a cash basis method when they return to accrual status, while interest income that was previously recorded as a reduction in the carrying value of the loan would be recognized as interest income based on the effective yield to maturity on the loan. Please refer to the TDRs section below for discussion related to TDR loans placed on non-accrual status. Credit cards continue to accrue interest until they become 180 days past due, at which point they are charged-off.

For RICs, the accrual of interest is discontinued and accrued but uncollected interest is reversed once a RIC becomes more than 60 days past due, and is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due. The servicing practices for RICs originated after January 1, 2017 changed such that there is an increase in the minimum payment requirements. For reporting of past due loans, a payment of 90% or more of the amount due is considered to meet the contractual 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 certain RICs originated prior to January 1, 2017, the Company considers 50% of a single payment due sufficient to qualify as a payment for past due classification purposes. For RICs originated after January 1, 2017, the required minimum payment is 90% of the scheduled payment, regardless of through which origination channel the receivable was originated. The payment following the partial payment must be a full payment, or the account will move into delinquency status at that time. For non-TDR RICs, payments generally are applied to fees first, then interest, then principal, regardless of a contract's accrual status.

Charge-off of Uncollectible Loans

Any loan may be charged-off if a loss confirming event has occurred. Loss confirming events usually involve the receipt of specific adverse information about the borrower and may include bankruptcy (unsecured), foreclosure, or receipt of an asset valuation indicating a shortfall between the value of the collateral and the book value of the loan when that collateral asset is the sole source of repayment. The Company generally charges off commercial loans when it is determined that the specific loan or a portion thereof is uncollectible. This determination is based on facts and circumstances of the individual loans and normally includes considering the viability of the related business, the value of any collateral, the ability and willingness of any guarantors to perform and the overall financial condition of the borrower. Partially charged-off loans continue to be evaluated on not less than a quarterly basis, with additional charge-offs or loan and lease loss provisions taken on the remaining loan balance, if warranted, utilizing the same criteria.

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

The Company generally charges off consumer loans, or a portion thereof, as follows: residential mortgage loans and home equity loans are charged-off to the estimated fair value of their collateral (net of selling costs) when they become 180 days past due, and other loans (closed-end) are charged-off when they become 120 days past due. Auto loans are charged-off to the estimated net recovery value in the month an account becomes greater than 120 days delinquent if the Company has not repossessed the related vehicle. The Company charges off accounts in repossession to estimated net recovery value when the automobile is repossessed and legally available for disposition. Loans receiving a bankruptcy notice or in which fraud is discovered are written down to the collateral value less costs to sell within 60 days of such notice or discovery. Revolving personal unsecured loans are charged off when they become 180 days past due. Credit cards are charged off when they are 180 days delinquent or within 60 days after the receipt of notification of the cardholder’s death or bankruptcy. Charge-offs are not required when it can be clearly demonstrated that repayment will occur regardless of delinquency status. Factors that would demonstrate repayment include a loan that is secured by collateral and is in the process of collection, a loan supported by a valid guarantee or insurance, or a loan supported by a valid claim against a solvent estate.

RICs are charged off against the allowance in the month in which the account becomes 120 days contractually delinquent if the Company has not repossessed the related vehicle. The Company charges off accounts in repossession when the automobile is repossessed and legally available for disposition. A net charge off represents the difference between the estimated net sales proceeds and the Company's recorded investment in the related contract. Accounts in repossession that have been charged off and are pending liquidation are removed from RIC status and the related repossessed automobiles are included in Other assets in the Company's Consolidated Balance Sheets.

TDRs

TDRs are loans that have been modified for which the Company has agreed to make certain concessions to customers to both meet the needs of the customers and maximize the ultimate recovery of the loan. TDRs occur when a borrower is experiencing financial difficulties and the loan is modified involving a concession that would otherwise not be granted to the borrower. TDRs are generally placed on non-accrual status until the Company believes repayment under the revised terms is reasonably assured and a sustained period of repayment performance has been achieved (typically defined as six months for a monthly amortizing loan). All costs incurred by the Company in connection with a TDR are expensed as incurred. The TDR classification remains on the loan until it is paid in full or liquidated.

Commercial Loan TDRs

All of the Company’s commercial loan modifications are based on the circumstances of the individual customer, including specific customers' complete relationship with the Company. Loan terms are modified to meet each borrower’s specific circumstances at a point in time and may allow for modifications such as term extensions 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 an upgraded risk rating and return to accrual status after a sustained period of payment performance has been achieved (typically six months for monthly payment schedules). The B note, if any, is structured as a deficiency note and the balance is charged off but the debt is usually not forgiven. As TDRs, they will be subject to analysis for specific reserves by either calculating the present value of expected future cash flows or, if collateral-dependent, calculating the fair value of the collateral less its estimated cost to sell. The TDR classification will remain on the loan until it is paid in full or liquidated.

Consumer Loan TDRs

The majority of the Company's TDR balance is comprised of RICs and auto loans. The terms of the modifications for the RIC and auto loan portfolio 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.

In accordance with our policies and guidelines, the Company at times offers extensions (deferrals) to consumers on our RICs under which the consumer is allowed to defer a maximum of three payments per event to the end of the loan. More than 90% of deferrals granted are for two payments. Our policies and guidelines limit the frequency of each new deferral that may be granted to one deferral every six months, regardless of the length of any prior deferral. The maximum number of months extended for the life of the loan for all automobile RICs is eight, while some marine and recreational vehicle ("RV") contracts have a maximum of twelve months extended to reflect their longer term. Additionally, we generally limit the granting of deferrals on new accounts until a requisite number of payments has been received. During the deferral period, we continue to accrue and collect interest on the loan in accordance with the terms of the deferral agreement. The Company considers all individually acquired RICs that have been modified at least once, deferred for a period of 90 days or more, or deferred at least twice, as TDRs.

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

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 nonaccrual 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 nonaccrual 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 a cost recovery basis, the Company returns them 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 nonaccrual (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 another 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.

At the time a deferral is granted on a RIC, all delinquent amounts may be deferred or paid, resulting in the classification of the loan as current and therefore not considered a delinquent account. Thereafter, the account is aged based on the timely payment of future installments in the same manner as any other account.

Changes in deferral levels do not have a direct impact on the ultimate amount of consumer finance receivables charged off. However, the timing of a charge-off may be affected if the previously deferred account ultimately results in a charge-off. To the extent that deferrals impact the ultimate timing of when an account is charged off, historical charge-off ratios, loss confirmation periods, and cash flow forecasts for loans classified as TDRs used in the determination of the adequacy of the ALLL 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 ALLL and related provision for loan and lease losses.

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

Consumer TDRs in the residential mortgage and home equity portfolios are generally placed on non-accrual status until the Company believes repayment under the revised terms is reasonably assured and a sustained period of repayment performance has been achieved (typically six months for a monthly amortizing loan). Any loan that has remained current for the six months immediately prior to modification will remain on accrual status after the modification is implemented. The TDR classification will remain on the loan until it is paid in full or liquidated. In addition to those identified as TDRs above, accounting guidance also requires loans discharged under Chapter 7 bankruptcy to be considered TDRs and collateral-dependent, regardless of delinquency status. These loans are written down to fair market value and classified as non-accrual/non-performing for the remaining life of the loan.

TDR Impact to ALLL

The ALLL is established to recognize losses 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 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.

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 subsequently defaulted loans is generally measured based on the fair value of the collateral, if applicable, less its estimated cost to sell.

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

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 the fair values of their collateral less its estimated cost to sell. Accordingly, upon TDR modification or if a TDR modification subsequently defaults, the allowance methodology remains unchanged.

Impaired loans

A loan is considered to be impaired when, based upon current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan. An insignificant delay (e.g., less than 61 days for RICs or less than 90 days for all of the Company's other loans) or insignificant shortfall in amount of payments does not necessarily result in the loan being identified as impaired.

The Company considers all of its loans TDRs and all of its non-accrual commercial loans in excess of $1 million to be impaired as of the balance sheet date. The Company may perform an impairment analysis on loans that fail to meet this threshold if the nature of the collateral or business conditions warrant. The Company considers all individually acquired RICs that have been modified at least once, deferred for a period of 90 days or more, or deferred at least twice, as TDRs.

The Company measures impairment on impaired loans based on the present value of expected future cash flows discounted at the loan's original effective interest rate, except that, as a practical expedient, the Company may measure impairment based on a loan's observable market price, or the fair value of the collateral, less the costs to sell, if the loan is a collateral-dependent loan. Some impaired loans share common risk characteristics. Such loans are collectively assessed for impairment and the Company utilizes historical loan loss experience information as part of its evaluation. When the Company determines that the present value of an impaired loan is less than its carrying amount, the Company recognizes impairment through a provision estimate or a charge-off to the allowance. Management performs these assessments on at least a quarterly basis.

Additional discussions related to the Company’s loan and lease loss provisions is included in the “ALLL Losses and Reserve for Unfunded Lending Commitments” section above.

LHFS

LHFS are recorded at either estimated fair value (if the FVO is elected) or the lower of cost or fair value. The Company has elected to account for most of its residential real estate mortgages originated with the intent to sell at fair value. Generally, residential loans are valued on an aggregate portfolio basis, and commercial loans are valued on an individual loan basis. Gains and losses on LHFS which are accounted for at fair value are recorded in Mortgage banking income, net. For residential mortgages for which the FVO is selected, direct loan origination costs and fees are recorded in Mortgage banking income, net at origination. The fair value of LHFS is based on what secondary markets are currently offering for portfolios with similar characteristics, and related gains and losses are recorded in Mortgage banking income, net.

All other LHFS which the Company does not have the intent and ability to hold for the foreseeable future or until maturity or payoff are carried at the lower of cost or fair value. When loans are transferred from HFI, if the recorded investment of the loan exceeds its market value at the time of initial designation as held for sale, the Company will recognize a direct write-down of the excess of the recorded investment over market through a charge-off to the ALLL. Subsequent to the initial measurement of LHFS, market declines in the recorded investment, whether due to credit or market risk, are recorded through miscellaneous income, net as lower of cost or market adjustments.

Leases

The Company provides financing for various types of equipment, aircraft, energy and power systems, and automobiles through a variety of lease arrangements.

The Company’s investments in leases that are accounted for as direct financing leases are carried at the aggregate of lease payments plus estimated residual value of the leased property less unearned income, and are reported as part of LHFI in the Company’s Consolidated Balance Sheets. Leveraged leases, a form of financing lease, are carried net of non-recourse debt. The Company recognizes income over the term of the lease using the constant effective yield method.

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

Leased vehicles under operating leases are carried at amortized cost net of accumulated depreciation and any impairment charges and presented as Operating lease assets, net in the Company’s Consolidated Balance Sheets. Leased assets acquired in a business combination such as the Change in Control are initially recorded at their estimated fair value. Leased vehicles purchased in connection with newly originated operating leases are recorded at amortized cost. The depreciation expense of the vehicles is recognized on a straight-line basis over the contractual term of the leases to the expected residual value. The expected residual value and, accordingly, the monthly depreciation expense may change throughout the term of the lease. The Company estimates expected residual values using independent data sources and internal statistical models that take into consideration economic conditions, current auction results, the Company’s remarketing abilities, and manufacturer vehicle and marketing programs.

Lease payments due from customers are recorded as income within Lease income in the Company’s Consolidated Statements of Operations, unless and until a customer becomes more than 60 days delinquent, at which time the accrual of revenue is discontinued. The accrual is resumed and reinstated if a delinquent account subsequently becomes 60 days or less past due. Payments from the vehicle’s manufacturer under its subvention programs are recorded as reductions to the cost of the vehicle and are recognized as an adjustment to depreciation expense on a straight-line basis over the contractual term of the lease.

The Company periodically evaluates its investment in operating leases for impairment if circumstances such as a systemic and material decline in used vehicle values occurs. This would include, for example, a decline in the residual value of our lease portfolio due to an event caused by shocks to oil and gas prices that have a pronounced impact on certain models of vehicles, pervasive manufacturer defects, or other events that could systemically affect the value of a particular brand or model of leased asset, which indicates that impairment may exist.

Under the accounting for impairment or disposal of long-lived assets, residual values of leased assets under operating leases are evaluated individually for impairment. When aggregate future cash flows from the operating lease, including the expected realizable fair value of the leased asset at the end of the lease, are less than the book value of the lease, an immediate impairment write-down is recognized if the difference is deemed not recoverable. Otherwise, reductions in the expected residual value result in additional depreciation of the leased asset over the remaining term of the lease. Upon disposition, a gain or loss is recorded for any difference between the net book value of the leased asset and the proceeds from the disposition of the asset, including any insurance proceeds. Gains or losses on the sale of leased assets are included in Miscellaneous income, net, while valuation adjustments on operating lease residuals are included in Other administrative expense in the Consolidated Statements of Operations. No impairment for leased assets was recognized during the years ended December 31, 2017, 2016, or 2015.

Premises and Equipment

Premises and equipment are carried at cost, less accumulated depreciation. Depreciation is calculated utilizing the straight-line method. Estimated useful lives are as follows:

Office buildings	10 to 50 years
Leasehold improvements(1)	10 to 30 years
Software(2)	3 to 5 years
Furniture, fixtures and equipment	3 to 10 years
Automobiles	5 years

(1) Leasehold improvements are depreciated over the shorter of the useful lives of the assets or the remaining term of the leases. The useful life of the leasehold improvements may be extended beyond the base term of the lease contract when the lease contract includes renewal option period(s) that are reasonably assured of being exercised at the date the leasehold improvements are purchased. At no point does the depreciable life exceed the economic useful life of the leasehold improvement or the expected term of the lease contract.

(2) The standard depreciable period for software is three years. However, for certain software implementation projects, a five-year period is utilized.

Expenditures for maintenance and repairs are charged to Occupancy and equipment expense in the Consolidated Statements of Operations as incurred.

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

Cost and Equity Method Investments

For investments in limited partnerships, limited liability companies and other investments that are not required to be consolidated, the Company uses either the equity method or the cost method of accounting. The Company uses the equity method for general and limited partnership interests, limited liability companies and other unconsolidated equity investments in which the Company is considered to have significant influence over the operations of the investee. Under the equity method, the Company records its equity ownership share of net income or loss of the investee in "Other miscellaneous expenses." The Company uses the cost method for all other investments. Under the cost method, there is no change to the cost basis unless there is an other-than-temporary decline in value or dividends are received. If the decline is determined to be other-than-temporary, the Company writes down the cost basis of the investment to a new cost basis that represents realizable value. The amount of the write-down is accounted for as a loss included in "Other miscellaneous expenses." Distributions received from the income of an investee on cost method investments are included in "Other miscellaneous expenses." Investments accounted for under the equity method or cost method of accounting above are included in the caption "Other Assets" on the Consolidated Balance Sheets.

See Note 7 to the Consolidated Financial Statements for a related discussion of the Company's equity investments in Trusts and entities.

Goodwill and Intangible Assets

Goodwill is the excess of the purchase price over the fair value of the tangible and identifiable intangible assets and liabilities of companies acquired through business combinations accounted for under the acquisition method.

Goodwill and other indefinite-lived intangible assets are not amortized on a recurring basis, but rather are subject to periodic impairment testing. 

The Company conducts its evaluation of goodwill impairment at the reporting unit level on an annual basis at October 1, and more frequently if events or circumstances indicate that the carrying value of a reporting unit exceeds its fair value. A reporting unit is an operating segment or one level below.

An entity's goodwill impairment quantitative analysis is required to be completed unless the entity determines, based on certain qualitative factors, that it is more likely than not (that is, a likelihood of more than 50 percent) that the fair value of a reporting unit is greater than its carrying amount, including goodwill, in which case no further analysis is required. An entity has an unconditional option to bypass the preceding qualitative assessment (often referred to as step 0) for any reporting unit in any period and proceed directly to the quantitative goodwill impairment test.

The quantitative test includes a comparison of the fair value of each reporting unit to its respective carrying amount, including its allocated goodwill. If the fair value of the reporting unit is in excess of the carrying value, the related goodwill is considered not to be impaired and no further analysis is necessary. If the carrying value of the reporting unit is higher than the fair value, the impairment is measured as the excess of carrying value over fair value.

A recognized impairment charge cannot exceed the amount of goodwill allocated to a reporting unit and cannot subsequently be reversed even if the fair value of the reporting unit recovers.

The Company's intangible assets consist of assets purchased or acquired through business combinations, including trade names and dealer networks. Certain intangible assets are amortized over their useful lives. The Company evaluates identifiable intangibles for impairment when an indicator of impairment exists, but not less than annually. Separable intangible assets that are not deemed to have an indefinite life continue to be amortized over their useful lives.

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

MSRs

The Company has elected to measure most of its residential MSRs at fair value to be consistent with the risk management strategy to hedge changes in the fair value of these assets. The fair value of residential MSRs is estimated by using a cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration actual and expected mortgage loan prepayment rates, discount rates, servicing costs, and other economic factors which are determined based on current market conditions. Assumptions incorporated into the residential MSRs valuation model reflect management's best estimate of factors that a market participant would use in valuing the residential MSRs. Although sales of residential MSRs do occur, residential MSRs do not trade in an active market with readily observable prices. Those MSRs not accounted for at fair value are accounted for at amortized cost, less impairment.

As a benchmark for the reasonableness of the residential MSRs' fair value, opinions of value from independent third parties ("Brokers") are obtained. Brokers provide a range of values based upon their own DCF calculations of our portfolio that reflect conditions in the secondary market and any recently executed servicing transactions. Management compares the internally-developed residential MSR values to the ranges of values received from Brokers. If the residential MSRs fair value falls outside the Brokers' ranges, management will assess whether a valuation adjustment is warranted. Residential MSRs value is considered to represent a reasonable estimate of fair value.

See Note 9 to the Consolidated Financial Statements for detail on MSRs.

BOLI

BOLI represents the cash surrender value of life insurance policies for certain current and former employees who have provided positive consent to allow the Bank to be the beneficiary of such policies. Increases in the net cash surrender value of the policies, as well as insurance proceeds received, are recorded in non-interest income, and are not subject to income taxes.

OREO and Other Repossessed Assets

OREO and other repossessed assets consist of properties, vehicles, and other assets acquired by, or in lieu of, foreclosure or repossession in partial or total satisfaction of NPLs, including RICs and leases. Assets obtained in satisfaction of a loan are recorded at the estimated fair value minus estimated costs to sell based upon the asset's appraisal value at the date of transfer. The excess of the carrying value of the loan over the fair value of the asset minus estimated costs to sell are charged to the ALLL at the initial measurement date. Subsequent to the acquisition date, OREO and repossessed assets are carried at the lower of cost or estimated fair value, net of estimated cost to sell. Any declines in the fair value of OREO and repossessed assets below the initial cost basis are recorded through a valuation allowance with a charge to non-interest income. Increases in the fair value of OREO and repossessed assets net of estimated selling costs will reverse the valuation allowance, but only up to the cost basis which was established at the initial measurement date. Costs of holding the assets are recorded as operating expenses, except for significant property improvements, which are capitalized to the extent that the carrying value does not exceed the estimated fair value. The Company generally begins vehicle repossession activity once a customer's account becomes 60 days past due. The customer has an opportunity to redeem the repossessed vehicle by paying all outstanding balances, including finance changes and fees. Any vehicles not redeemed are sold at auction. OREO and other repossessed assets are recorded within Other assets on the Consolidated Balance Sheets.

Derivative Instruments and Hedging Activities

The Company uses derivative financial instruments primarily to help manage exposure to interest rate, foreign exchange, equity, and credit risk. Derivative financial instruments are also used to reduce the effects that changes in interest rates may have on net income, the fair value of assets and liabilities, and cash flows. The Company also enters into derivatives with commercial banking customers to facilitate their risk management activities.

Derivative instruments designated in a hedge relationship to mitigate exposure to changes in the fair value of an asset, liability or firm commitment attributable to a particular risk such as interest rate risk are considered fair value hedges. Derivative instruments designated in a hedge relationship to mitigate exposure to variability in expected future cash flows or other types of forecasted transactions are considered cash flow hedges. The Company formally documents the relationships of qualifying hedging instruments and hedged items, as well as its risk management objective and strategy for undertaking each hedge transaction.

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

Fair value hedges that are highly effective are accounted for by recording the change in the fair value of the derivative instrument and the related hedged asset, liability or firm commitment on the Consolidated Balance Sheets, with the corresponding income or expense recorded in the Consolidated Statements of Operations. The adjustment to the hedged asset or liability is included in the basis of the hedged item, while the fair value of the derivative is recorded as an other asset or other liability. Actual cash receipts or payments and related amounts accrued during the period on derivatives included in a fair value hedge relationship are recorded as adjustments to the income or expense associated with the hedged asset or liability.

Cash flow hedges that are highly effective are accounted for by recording the fair value of the derivative instrument on the Consolidated Balance Sheets as an asset or liability, with a corresponding charge or credit for the effective portion of the change in the fair value of the derivative, net of tax, recorded in accumulated OCI within stockholder's equity in the accompanying Consolidated Balance Sheets. Amounts are reclassified from accumulated other comprehensive income to the Consolidated Statements of Operations in the period or periods the hedged transaction affects earnings. In the case in which certain cash flow hedging relationships have been terminated, the Company continues to defer the net gain or loss in accumulated OCI and reclassifies it into interest expense as the future cash flows occur, unless it becomes probable that the future cash flows will not occur.

We discontinue hedge accounting when it is determined that the derivative no longer qualifies as an effective hedge; the derivative expires or is sold, terminated or exercised; the derivative is de-designated as a fair value or cash flow hedge; or, for a cash flow hedge, it is no longer probable that the forecasted transaction will occur by the end of the originally specified time period. If we determine that the derivative no longer qualifies as a fair value or cash flow hedge and hedge accounting is discontinued, the derivative will continue to be recorded on the balance sheet at its fair value, with changes in fair value included in current earnings. For a discontinued fair value hedge, the previously hedged item is no longer adjusted for changes in fair value.

The portion of gains and losses on derivative instruments not considered highly effective in hedging the change in fair value or expected cash flows of the hedged item, or derivatives not designated in hedging relationships, are recognized immediately in the Consolidated Statements of Operations. Derivatives are classified in the Consolidated Balance Sheets as "Other assets" or "Other liabilities," as applicable. See Note 14 to the Consolidated Financial Statements for further discussion.

Income Taxes

The Company accounts for income taxes under the asset and liability method. Deferred taxes are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. On December 22, 2017, H.R.1, known as the Tax Cuts and Jobs Act (the "TCJA") was enacted. Effective January 1, 2018, the TCJA, among other things, reduced the federal corporate income tax rate from 35% to 21%. Deferred tax assets and liabilities are measured using enacted tax rates that will apply to taxable income in the years in which those temporary differences are expected to reverse or be realized. The effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date. As a result of the TCJA's enactment, the effect of a change in tax rates on deferred tax assets and liabilities is recognized as income or expense in the period that includes the enactment date.

A valuation allowance will be established if the Company determines that it is more likely than not that a deferred tax asset will not be realized. This requires periodic analysis of the carrying amount of deferred tax assets and when the deferred tax assets will be realized in future periods. Consideration is given to all positive and negative evidence related to the realization of deferred tax assets.

In establishing a provision for income tax expense, the Company must make judgments and interpretations about the application of inherently complex tax laws of the U.S., its states and municipalities, and abroad. Actual income taxes paid may vary from estimates depending upon changes in income tax laws, actual results of operations, and the final audit of tax returns by taxing authorities. Tax assessments may arise several years after tax returns have been filed. The Company reviews its tax balances quarterly and as new information becomes available. Interest and penalties on income tax payments are included within Income tax provision on the Consolidated Statements of Operations.

The Company recognizes tax benefits in its financial statements when it is more likely than not the related tax position will be sustained upon examination by tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the taxing authority, assuming full knowledge of the position and all relevant facts. See Note 15 to the Consolidated Financial Statements for details on the Company's income taxes.

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

Sales of RICs and Leases

The Company, through SC, transfers RICs into newly formed Trusts which then issue one or more classes of notes payable backed by the RICs. The Company’s continuing involvement with the credit facilities and Trusts are in the form of servicing loans held by the special purpose entities ("SPEs") and, generally, through holding a residual interest in the SPE. These transactions are structured without recourse. The Trusts are considered VIEs under GAAP and are consolidated when the Company has: (a) power over the significant activities of the entity and (b) an obligation to absorb losses or the right to receive benefits from the VIE which are potentially significant to the VIE. The Company has power over the significant activities of those Trusts as servicer of the financial assets held in the Trust. Servicing fees are not considered significant variable interests in the Trusts; however, when the Company also retains a residual interest in the Trust, either in the form of a debt security or equity interest, the Company has an obligation to absorb losses or the right to receive benefits that are potentially significant to the SPE. Accordingly, these Trusts are consolidated within the Consolidated Financial Statements, and the associated RICs, borrowings under credit facilities and securitization notes payable remain on the Consolidated Balance Sheets. Securitizations involving Trusts in which the Company does not retain a residual interest or any other debt or equity interests are treated as sales of the associated RICs. While these Trusts are included in our Consolidated Financial Statements, they are separate legal entities; thus, the finance receivables and other assets sold to these Trusts are legally owned by the Trusts, are available only to satisfy the notes payable related to the securitized RICs, and are not available to our creditors or our other subsidiaries.

The Company also sells RICs and leases to VIEs or directly to third parties, which the Company may determine meet sale accounting treatment in accordance with applicable guidance. Due to the nature, purpose, and activity of these transactions, the Company either does not hold potentially significant variable interests or is not the primary beneficiary as a result of the Company's limited further involvement with the financial assets. The transferred financial assets are removed from the Company's Consolidated Balance Sheets at the time the sale is completed. The Company generally remains the servicer of the financial assets and receives servicing fees. The Company also recognizes a gain or loss for the difference between the fair value, as measured based on sales proceeds plus (or minus) the value of any servicing asset (or liability) retained and the carrying value of the assets sold.

See further discussion on the Company's securitizations in Note 7 to these Consolidated Financial Statements.

Stock-Based Compensation

The Company, through Santander, sponsors stock plans under which incentive and non-qualified stock options and non-vested stock may be granted periodically to certain employees. The Company recognizes compensation expense related to stock options and non-vested stock awards based upon the fair value of the awards on the date of the grant, which is charged to earnings over the requisite service period (i.e., the vesting period). The impact of the forfeiture of awards is recognized as forfeitures occur. Amounts in the Consolidated Statements of Operations associated with the Company's stock compensation plan were negligible in all years presented.

The Company assumed stock-based arrangements in connection with the Change in Control. The Company was required to recognize stock option awards that were outstanding as of the Change in Control date at fair value. The portion of the fair value measurement of the share-based payments that is attributable to pre-business combination service is recognized as NCI and the portion relating to any remaining post-business combination service is recognized as stock compensation expense over the remaining vesting period of the awards in the Company’s post-business combination financial statements.

Guarantees

Certain off-balance sheet financial instruments of the Company meet the definition of a guarantee that require the Company to perform and make future payments in the event specified triggering events or conditions were to occur over the term of the guarantee. In accordance with the applicable accounting rules, it is the Company’s accounting policy to recognize a liability at inception associated with such a guarantee at the greater of the fair value of the guarantee or the Company's estimate of the contingent liability arising from the guarantee. Subsequent to initial recognition, the liability is adjusted based on the passage of time to perform under the guarantee and the changes to the probabilities of occurrence related to the specified triggering events or conditions that would require the Company to perform on the guarantee.

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

Subsequent Events

The Company evaluated events from the date of the Consolidated Financial Statements on December 31, 2017 through the issuance of these Consolidated Financial Statements, and has determined that there have been no material events that would require recognition in its Consolidated Financial Statements or disclosure in the Notes to the Consolidated Financial Statements for the year ended December 31, 2017 other than the transactions disclosed in Note 4, Note 11, and Note 21 of these Consolidated Financial Statements.

NOTE 2. RECENT ACCOUNTING DEVELOPMENTS

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

Because the ASU does not apply to revenue associated with leases and financial instruments (including loans, securities, and derivatives), it will 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). For revenues in scope of the new standard, SHUSA evaluated contracts for potential accounting changes, such as timing differences and gross versus net reporting of revenues and expenses related to certain arrangements, such as securities underwriting and debit/credit card interchange. Several changes to gross versus net reporting will result in an immaterial impact to the Company’s Consolidated Financial Statements. The Company adopted this ASU in the first quarter of 2018 using a modified retrospective approach resulting in an immaterial cumulative-effect adjustment to opening retained earnings. The most significant impact of adoption will be expanded disclosures relating to disaggregation of in-scope revenue, which will be included in our first quarter 2018 Form 10-Q.

In January 2016, the FASB issued 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 fair value option 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 in the first quarter of 2018, and it did not have a material impact on the Company's financial position or results of operations.

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance, as amended, in this update supersedes the current lease accounting guidance for both lessees and lessors under ASC 840, Leases. The new guidance requires lessees to evaluate whether a lease is a finance lease using criteria similar to what lessees use today to determine whether they have a capital lease. Leases not classified as finance leases are classified as operating leases. This classification will determine whether the lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. The lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similarly to today’s guidance for operating leases. The new guidance will require lessors to account for leases using an approach that is substantially similar to the existing guidance. This new guidance will be effective for the Company for the first reporting period beginning after December 15, 2018, with earlier adoption permitted. The Company does not intend to early adopt this ASU. Adoption of this amendment must be applied on a modified retrospective approach. The Company is in the process of reviewing our existing property and equipment lease contracts, as well as service contracts that may include embedded leases. Upon adoption, the Company expects to report higher assets and liabilities from recording the present value of the future minimum lease payments of the leases.

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NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)

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 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 ACL, which will depend upon the nature and characteristics of the Company's portfolio at the adoption date, as well as the macroeconomic conditions and forecasts at that date. The Company currently does not intend to early adopt this new guidance.

In August 2017, the FASB issued 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 on the opening balance of retained earnings for the cumulative-effect adjustment related to eliminating the separate measurement of ineffectiveness.

On January 18, 2018, the FASB issued 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 TCJA. The amendments are effective for all entities for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, including adoption in any interim period, for public companies for reporting periods for which financial statements have not yet been issued. The Company is currently evaluating the impact of this standard.

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’s Effective in Q1 2018:

• 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’s Effective in Q1 2019:

• 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

142

NOTE 2. RECENT ACCOUNTING DEVELOPMENTS (continued)

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

NOTE 3. INVESTMENT SECURITIES

Investment Securities Summary - AFS and HTM

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

	December 31, 2017									December 31, 2016
(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	$	1,006,219	$	—	$	(8,107	)	$	998,112	$	1,857,357	$	1,826	$	(2,326	)	$	1,856,857
Corporate debt securities	11,639		21		—			11,660		—		—		—			—
Asset-backed securities (“ABS”)	501,575		6,901		(1,314		)	507,162		1,196,702		16,410		(2,388		)	1,210,724
Equity securities	11,428		—		(614		)	10,814		11,716		—		(565		)	11,151
State and municipal securities	23		—		—			23		30		—		—			30
Mortgage-backed securities (“MBS”):
GNMA - Residential	4,745,998		3,531		(62,524		)	4,687,005		5,424,412		3,253		(64,537		)	5,363,128
GNMA - Commercial	1,377,449		179		(19,917		)	1,357,711		948,696		1,998		(8,196		)	942,498
FHLMC and FNMA - Residential	6,958,433		1,093		(141,393		)	6,818,133		7,765,003		6,712		(154,858		)	7,616,857
FHLMC and FNMA - Commercial	23,003		—		(440		)	22,563		23,636		—		(670		)	22,966
Non-agency securities	—		—		—			—		14		—		—			14
Total investment securities AFS	$	14,635,767	$	11,725	$	(234,309	)	$	14,413,183	$	17,227,566	$	30,199	$	(233,540	)	$	17,024,225

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of securities held-to-maturity at the dates indicated:

	December 31, 2017									December 31, 2016
(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	$	1,447,669	$	722	$	(26,150	)	$	1,422,241	$	1,658,644	$	2,195	$	(25,426	)	$	1,635,413
GNMA - Commercial	352,139		325		(767		)	351,697		—		—		—			—
Total investment securities HTM	$	1,799,808	$	1,047	$	(26,917	)	$	1,773,938	$	1,658,644	$	2,195	$	(25,426	)	$	1,635,413

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

As of December 31, 2017 and December 31, 2016, the Company had investment securities AFS with an estimated fair value of $5.9 billion and $7.2 billion, respectively, pledged as collateral, which was comprised of the following: $3.0 billion and $3.2 billion, respectively, were pledged as collateral for the Company's borrowing capacity with the FRB; $2.3 billion and $3.0 billion, respectively, were pledged to secure public fund deposits; $243.8 million and $109.7 million, respectively, were pledged to various independent parties to secure repurchase agreements, support hedging relationships, and for recourse on loan sales; $0.0 million and $622.0 million, respectively, were pledged to deposits with clearing organizations; and $387.9 million and $271.2 million, respectively, were pledged to secure the Company's customer overnight sweep product.

At December 31, 2017 and December 31, 2016, the Company had $47.0 million and $44.8 million, respectively, of accrued interest related to investment securities which is included in the Other assets line of the Company's Consolidated Balance Sheets.

143

NOTE 3. INVESTMENT SECURITIES (continued)

Contractual Maturity of Debt Securities

Contractual maturities of the Company’s debt securities AFS at December 31, 2017 were as follows:

(in thousands)	Due Within One Year			Due After 1 Within 5 Years			Due After 5 Within 10 Years			Due After 10 Years/No Maturity			Total (1)			Weighted Average Yield (2)
U.S Treasury securities	$	154,712		$	843,400		$	—		$	—		$	998,112		1.42	%
Corporate debt securities	11,647			—			13			—			11,660			2.99	%
ABS	—			350,229			27,688			129,245			507,162			2.90	%
State and municipal securities	—			23			—			—			23			7.39	%
MBS:
GNMA - Residential	—			3,685			117			4,683,203			4,687,005			2.07	%
GNMA - Commercial	—			—			—			1,357,711			1,357,711			2.43	%
FHLMC and FNMA - Residential	—			11,022			142,067			6,665,044			6,818,133			2.25	%
FHLMC and FNMA - Commercial	—			7,696			12,201			2,666			22,563			2.54	%
Total fair value	$	166,359		$	1,216,055		$	182,086		$	12,837,869		$	14,402,369		2.17	%
Weighted Average Yield	1.21		%	1.99		%	1.83		%	2.21		%	2.17		%
Total amortized cost	$	166,398		$	1,217,343		$	183,930		$	13,056,668		$	14,624,339

(1) The maturities above do not represent the effective duration of the Company's portfolio, since the amounts above are based on contractual maturities and do not contemplate anticipated prepayments.

(2) Yields on tax-exempt securities are calculated on a tax equivalent basis and are based on the statutory federal tax rate.

Contractual maturities of the Company’s debt securities HTM at December 31, 2017 were as follows:

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

(in thousands)	Due Within One Year			Due After 1 Within 5 Years			Due After 5 Within 10 Years			Due After 10 Years/No Maturity			Total (1)			Weighted Average Yield
MBS:
GNMA - Residential	$	—		$	—		$	—		$	1,422,241		$	1,422,241		2.34	%
GNMA - Commercial	—			—			—			351,697			351,697			2.22	%
Total fair value	$	—		$	—		$	—		$	1,773,938		$	1,773,938		2.31	%
Weighted Average Yield	—		%	—		%	—		%	2.31		%	2.31		%
Total amortized cost	$	—		$	—		$	—		$	1,799,808		$	1,799,808

(1) The maturities above do not represent the effective duration of the Company's portfolio, since the amounts above are based on contractual maturities and do not contemplate anticipated prepayments.

Gross Unrealized Loss and Fair Value of Securities AFS and HTM

The following tables present the aggregate amount of unrealized losses as of December 31, 2017 and December 31, 2016 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:

	December 31, 2017										December 31, 2016
	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	$	998,112	$	(8,107	)	$	—	$	—		$	1,016,654	$	(2,326	)	$	—	$	—
ABS	8,013		(125		)	103,559		(1,189		)	76,552		(1,021		)	111,758		(1,367		)
Equity securities	335		(2		)	10,398		(612		)	770		(16		)	9,800		(549		)
MBS:
GNMA - Residential	1,236,716		(8,600		)	2,583,955		(53,924		)	3,831,354		(46,846		)	1,027,609		(17,691		)
GNMA - Commercial	1,022,452		(11,492		)	251,209		(8,425		)	532,334		(4,451		)	98,918		(3,745		)
FHLMC and FNMA - Residential	3,429,678		(32,899		)	3,017,533		(108,494		)	4,740,824		(58,514		)	1,981,886		(96,344		)
FHLMC and FNMA - Commercial	6,948		(103		)	15,614		(337		)	22,504		(659		)	462		(11		)
Total investment securities AFS	$	6,702,254	$	(61,328	)	$	5,982,268	$	(172,981	)	$	10,220,992	$	(113,833	)	$	3,230,433	$	(119,707	)

144

NOTE 3. INVESTMENT SECURITIES (continued)

The following tables present the aggregate amount of unrealized losses as of December 31, 2017 and December 31, 2016 on securities in the Company’s held-to-maturity investment portfolios classified according to the amount of time those securities have been in a continuous loss position:

	December 31, 2017										December 31, 2016
	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	$	434,322	$	(6,419	)	$	739,612	(19,731		)	$	1,311,390	$	(25,426	)	$	—	$	—
GNMA - Commercial	118,951		(767		)	—		—			—		—			—		—
Total investment securities HTM	$	553,273	$	(7,186	)	$	739,612	$	(19,731	)	$	1,311,390	$	(25,426	)	$	—	$	—

OTTI

Management evaluates all investment securities in an unrealized loss position for OTTI on a quarterly basis. An unrealized loss exists when the current fair value of an individual security is less than its amortized cost basis. The OTTI assessment is a subjective process requiring the use of judgments and assumptions. During the securities-level assessments, consideration is given to (1) the intent not to sell and probability that the Company will not be required to sell the security before recovery of its cost basis to allow for any anticipated recovery in fair value, (2) the financial condition and near-term prospects of the issuer, as well as company news and current events, and (3) the ability to collect the future expected cash flows. Key assumptions utilized to forecast expected cash flows may include loss severity, expected cumulative loss percentage, cumulative loss percentage to date, weighted average Fair Isaac Corporation ("FICO") scores and weighted average 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 OTTI related to its investment securities of $44 thousand and $1.1 million for the years ended December 31, 2016 and 2015, respectively. There was no OTTI recorded for the year ended December 31, 2017.

Management has concluded that the unrealized losses on its debt and equity securities for which it has not recognized OTTI (which were comprised of 626 individual securities at December 31, 2017) 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 Securities

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

	Year Ended December 31,
(in thousands)	2017			2016			2015
Proceeds from the sales of AFS securities	$	3,256,378		$	6,755,299		$	2,809,779
Gross realized gains	$	21,745		$	60,367		$	24,183
Gross realized losses	(19,943		)	(2,559		)	(5,692		)
OTTI	—			(44		)	(1,092		)
Net realized gains (1)	$	1,802		$	57,764		$	17,399

(1) Excludes the net realized gains/(losses) related to trading securities.

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

145

NOTE 3. INVESTMENT SECURITIES (continued)

Trading Securities

The Company held $1 thousand of trading securities as of December 31, 2017, compared to $1.6 million held at December 31, 2016. Gains and losses on trading securities are recorded within Net (losses)/gains on sale of investment securities on the Company's Consolidated Statements of Operations.

Other Investments

Other investments primarily include the Company's investment in the stock of the FHLB of Pittsburgh and the FRB with aggregate carrying amounts of $516.7 million and $680.5 million as of December 31, 2017 and December 31, 2016, respectively. 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 year endedDecember 31, 2017, the Company purchased $163.0 million of FHLB stock at par and redeemed $327.6 million of FHLB stock at par. There was no gain or loss associated with these redemptions. During the year endedDecember 31, 2017, the Company did not purchase any FRB stock. Other investments also include $88.2 million and $50.4 million of low-income housing tax credit ("LIHTC") investments as of December 31, 2017 and December 31, 2016, respectively. Other investments also includes $54.0 million and $0.0 million of time deposits with a maturity of greater than 90 days held at a non-affiliate financial institution as of December 31, 2017 and December 31, 2016, respectively.

The Company evaluates these investments for impairment based on the ultimate recoverability of the carrying value, rather than by recognizing temporary declines in value.

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 SPEs. These loans totaled $50.8 billion at December 31, 2017 and $53.5 billion at December 31, 2016.

Loans that the Company intends to sell are classified as LHFS. The LHFS portfolio balance at December 31, 2017 was $2.5 billion, compared to $2.6 billion at December 31, 2016. LHFS in the residential mortgage portfolio are either reported at fair value or at the lower of cost or fair value. For a discussion on the valuation of LHFS at fair value, see Note 18 to the Consolidated Financial Statements. During the third quarter of 2015, the Company determined that it no longer intended to hold certain personal lending assets at SC for investment. The Company adjusted the ACL associated with SC's personal loan portfolio through the provision for credit losses to value the portfolio at the lower of cost or market. Upon transferring the loans to LHFS at fair value, the adjusted ACL was released as a charge-off. Loan originations and purchases under SC’s personal lending platform during 2016 and 2017 have been classified as held for sale and subsequent adjustments to lower of cost or market are recorded through Miscellaneous Income (Expense), net on the Consolidated Statements of Operations. As of December 31, 2017 and 2016, the carrying value of the personal unsecured held-for-sale portfolio was $1.1 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 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 estimated lives using estimated prepayment speeds, which are updated on a monthly basis. At December 31, 2017 and 2016, accrued interest receivable on the Company's loans was $515.9 million and $554.5 million, respectively.

On February 16, 2018, an agreement was executed to sell substantially all of SBNA’s warehouse facilities with a balance of $830 million at December 31, 2017 for a price contingent upon total consented commitments.  These facilities are included in the commercial and industrial loans segment reported under LHFI.  This transaction is expected to close within the first quarter of 2018.

146

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

Loan and Lease Portfolio Composition

The following presents the composition of the gross loans and leases held-for-investment by portfolio and by rate type:

	December 31, 2017				December 31, 2016
(dollars in thousands)	Amount		Percent		Amount		Percent
Commercial LHFI:
CRE loans	$	9,279,225	11.5	%	$	10,112,043	11.8	%
Commercial and industrial loans	14,438,311		17.9	%	18,812,002		21.9	%
Multifamily loans	8,274,435		10.1	%	8,683,680		10.1	%
Other commercial(2)	7,174,739		8.9	%	6,832,403		8.0	%
Total commercial LHFI	39,166,710		48.4	%	44,440,128		51.8	%
Consumer loans secured by real estate:
Residential mortgages	8,846,765		11.0	%	7,775,272		9.1	%
Home equity loans and lines of credit	5,907,733		7.3	%	6,001,192		7.0	%
Total consumer loans secured by real estate	14,754,498		18.3	%	13,776,464		16.1	%
Consumer loans not secured by real estate:
RICs and auto loans - originated	23,081,424		28.6	%	22,104,918		25.8	%
RICs and auto loans - purchased	1,834,868		2.3	%	3,468,803		4.0	%
Personal unsecured loans	1,285,677		1.6	%	1,234,094		1.4	%
Other consumer(3)	617,675		0.8	%	795,378		0.9	%
Total consumer loans	41,574,142		51.6	%	41,379,657		48.2	%
Total LHFI(1)	$	80,740,852	100.0	%	$	85,819,785	100.0	%
Total LHFI:
Fixed rate	$	50,653,790	62.7	%	$	51,752,761	60.3	%
Variable rate	30,087,062		37.3	%	34,067,024		39.7	%
Total LHFI(1)	$	80,740,852	100.0	%	$	85,819,785	100.0	%

(1)Total LHFI includes deferred loan fees, net of deferred origination costs and unamortized purchase premiums, net of discounts as well as purchase accounting adjustments. These items resulted in a net increase in the loan balances of $1.3 billion and $845.8 million as of December 31, 2017 and December 31, 2016, 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

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

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

147

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

The following table reconciles the Company's recorded investment classified by its major portfolio classifications to its commercial loan classifications utilized in its determination of the ALLL and other credit quality disclosures at December 31, 2017 and December 31, 2016, respectively:

Commercial Portfolio Segment(2)
Major Loan Classifications(1)	December 31, 2017		December 31, 2016
	(in thousands)
Commercial LHFI:
CRE:
Corporate Banking	$	3,433,971	$	3,693,109
Middle Market Real Estate	4,820,727		5,180,572
Santander Real Estate Capital	1,024,527		1,238,362
Total commercial real estate	9,279,225		10,112,043
Commercial and industrial (3)	14,438,311		18,812,002
Multifamily	8,274,435		8,683,680
Other commercial	7,174,739		6,832,403
Total commercial LHFI	$	39,166,710	$	44,440,128

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

(2) These represent the Company's loan classes used to determine its ALLL.

(3) Commercial and industrial loans excluded $149.2 million of LHFS at December 31, 2017 and excluded $121.1 million of LHFS at December 31, 2016.

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

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

Consumer Portfolio Segment(2)
Major Loan Classifications(1)	December 31, 2017		December 31, 2016
	(in thousands)
Consumer loans secured by real estate:
Residential mortgages(3)	$	8,846,765	$	7,775,272
Home equity loans and lines of credit	5,907,733		6,001,192
Total consumer loans secured by real estate	14,754,498		13,776,464
Consumer loans not secured by real estate:
RICs and auto loans - originated (4)	23,081,424		22,104,918
RICs and auto loans - purchased (4)	1,834,868		3,468,803
Personal unsecured loans(5)	1,285,677		1,234,094
Other consumer	617,675		795,378
Total consumer LHFI	$	41,574,142	$	41,379,657

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

(2) These represent the Company's loan classes used to determine its ALLL.

(3) Residential mortgages exclude $210.2 million and $462.9 million of LHFS at December 31, 2017 and December 31, 2016, respectively.

(4) RIC and auto loans exclude $1.1 billion and $924.7 million of LHFS at December 31, 2017 and December 31, 2016, respectively.

(5) Personal unsecured loans exclude $1.1 billion and $1.1 billion of LHFS at December 31, 2017 and December 31, 2016, respectively.

148

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

The RIC and auto loan portfolio is comprised of: (1) RICs originated by SC prior to the 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)	December 31, 2017			December 31, 2016
RICs - Purchased HFI:
Unpaid principal balance ("UPB") (1)	$	1,929,548		$	3,765,714
UPB - FVO (2)	24,926			29,481
Total UPB	1,954,474			3,795,195
Purchase marks (3)	(119,606		)	(326,392		)
Total RICs - Purchased HFI	1,834,868			3,468,803
RICs - Originated HFI:
UPB (1)	23,373,202			22,527,753
Net discount	(309,920		)	(441,131		)
Total RICs - Originated	23,063,282			22,086,622
SBNA auto loans	18,142			18,296
Total RICs - originated post Change in Control	23,081,424			22,104,918
Total RICs and auto loans HFI	$	24,916,292		$	25,573,721

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

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

(3) Includes purchase marks of $5.5 million and $6.7 million related to purchase loan portfolios on which we elected to apply the FVO at December 31, 2017 and December 31, 2016, respectively.

During the years endedDecember 31, 2017 and 2016, the Company originated $6.7 billion and $8.0 billion, respectively, in Chrysler Capital loans, which represented 47% and 49%, respectively, of the Company's total RIC originations. As of December 31, 2017 and December 31, 2016, the Company's auto RIC portfolio consisted of $8.2 billion and $7.4 billion, respectively, of Chrysler loans, which represented 37% and 32%, respectively, of the Company's auto RIC portfolio.

ACL Rollforward by Portfolio Segment

The activity in the ACL by portfolio segment for the year endedDecember 31, 2017, 2016, and 2015 was as follows:

	Year Ended December 31, 2017
(in thousands)	Commercial			Consumer			Unallocated		Total
ALLL, beginning of period	$	449,837		$	3,317,604		$	47,023	$	3,814,464
Provision for loan and lease losses	99,606			2,561,500			—		2,661,106
Other(1)	356			5,283			—		5,639
Charge-offs	(144,002		)	(4,865,244		)	—		(5,009,246		)
Recoveries	37,999			2,401,613			—		2,439,612
Charge-offs, net of recoveries	(106,003		)	(2,463,631		)	—		(2,569,634		)
ALLL, end of period	$	443,796		$	3,420,756		$	47,023	$	3,911,575
Reserve for unfunded lending commitments, beginning of period	$	121,612		$	806		$	—	$	122,418
Release of reserve for unfunded lending commitments	(10,112		)	(500		)	—		(10,612		)
Loss on unfunded lending commitments	(2,695		)	—			—		(2,695		)
Reserve for unfunded lending commitments, end of period	108,805			306			—		109,111
Total ACL, end of period	$	552,601		$	3,421,062		$	47,023	$	4,020,686
Ending balance, individually evaluated for impairment(2)	$	102,326		$	1,751,828		$	—	$	1,854,154
Ending balance, collectively evaluated for impairment	341,470			1,668,928			47,023		2,057,421
Financing receivables:
Ending balance	$	39,315,888		$	43,947,450		$	—	$	83,263,338
Ending balance, evaluated under the FVO or lower of cost or fair value	149,177			2,420,155			—		2,569,332
Ending balance, individually evaluated for impairment(1)	593,585			6,586,222			—		7,179,807
Ending balance, collectively evaluated for impairment	38,573,126			34,941,073			—		73,514,199

(1) Includes transfers in for the period ending December 31, 2017 related to the contribution of SFS to SHUSA.

(2) Consists of loans in TDR status.

149

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

	Year Ended December 31, 2016
(in thousands)	Commercial			Consumer			Unallocated			Total
ALLL, beginning of period	$	456,812		$	2,742,088		$	47,245		$	3,246,145
Provision for loan and lease losses	152,112			2,852,730			(222		)	3,004,620
Charge-offs	(245,399		)	(4,720,135		)	—			(4,965,534		)
Recoveries	86,312			2,442,921			—			2,529,233
Charge-offs, net of recoveries	(159,087		)	(2,277,214		)	—			(2,436,301		)
ALLL, end of period	$	449,837		$	3,317,604		$	47,023		$	3,814,464
Reserve for unfunded lending commitments, beginning of period	$	148,207		$	814		$	—		$	149,021
Provision for / (Release of) unfunded lending commitments	(24,887		)	(8		)	—			(24,895		)
Loss on unfunded lending commitments	(1,708		)	—			—			(1,708		)
Reserve for unfunded lending commitments, end of period	121,612			806			—			122,418
Total ACL, end of period	$	571,449		$	3,318,410		$	47,023		$	3,936,882
Ending balance, individually evaluated for impairment(1)	$	98,596		$	1,520,375		$	—		$	1,618,971
Ending balance, collectively evaluated for impairment	351,241			1,797,229			47,023			2,195,493
Financing receivables:
Ending balance	$	44,561,193		$	43,844,900		$	—		$	88,406,093
Ending balance, evaluated under the FVO or lower of cost or fair value(1)	121,065			2,482,595			—			2,603,660
Ending balance, individually evaluated for impairment(1)	666,386			5,795,366			—			6,461,752
Ending balance, collectively evaluated for impairment	43,773,742			35,566,939			—			79,340,681

(1) Consists of loans in TDR status.

	Year Ended December 31, 2015
(in thousands)	Commercial			Consumer			Unallocated		Total
ALLL, beginning of period	$	413,885		$	1,329,063		$	34,941	$	1,777,889
Provision for loan losses	152,944			3,899,813			12,304		4,065,061
Other(1)	—			(27,117		)	—		(27,117		)
Charge-offs	(175,234		)	(4,489,848		)	—		(4,665,082		)
Recoveries	65,217			2,030,177			—		2,095,394
Charge-offs, net of recoveries	(110,017		)	(2,459,671		)	—		(2,569,688		)
ALLL, end of period	$	456,812		$	2,742,088		$	47,245	$	3,246,145
Reserve for unfunded lending commitments, beginning of period	$	133,002		$	1,001		$	—	$	134,003
Provision for unfunded lending commitments	14,756			(74		)	—		14,682
Loss on unfunded lending commitments	449			(113		)	—		336
Reserve for unfunded lending commitments, end of period	148,207			814			—		149,021
Total ACL end of period	$	605,019		$	2,742,902		$	47,245	$	3,395,166
Ending balance, individually evaluated for impairment(2)	$	54,836		$	911,364		$	—	$	966,200
Ending balance, collectively evaluated for impairment	401,976			1,830,724			47,245		2,279,945
Financing receivables:
Ending balance	$	46,536,277		$	43,679,576		$	—	$	90,215,853
Ending balance, evaluated under the FVO or lower of cost or fair value(1)	86,399			3,432,322			—		3,518,721
Ending balance, individually evaluated for impairment(2)	504,919			4,473,320			—		4,978,239
Ending balance, collectively evaluated for impairment	45,944,959			35,773,934			—		81,718,893

(1) The "Other" amount represents the impact on the ALLL in connection with SC classifying approximately $1 billion of RICs as held-for-sale during the year.

(2) Consists of loans in TDR status.

150

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.

	Year ended
	December 31, 2017
(in thousands)	Purchased			Originated			Total
ALLL, beginning of period	$	559,092		$	2,538,127		$	3,097,219
Provision for loan and lease losses	181,698			2,222,710			2,404,408
Charge-offs	(606,898		)	(4,102,110		)	(4,709,008		)
Recoveries	250,275			2,120,317			2,370,592
Charge-offs, net of recoveries	(356,623		)	(1,981,793		)	(2,338,416		)
ALLL, end of period	$	384,167		$	2,779,044		$	3,163,211

	Year ended
	December 31, 2016
(in thousands)	Purchased			Originated			Total
ALLL, beginning of period	$	590,807		$	1,891,989		$	2,482,796
Provision for loan and lease losses	309,664			2,459,588			2,769,252
Charge-offs	(1,024,882		)	(3,539,153		)	(4,564,035		)
Recoveries	683,503			1,725,703			2,409,206
Charge-offs, net of recoveries	(341,379		)	(1,813,450		)	(2,154,829		)
ALLL, end of period	$	559,092		$	2,538,127		$	3,097,219

	Year ended
	December 31, 2015
(in thousands)	Purchased			Originated			Total
ALLL, beginning of period	$	963		$	709,024		$	709,987
Provision for loan and lease losses	1,106,462			2,313,825			3,420,287
Other(1)	(27,117		)	—			(27,117		)
Charge-offs	(1,516,951		)	(2,035,878		)	(3,552,829		)
Recoveries	1,027,450			905,018			1,932,468
Charge-offs, net of recoveries	(489,501		)	(1,130,860		)	(1,620,361		)
ALLL, end of period	$	590,807		$	1,891,989		$	2,482,796

(1) The "Other" amount represents the impact on the ALLL in connection with SC classifying approximately $1 billion of RICs as held-for-sale during the first quarter of 2015.

Refer to Note 19 for discussion of contingencies and possible losses related to the impact of hurricane activity in regions where the Company has lending activities.

151

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)	December 31, 2017		December 31, 2016
Non-accrual loans:
Commercial:
CRE:
Corporate banking	$	84,072	$	104,879
Middle market commercial real estate	54,783		71,264
Santander real estate capital	381		3,077
Commercial and industrial	230,481		182,368
Multifamily	11,348		8,196
Other commercial	83,468		11,097