Company Quick10K Filing
Quick10K
Santander Holdings
10-Q 2019-06-30 Quarter: 2019-06-30
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-10-02 Other Events, Exhibits
8-K 2019-10-01 Other Events, Exhibits
8-K 2019-09-25 Other Events, Exhibits
8-K 2019-08-21 Regulation FD, Exhibits
8-K 2019-08-07 Amend Bylaw, Exhibits
8-K 2019-06-28 Other Events, Exhibits
8-K 2019-06-04 Other Events, Exhibits
8-K 2019-05-24 Other Events, Exhibits
8-K 2019-05-23 Amend Bylaw, Exhibits
8-K 2019-05-17 Regulation FD, Exhibits
8-K 2019-03-21 Regulation FD, Exhibits
8-K 2018-11-28 Other Events, Exhibits
8-K 2018-11-16 Regulation FD, Exhibits
8-K 2018-11-01 Other Events
8-K 2018-09-14 Officers, Exhibits
8-K 2018-08-17 Regulation FD, Exhibits
8-K 2018-06-29 Other Events, Exhibits
8-K 2018-06-28 Other Events, Exhibits
8-K 2018-06-25 Other Events, Exhibits
8-K 2018-06-22 Other Events
8-K 2018-05-18 Regulation FD, Exhibits
8-K 2018-03-30 Regulation FD, Exhibits
8-K 2018-03-07 Other Events, Exhibits
8-K 2018-02-15 Regulation FD, Exhibits
8-K 2018-02-01 Regulation FD, Exhibits
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SLGD Scotts Liquid Gold 25
RGBP Regen Biopharma 5
FES Forbes Energy Services 0
C004 Chugach Electric Association 0
KRDO Kreido Biofuels 0
SFAR Steadfast Apartment REIT 0
CRVW Careview Communications 0
SOV 2019-06-30
Part I. Financial Information
Item 1 - Condensed Consolidated Financial Statements
Note 1. Basis of Presentation and Accounting Policies
Note 2. Recent Accounting Developments
Note 3. Investment Securities
Note 4. Loans and Allowance for Credit Losses
Note 5. Operating Lease Assets, Net
Note 6. Vies
Note 7. Goodwill and Other Intangibles
Note 8. Other Assets
Note 9. Deposits and Other Customer Accounts
Note 10. Borrowings
Note 11. Accumulated Other Comprehensive Income / (Loss)
Note 12. Derivatives
Note 13. Income Taxes
Note 14. Fair Value
Note 15. Non-Interest Income and Other Expenses
Note 16. Commitments, Contingencies and Guarantees
Note 17. Related Party Transactions
Note 18. Business Segment Information
Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A")
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
Item 4 - Controls and Procedures
Part II. Other Information
Item 1 - Legal Proceedings
Item 1A - Risk Factors
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
Item 4 - Mine Safety Disclosures
Item 5 - Other Information
Item 6 - Exhibits
EX-31.1 a10-q_2q19exhibit311.htm
EX-31.2 a10-q_2q19exhibit312.htm
EX-32.1 a10-q_2q19exhibit321.htm
EX-32.2 a10-q_2q19exhibit322.htm

Santander Holdings Earnings 2019-06-30

SOV 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 santanderholdingsq22019.htm 10-Q Document

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
þ
 
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2019
OR
o
 
Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
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)
Registrant’s telephone number including area code (617) 346-7200
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbols
 
Name of each exchange on which registered
 
Outstanding at July 31, 2019
Common Stock (no par value)
 
Not Applicable
 
Not Applicable
 
530,391,043 shares
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 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 such files). Yes þ. No o.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.
        
Large accelerated filer o
 
Accelerated filer o
 
Emerging growth company o
 
 
 
 
 
Non-accelerated filer þ
 
Smaller reporting 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.




INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 Ex-31.1 Certification
 Ex-31.2 Certification
 Ex-32.1 Certification
 Ex-32.2 Certification
 EX-101 INSTANCE DOCUMENT
 EX-101 SCHEMA DOCUMENT
 EX-101 CALCULATION LINKBASE DOCUMENT
 EX-101 LABELS LINKBASE DOCUMENT
 EX-101 PRESENTATION LINKBASE DOCUMENT
 EX-101 DEFINITION LINKBASE DOCUMENT




FORWARD-LOOKING STATEMENTS
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES

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

Although SHUSA believes that the expectations reflected in these forward-looking statements are reasonable as of the date on which the statements are made, these statements are not guarantees of future performance and involve risks and uncertainties based on various factors and assumptions, many of which are beyond the Company's control. 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 policies that affect market interest rates and money supply, 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 and result in fines, penalties, restitution and other costs and expenses, changes in our business practice, and reputational harm;
SHUSA’s ability to manage credit risk that may increase to the extent our loans are concentrated by loan type, industry segment, borrower type or location of the borrower or collateral;
the 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;
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;
Santander Consumer USA Inc.'s ("SC's") agreement with Fiat Chrysler Automobiles US LLC ("FCA") may not result in currently anticipated levels of growth, is subject to performance conditions that could result in termination of the agreement, and is also subject to an option giving FCA the right to acquire an equity participation in the Chrysler Capital portion of SC's business;
the pursuit of protectionist trade or other related policies, including tariffs by the U.S., its global trading partners, and/or other countries;
adverse movements and volatility in debt and equity capital markets and adverse changes in the securities markets, including those related to the financial condition of significant issuers in SHUSA’s investment portfolio;
SHUSA's ability to grow revenue, manage expenses, attract and retain highly-skilled people and raise capital necessary to achieve its business goals and comply with regulatory requirements;
SHUSA’s ability to effectively manage its capital and liquidity, including approval of its capital plans by its regulators and its ability to continue to receive dividends from its subsidiaries or other investments;
changes in credit ratings assigned to SHUSA or its subsidiaries;
the ability to manage risks inherent in our businesses, including through effective use of systems and controls, insurance, derivatives and capital management;
SHUSA’s ability to 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 success of our marketing efforts to customers, and the potential for new products and services to impose additional unexpected costs, losses, or other liabilities not anticipated at their initiation, and expose SHUSA to increased operational risk;
competitors of SHUSA may have greater financial resources or lower costs, or be subject to different regulatory requirements than SHUSA, may innovate more effectively, or may develop products and technology that enable those competitors to compete more successfully than SHUSA and cause SHUSA to lose business or market share;
consumers and small businesses may decide not to use banks for their financial transactions, which could impact our net income;
changes in customer spending, investment or savings behavior;
loss of customer deposits that could increase our funding costs;
the ability of SHUSA and its third-party vendors to convert, maintain and upgrade, as necessary, SHUSA’s data processing and other information technology ("IT") infrastructure on a timely and acceptable basis, within projected cost estimates and without significant disruption to our business;
SHUSA's ability to control operational risks, data security breach risks and outsourcing risks, and the possibility of errors in quantitative models SHUSA uses to manage its business, including as a result of cyberattacks, technological failure, human error, fraud or malice, and the possibility that SHUSA's controls will prove insufficient, fail or be circumvented;
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, including economic instability and recessionary conditions in Europe and the eventual exit of the United Kingdom from the European Union;
changes to income tax laws and regulations and the outcome of ongoing tax audits by federal, state and local income tax authorities that may require SHUSA to pay additional taxes or recover fewer overpayments compared to what has been accrued or paid as of period-end;
the costs and effects of regulatory or judicial proceedings, including possible business restrictions resulting from such proceedings;
adverse publicity, and negative public opinion, whether specific to SHUSA or regarding other industry participants or industry-wide factors, or other reputational harm; and
acts of terrorism or domestic or foreign military conflicts; and acts of God, including natural disasters.

1




SHUSA provides the following list of abbreviations and acronyms as a tool for the readers that are used in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Condensed Consolidated Financial Statements and the Notes to Condensed Consolidated Financial Statements.
ABS: Asset-backed securities
 
ECOA: Equal Credit Opportunity Act
ACL: Allowance for credit losses
 
EPS: Enhanced Prudential Standards
AFS: Available-for-sale
 
ETR: Effective tax rate
ALLL: Allowance for loan and lease losses
 
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
Bank: Santander Bank, National Association
 
FCA: Fiat Chrysler Automobiles US LLC
BHC: Bank holding company
 
FDIA: Federal Deposit Insurance Corporation Improvement Act
BOLI: Bank-owned life insurance
 
FDIC: Federal Deposit Insurance Corporation
BSI: Banco Santander International
 
Federal Reserve: Board of Governors of the Federal Reserve System
BSPR: Banco Santander Puerto Rico
 
FHLB: Federal Home Loan Bank
C&I: Commercial & industrial
 
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 of deposit
 
FINRA: Financial Industrial Regulatory Authority
CEF: Closed-end fund
 
FNMA: Federal National Mortgage Association
CEO: Chief Executive Officer
 
FOB: Financial Oversight and Management Board of Puerto Rico
CEVF: Commercial equipment vehicle financing
 
FRB: Federal Reserve Bank
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
 
GAP: Guaranteed auto protection
Chrysler Agreement: Ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC, formerly Chrysler Group LLC, signed by SC
 
HFI: Held for investment
Chrysler Capital: Trade name used in providing services under the Chrysler Agreement
 
HTM: Held to maturity
CIB: Corporate and Investment Banking
 
IHC: U.S. intermediate holding company
CID: Civil investigative demand
 
IPO: Initial public offering
CLTV: Combined loan-to-value
 
IRS: Internal Revenue Service
CMO: Collateralized mortgage obligation
 
ISDA: International Swaps and Derivatives Association, Inc.
CMP: Civil monetary penalty
 
IT: Information Technology
CODM: Chief Operating Decision Maker
 
LendingClub: LendingClub Corporation, a peer-to-peer personal lending platform company from which SC acquires loans under flow agreements
Company: Santander Holdings USA, Inc.
 
LCR: Liquidity coverage ratio
COSO: Committee of Sponsoring Organizations
 
LHFI: Loans held-for-investment
CPR: Constant prepayment rate
 
LHFS: Loans held-for-sale
CRA: Community Reinvestment Act
 
LIBOR: London Interbank Offered Rate
CRE: Commercial real estate
 
LIHTC: Low Income Housing Tax Credit
DCF: Discounted cash flow
 
LTD: Long-term debt
DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act
 
LTV: Loan-to-value
DOJ: Department of Justice
 
MBS: Mortgage-backed securities
DPD: Days past due
 
MD&A: Management's Discussion and Analysis of Financial Condition and Results of Operations
DTI: Debt-to-income
 
MSR: Mortgage servicing right

2




MVE: Market value of equity
 
SBNA: Santander Bank, National Association
NCI: Non-controlling interest
 
SC: Santander Consumer USA Holdings Inc. and its subsidiaries
NMTC: New market tax credits
 
SC Common Stock: Common shares of SC
NPL: Non-performing loan
 
SCF: Statement of cash flows
NSFR: Net stable funding ratio
 
SCRA: Servicemembers' Civil Relief Act
NYSE: New York Stock Exchange
 
SEC: Securities and Exchange Commission
OCC: Office of the Comptroller of the Currency
 
Securities Act: Securities Act of 1933, as amended
OREO: Other real estate owned
 
SFS: Santander Financial Services, Inc.
OTTI: Other-than-temporary impairment
 
SHUSA: Santander Holdings USA, Inc.
Parent Company: the parent holding company of SBNA and other consolidated subsidiaries
 
SIS: Santander Investment Securities Inc.
REIT: Real estate investment trust
 
SPE: Special purpose entity
RIC: Retail installment contract
 
SSLLC: Santander Securities LLC
RV: Recreational vehicle
 
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.
RWA: Risk-weighted asset
 
TCJA: Tax Cut and Jobs Act of 2017
S&P: Standard & Poor's
 
TDR: Troubled debt restructuring
Santander: Banco Santander, S.A.
 
TLAC: Total loss-absorbing capacity
Santander BanCorp: Santander BanCorp and its subsidiaries
 
Trusts: Securitization trusts
SAM: Santander Asset Management, LLC
 
UPB: Unpaid principal balance
Santander NY: New York branch of Santander
 
VIE: Variable interest entity
Santander UK: Santander UK plc
 
VOE: Voting rights entity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


3




PART I. FINANCIAL INFORMATION

ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(unaudited)

 
June 30, 2019
 
December 31, 2018
 
(in thousands)
ASSETS
 
 
 
Cash and cash equivalents
$
8,019,284

 
$
7,790,593

Investment securities:
 
 
 
Available-for-sale ("AFS") at fair value
11,902,455

 
11,632,987

Held-to-maturity ("HTM") (fair value of $2,969,488 and $2,676,049 as of June 30, 2019 and December 31, 2018, respectively)
2,955,751

 
2,750,680

Other investments (includes Trading securities of $2,302 and $10 as of June 30, 2019 and December 31, 2018, respectively)
955,811

 
805,357

Loans held-for-investment ("LHFI")(1) (5)
89,972,067

 
87,045,868

Allowance for loan and lease losses ("ALLL") (5)
(3,783,833
)
 
(3,897,130
)
Net LHFI
86,188,234

 
83,148,738

Loans held-for-sale ("LHFS") (2)
2,523,688

 
1,283,278

Premises and equipment, net (3)
772,319

 
805,940

Operating lease assets, net (5)(6)
15,418,163

 
14,078,793

Goodwill
4,444,389

 
4,444,389

Intangible assets, net
445,687

 
475,193

Bank-owned life insurance ("BOLI")
1,846,056

 
1,833,290

Restricted cash (5)
3,417,993

 
2,931,711

Other assets (4) (5)
5,020,601

 
3,653,336

TOTAL ASSETS
$
143,910,431

 
$
135,634,285

LIABILITIES
 
 
 
Accrued expenses and payables
$
4,188,536

 
$
3,035,848

Deposits and other customer accounts (includes $507.4 million and zero of deposits held for sale as of June 30, 2019 and December 31, 2018, respectively)
63,720,054

 
61,511,380

Borrowings and other debt obligations (5)
48,906,752

 
44,953,784

Advance payments by borrowers for taxes and insurance
181,989

 
160,728

Deferred tax liabilities, net
1,416,993

 
1,212,538

Other liabilities (5)
991,287

 
912,775

TOTAL LIABILITIES
119,405,611

 
111,787,053

Commitments and contingencies (Note 16)

 

STOCKHOLDER'S EQUITY
 
 
 
Common stock and paid-in capital (no par value; 800,000,000 shares authorized; 530,391,043 shares outstanding at both June 30, 2019 and December 31, 2018)
17,945,636

 
17,859,304

Accumulated other comprehensive loss
(96,519
)
 
(321,652
)
Retained earnings
4,114,659

 
3,783,405

TOTAL SANTANDER HOLDINGS USA, INC. ("SHUSA") STOCKHOLDER'S EQUITY
21,963,776

 
21,321,057

Noncontrolling interest ("NCI")
2,541,044

 
2,526,175

TOTAL STOCKHOLDER'S EQUITY
24,504,820

 
23,847,232

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
$
143,910,431

 
$
135,634,285

 
(1) LHFI includes $104.2 million and $126.3 million of loans recorded at fair value at June 30, 2019 and December 31, 2018, respectively.
(2) Includes $259.2 million and $209.5 million of loans recorded at the fair value option ("FVO") at June 30, 2019 and December 31, 2018, respectively.
(3) Net of accumulated depreciation of $1.5 billion and $1.4 billion at June 30, 2019 and December 31, 2018, respectively.
(4) Includes mortgage servicing rights ("MSRs") of $129.9 million and $149.7 million at June 30, 2019 and December 31, 2018, respectively, for which the Company has elected the FVO. See Note 14 to these Condensed Consolidated Financial Statements for additional information.
(5) The Company has interests in certain securitization trusts ("Trusts") that are considered variable interest entities ("VIEs") for accounting purposes. At June 30, 2019 and December 31, 2018, LHFI included $25.2 billion and $24.1 billion, Operating leases assets, net included $15.3 billion and $14.0 billion, restricted cash included $1.7 billion and $1.6 billion, other assets included $604.4 million and $685.4 million, Borrowings and other debt obligations included $33.3 billion and $31.9 billion, and Other liabilities included $99.9 million and $122.0 million of assets or liabilities that were included within VIEs, respectively. See Note 6 to these Condensed Consolidated Financial Statements for additional information.
(6) Net of accumulated depreciation of $3.7 billion and $3.5 billion at June 30, 2019 and December 31, 2018, respectively.
See accompanying notes to Condensed Consolidated Financial Statements.

4




SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)

 
Three-Month Period
Ended June 30,
 
Six-Month Period Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
 
(in thousands)
INTEREST INCOME:
 
 
 
 
 
 
 
Loans
$
2,035,148

 
$
1,868,323

 
$
4,034,486

 
$
3,670,452

Interest-earning deposits
47,899

 
33,939

 
91,917

 
66,452

Investment securities:
 
 
 
 
 
 
 
AFS
71,137

 
77,031

 
145,567

 
150,536

HTM
15,789

 
17,181

 
33,111

 
34,245

Other investments
6,117

 
4,599

 
12,051

 
9,848

TOTAL INTEREST INCOME
2,176,090

 
2,001,073

 
4,317,132

 
3,931,533

INTEREST EXPENSE:
 
 
 
 
 
 
 
Deposits and other customer accounts
145,145

 
92,333

 
275,433

 
167,758

Borrowings and other debt obligations
409,220

 
316,654

 
817,089

 
621,344

TOTAL INTEREST EXPENSE
554,365

 
408,987

 
1,092,522

 
789,102

NET INTEREST INCOME
1,621,725

 
1,592,086

 
3,224,610

 
3,142,431

Provision for credit losses
480,632

 
433,803

 
1,080,843

 
987,683

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
1,141,093

 
1,158,283

 
2,143,767

 
2,154,748

NON-INTEREST INCOME:
 
 
 
 
 
 
 
Consumer and commercial fees
146,499

 
136,165

 
279,517

 
276,337

Lease income
705,835

 
569,306

 
1,380,720

 
1,110,202

Miscellaneous income, net(1) (2)
108,271

 
113,283

 
197,815

 
234,085

TOTAL FEES AND OTHER INCOME
960,605

 
818,754

 
1,858,052

 
1,620,624

Net gain/(loss) on sale of investment securities
2,379

 
419

 
379

 
(244
)
Net gain/(loss) recognized in earnings
2,379

 
419

 
379

 
(244
)
TOTAL NON-INTEREST INCOME
962,984

 
819,173

 
1,858,431

 
1,620,380

GENERAL, ADMINISTRATIVE AND OTHER EXPENSES:
 
 
 
 
 
 
 
Compensation and benefits
470,247

 
427,728

 
946,810

 
896,505

Occupancy and equipment expenses
142,646

 
163,171

 
285,040

 
322,511

Technology, outside service, and marketing expense
152,425

 
156,010

 
304,131

 
308,292

Loan expense
102,784

 
97,679

 
209,500

 
194,493

Lease expense
513,780

 
436,795

 
993,084

 
861,061

Other expenses
160,504

 
168,366

 
346,236

 
308,246

TOTAL GENERAL, ADMINISTRATIVE AND OTHER EXPENSES
1,542,386

 
1,449,749

 
3,084,801

 
2,891,108

INCOME BEFORE INCOME TAX PROVISION
561,691

 
527,707

 
917,397

 
884,020

Income tax provision
155,326

 
168,151

 
271,540

 
264,213

NET INCOME INCLUDING NCI
406,365

 
359,556

 
645,857

 
619,807

LESS: NET INCOME ATTRIBUTABLE TO NCI
110,743

 
104,141

 
183,255

 
179,280

NET INCOME ATTRIBUTABLE TO SHUSA
$
295,622

 
$
255,415

 
$
462,602

 
$
440,527

(1) Includes impact of $104.4 million and $172.0 million for the three-month and six-month periods ended June 30, 2019, respectively, compared to $79.2 million and $149.7 million for the corresponding periods in 2018 of lower of cost or market adjustments on a portion of the Company's LHFS portfolio.
(2) Includes equity investment (income)/expense, net.

See accompanying notes to Condensed Consolidated Financial Statements.

5




SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME/(LOSS)
(unaudited)


 
Three-Month Period
Ended June 30,
 
Six-Month Period Ended June 30,
 
2019
 
2018
 
2019
 
2018
 
(in thousands)
 
(in thousands)
NET INCOME INCLUDING NCI
$
406,365

 
$
359,556

 
$
645,857

 
$
619,807

OTHER COMPREHENSIVE INCOME ("OCI"), NET OF TAX
 
 
 
 
 
 
 
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments, net of tax (1) (2)
1,133

 
(4,739
)
 
8,137

 
(12,474
)
Net unrealized gains/(losses) on AFS and HTM investment securities, net of tax (2)
113,290

 
(35,054
)
 
204,794

 
(160,700
)
Pension and post-retirement actuarial gains, net of tax (2)
6,091

 
625

 
12,202

 
1,250

TOTAL OTHER COMPREHENSIVE GAIN / (LOSS), NET OF TAX
120,514

 
(39,168
)
 
225,133

 
(171,924
)
COMPREHENSIVE INCOME
526,879

 
320,388

 
870,990

 
447,883

NET INCOME ATTRIBUTABLE TO NCI
110,743

 
104,141

 
183,255

 
179,280

COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA
$
416,136

 
$
216,247

 
$
687,735

 
$
268,603


(1) Excludes $(10.2) million, and $(16.5) million of OCI attributable to NCI for the three-month and six-month periods ended June 30, 2019, respectively, compared to $(0.2) million and $5.8 million for the corresponding periods in 2018.
(2) Excludes $39.1 million impact of OCI reclassified to Retained earnings as a result of the adoption of Accounting Standards Update ("ASU 2018-02") for the six-month period ended June 30, 2018.

See accompanying notes to Condensed Consolidated Financial Statements.


6




SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(unaudited)
(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, April 1, 2019
530,391

 

 
17,899,170

 
(217,033
)
 
3,894,037

 
2,552,231

 
24,128,405

Comprehensive income attributable to SHUSA

 

 

 
120,514

 
295,622

 

 
416,136

Other comprehensive (OCI) income attributable to NCI

 

 

 

 

 
(10,180
)
 
(10,180
)
Net income attributable to NCI

 

 

 

 

 
110,743

 
110,743

Impact of SC stock option activity

 

 

 

 

 
1,255

 
1,255

Contribution from shareholder

 

 
41,570

 

 

 

 
41,570

Dividends declared and paid on common stock

 

 

 

 
(75,000
)
 

 
(75,000
)
Dividends paid to NCI

 

 

 

 

 
(21,245
)
 
(21,245
)
Stock repurchase attributable to NCI

 

 
4,896

 

 

 
(91,760
)
 
(86,864
)
Balance, June 30, 2019
530,391

 
$

 
$
17,945,636

 
$
(96,519
)
 
$
4,114,659

 
$
2,541,044

 
$
24,504,820


 
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, April 1, 2018
530,391

 
195,445

 
17,732,184

 
(370,281
)
 
3,677,968

 
2,595,283

 
23,830,599

Comprehensive income attributable to SHUSA

 

 

 
(39,168
)
 
255,415

 

 
216,247

OCI attributable to NCI

 

 

 

 

 
(245
)
 
(245
)
Net income attributable to NCI

 

 

 

 

 
104,141

 
104,141

Impact of SC stock option activity

 

 

 

 

 
4,075

 
4,075

Dividends declared and paid on common stock

 

 

 

 
(5,000
)
 

 
(5,000
)
Dividends paid to NCI

 

 

 

 

 
(5,787
)
 
(5,787
)
Dividends paid on preferred stock

 

 

 

 
(3,650
)
 

 
(3,650
)
Balance, June 30, 2018
530,391

 
$
195,445

 
$
17,732,184

 
$
(409,449
)
 
$
3,924,733

 
$
2,697,467

 
$
24,140,380














7




SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY
(unaudited)
(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, 2019
530,391

 

 
17,859,304

 
(321,652
)
 
3,783,405

 
2,526,175

 
23,847,232

Cumulative-effect adjustment upon adoption of ASU 2016-02

 

 

 

 
18,652

 

 
18,652

Comprehensive income attributable to SHUSA

 

 

 
225,133

 
462,602

 

 
687,735

OCI attributable to NCI

 

 

 

 

 
(16,523
)
 
(16,523
)
Net income attributable to NCI

 

 

 

 

 
183,255

 
183,255

Impact of SC stock option activity

 

 

 

 

 
5,606

 
5,606

Contribution from shareholder (Note 17)

 

 
75,901

 

 

 

 
75,901

Dividends declared and paid on common stock

 

 

 

 
(150,000
)
 

 
(150,000
)
Dividends paid to NCI

 

 

 

 

 
(42,394
)
 
(42,394
)
Stock repurchase attributable to NCI

 

 
10,431

 

 

 
(115,075
)
 
(104,644
)
Balance, June 30, 2019
530,391

 
$

 
$
17,945,636

 
$
(96,519
)
 
$
4,114,659

 
$
2,541,044

 
$
24,504,820


 
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, 2018
530,391

 
195,445

 
17,723,010

 
(198,431
)
 
3,453,957

 
2,516,851

 
23,690,832

Cumulative-effect adjustment upon adoption of new ASUs and other (Note 1)

 

 

 
(39,094
)
 
47,549

 

 
8,455

Comprehensive income attributable to SHUSA

 

 

 
(171,924
)
 
440,527

 

 
268,603

OCI attributable to NCI

 

 

 

 

 
5,797

 
5,797

Net income attributable to NCI

 

 

 

 

 
179,280

 
179,280

Impact of SC stock option activity

 

 

 

 

 
7,074

 
7,074

Contribution from shareholder and related tax impact (Note 17)

 

 
9,174

 

 

 

 
9,174

Dividends declared and paid on common stock

 

 

 

 
(10,000
)
 

 
(10,000
)
Dividends paid to NCI

 

 

 

 

 
(11,535
)
 
(11,535
)
Dividends paid on preferred stock

 

 

 

 
(7,300
)
 

 
(7,300
)
Balance, June 30, 2018
530,391

 
$
195,445

 
$
17,732,184

 
$
(409,449
)
 
$
3,924,733

 
$
2,697,467

 
$
24,140,380




 
 
 
 
 
 
 
 
 
 
 
 
 
 

See accompanying notes to Condensed Consolidated Financial Statements.

8




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






Six-Month Period Ended June 30,
 
2019

2018
 
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income including NCI
$
645,857

 
$
619,807

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
1,080,843

 
987,683

Deferred tax expense
216,264

 
242,773

Depreciation, amortization and accretion
1,131,787

 
889,219

Net loss on sale of loans
150,147

 
148,838

Net (gain)/loss on sale of investment securities
(379
)
 
244

Loss on debt extinguishment
1,127

 
3,413

Net loss on real estate owned and premises and equipment
2,820

 
3,288

Stock-based compensation
266

 
501

Equity income on equity method investments
(322
)
 
(3,392
)
Originations of LHFS, net of repayments
(568,633
)
 
(2,369,626
)
Purchases of LHFS
(229
)
 
(620
)
Proceeds from sales of LHFS
614,783

 
3,256,748

Net change in:
 
 
 
Revolving personal loans
(72,723
)
 
(72,921
)
Other assets, BOLI and trading securities
(479,589
)
 
(401,695
)
Other liabilities
260,283

 
704,392

NET CASH PROVIDED BY OPERATING ACTIVITIES
2,982,302

 
4,008,652

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of AFS investment securities
285,263

 
39,446

Proceeds from prepayments and maturities of AFS investment securities
1,546,071

 
1,118,084

Purchases of AFS investment securities
(2,172,170
)
 
(1,194,315
)
Proceeds from prepayments and maturities of HTM investment securities
146,505

 
175,806

Purchases of HTM investment securities
(25,938
)
 
(135,898
)
Proceeds from sales of other investments
148,339

 
63,024

Proceeds from maturities of other investments
13,673

 

Purchases of other investments
(241,707
)
 
(64,678
)
Proceeds from sales of LHFI
602,325

 
826,085

Distributions from equity method investments
2,526

 
2,189

Contributions to equity method and other investments
(110,953
)
 
(52,341
)
Proceeds from settlements of BOLI policies
17,486

 
10,888

Purchases of LHFI
(625,435
)
 
(559,358
)
Net change in loans other than purchases and sales
(5,423,963
)
 
(3,624,591
)
Purchases and originations of operating leases
(4,527,626
)
 
(4,804,003
)
Proceeds from the sale and termination of operating leases
1,840,648

 
2,212,897

Manufacturer incentives
431,294

 
443,905

Proceeds from sales of real estate owned and premises and equipment
33,367

 
27,782

Purchases of premises and equipment
(88,014
)
 
(70,756
)
Upfront fee paid to FCA
(60,000
)
 

NET CASH USED IN INVESTING ACTIVITIES
(8,208,309
)
 
(5,585,834
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net change in deposits and other customer accounts
2,208,674

 
725,445

Net change in short-term borrowings
671,956

 
571,142

Net proceeds from long-term borrowings
21,916,766

 
23,140,364

Repayments of long-term borrowings
(19,882,995
)
 
(22,560,831
)
Proceeds from Federal Home Loan Bank ("FHLB") advances (with terms greater than 3 months)
3,375,000

 

Repayments of FHLB advances (with terms greater than 3 months)
(2,150,000
)
 
(1,400,000
)
Net change in advance payments by borrowers for taxes and insurance
21,261

 
31,283

Cash dividends paid to preferred stockholders

 
(7,300
)
Dividends paid on common stock
(150,000
)
 
(10,000
)
Dividends paid to NCI
(42,394
)
 
(11,535
)
Stock repurchase attributable to NCI
(104,644
)
 

Proceeds from the issuance of common stock
1,455

 
4,911

Capital contribution from shareholder
75,901

 
5,741

NET CASH PROVIDED BY FINANCING ACTIVITIES
5,940,980

 
489,220

 
 
 
 
NET INCREASE/(DECREASE) IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
714,973

 
(1,087,962
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
10,722,304

 
10,338,774

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (1)
$
11,437,277

 
$
9,250,812

 
 
 
 
NON-CASH TRANSACTIONS
 
 
 
Loans transferred from/(to) held-for-investment ("HFI") (from)/to held-for-sale, net ("HFS")
1,600,445

 
724,616

Unsettled purchases of investment securities
333,498

 

Unsettled sales of investment securities
342,401

 

AFS investment securities transferred to HTM investment securities

 
1,167,189

Adoption of lease accounting standard:
 
 
 
Right-of-use assets
664,057

 

Accrued expenses and payables
705,650

 


(1) The six-month periods ended June 30, 2019 and 2018 include cash and cash equivalents balances of $8.0 billion and $6.1 billion, respectively, and restricted cash balances of $3.4 billion and $3.1 billion, respectively.

See accompanying notes to Condensed Consolidated Financial Statements.

9





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

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

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

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

On June 28, 2019, SC entered into an amendment to the Chrysler Agreement, with FCA, which modified the Chrysler Agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions under the Chrysler Agreement. The amendment also terminated the previously disclosed tolling agreement dated July 2018, between SC and FCA.

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 other relationships through which it provides personal loans, private-label revolving lines of credit and other consumer finance products.

As of June 30, 2019, SC was owned approximately 70.5% by SHUSA and 29.5% by other shareholders. SC Common Stock is listed on the New York Stock Exchange (the "NYSE") under the trading symbol "SC."

On April 22, 2019, SBNA entered into an agreement with First Commonwealth Bank for the sale of 14 bank branches and four automated teller machines ("ATMs") located in central Pennsylvania, together with approximately $507 million of deposits and $113 million of retail and business loans (outstanding balances as of June 30, 2019). This transaction aligns with SHUSA’s strategy to reallocate capital to investments in core markets that will drive growth. The transaction is expected to close in the third quarter of 2019, with the recognition of an immaterial gain on sale.

10




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

Intermediate Holding Company ("IHC")

The enhanced prudential standards ("EPS") 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, are required to consolidate U.S. subsidiary activities under an IHC. Due to its U.S. non-branch total consolidated asset size, Santander is subject to the Final Rule. As a result of this rule, Santander transferred substantially all of its equity interests in U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. These subsidiaries included Santander BanCorp, BSI, SIS and SSLLC, as well as several other subsidiaries. On July 1, 2017, an additional Santander subsidiary, SFS, a finance company located in Puerto Rico, was transferred to the Company. Additionally, effective July 2, 2018, Santander transferred SAM to the IHC. The contribution of SAM to the Company transferred approximately $5.4 million of assets, $1.0 million of liabilities, and $4.4 million of equity to the Company.

Although SAM is an entity under common control, its results of operations, financial condition, and cash flows are immaterial to the historical financial results of the Company. As a result, the Company elected to report the results of SAM on a prospective basis beginning July 2, 2018. As a result of the contribution of SAM, SHUSA's net income is understated by $0.6 million and $1.0 million for the three- and six-month periods ended June 30, 2018. These amounts are immaterial to the overall presentation of the Company's financial statements for each of the periods presented.

Basis of Presentation

These Condensed Consolidated Financial Statements include accounts of the Company and its consolidated subsidiaries, and certain special purpose financing trusts that are considered VIEs. The Company generally consolidates VIEs for which it is deemed to be the primary beneficiary and voting interest entities ("VOEs") in which the Company has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation. These Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP") and pursuant to SEC regulations. Additionally, where applicable, the Company's accounting policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. In the opinion of management, the accompanying Condensed Consolidated Financial Statements reflect all adjustments of a normal and recurring nature necessary for a fair statement of the Condensed Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Income, Statements of Stockholder's Equity and Statements of Cash Flows ("SCF") for the periods indicated, and contain adequate disclosure to make the information presented not misleading. These Condensed Consolidated Financial Statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2018.

Corrections to Previously Reported Amounts

We have made certain corrections to previously disclosed amounts to correct for immaterial errors related to our RIC portfolio.

Certain accounting for RICs and auto loans

As discussed in Note 1 - "Basis of Presentation and Accounting Policies" in the 2018 Annual Report on Form 10-K, the Company identified and corrected two immaterial errors. The Company has revised its comparative Condensed Consolidated Financial Statements as of June 30, 2018 included within this Quarterly Report on Form 10-Q.


11




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

The following tables summarize the impacts of the corrections on the Company's Condensed Consolidated Statement of Operations for the periods indicated:
 
For the three-month period ended
 
For the six-month period ended
 
June 30, 2018
 
June 30, 2018
 
As Reported
 
Corrections
 
As Revised
 
As Reported
 
Corrections
 
Revised
INTEREST INCOME
 
 
 
 
 
 
 
 
 
 
 
Loans
$
1,813,853

 
$
54,470

 
$
1,868,323

 
$
3,561,579

 
$
108,873

 
$
3,670,452

TOTAL INTEREST INCOME
1,946,603

 
54,470

 
2,001,073

 
3,822,660

 
108,873

 
3,931,533

NET INTEREST INCOME
1,537,616

 
54,470

 
1,592,086

 
3,033,558

 
108,873

 
3,142,431

Provision for credit losses
379,834

 
53,969

 
433,803

 
882,368

 
105,315

 
987,683

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
1,157,782

 
501

 
1,158,283

 
2,151,190

 
3,558

 
2,154,748

Income tax provision / (benefit)
168,035

 
116

 
168,151

 
263,356

 
857

 
264,213

NET INCOME including NCI
359,171

 
385

 
359,556

 
617,107

 
2,700

 
619,807

Less: Net income attributable to NCI
104,018

 
123

 
104,141

 
178,416

 
864

 
179,280

NET INCOME ATTRIBUTABLE TO SHUSA
$
255,153

 
$
262

 
$
255,415

 
$
438,691

 
$
1,836

 
$
440,527

 
 
 
 
 
 
 
 
 
 
 
 

The following table summarizes the impacts of the corrections on the Company's Condensed Consolidated SCF for the period indicated:
 
For the six-month period ended
 
June 30, 2018
 
As Reported
 
Corrections
 
As Revised
Net cash provided by operating activities
$
3,909,460

 
$
99,192

 
$
4,008,652

Net cash provided by (used in) investing activities
$
(5,486,642
)
 
$
(99,192
)
 
$
(5,585,834
)

In addition to the revision of the Company's Consolidated Financial Statements, information within the Notes to the Consolidated Financial Statements has been revised to reflect the correction of the errors discussed above. The following tables summarize the impacts of the correction of those items:
 
June 30, 2018
 
As Reported
 
Corrections
 
As Revised
Non-performing - RICs and auto loans - originated
$
1,924,294

 
$
(946,334
)
 
$
977,960

Total non-performing loans
2,901,957

 
(946,334
)
 
1,955,623

Total non-performing assets
3,169,101

 
(946,334
)
 
2,222,767


 
June 30, 2018
 
As Reported
 
Corrections
 
As Revised
 
30-89 DPD(1)
 
90+ DPD
 
Current
 
30-89 DPD
 
90+ DPD
 
Current
 
30-89 DPD
 
90+ DPD
 
Current
RICs and auto loans - originated
$
3,038,768

 
$
229,528

 
$
22,416,117

 
$
174,294

 
$
20,269

 
$
(56,027
)
 
$
3,213,062

 
$
249,797

 
$
22,360,090

Total loans
$
3,787,412

 
$
814,165

 
$
80,095,126

 
$
174,294

 
$
20,269

 
$
(56,027
)
 
$
3,961,706

 
$
834,434

 
$
80,039,099

(1) Days past due ("DPD").

Significant Accounting Policies

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosures of contingent assets and liabilities, as of the date of the financial statements, and the amount of revenue and expenses during the reporting periods. Actual results could differ from those estimates, and those differences may be material.

12




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

Management has identified (i) the allowance for loan losses and the reserve for unfunded lending commitments, (ii) estimates of expected residual values of leases vehicles subject to operating leases, (iii) accretion of discounts and subvention on RICs, (iv) goodwill, (v) fair value of financial instruments, and (vi) income taxes as the Company's significant accounting policies and estimates, in that they are important to the portrayal of the Company's financial condition, results of operations and cash flows and the accounting estimates related thereto require management's most difficult, subjective and complex judgments as a result of the need to make estimates about the effect of matters that are inherently uncertain.

As of June 30, 2019, with the exception of the items noted in the section captioned "Recently Adopted Accounting Standards" below, there have been no significant changes to the Company's accounting policies as disclosed in its Annual Report on Form 10-K for the year ended December 31, 2018.

Recently Adopted Accounting Standards

Since January 1, 2019, the Company adopted the following Financial Accounting Standards Board ("FASB") Accounting Standards Updates (“ASUs"):
ASU 2016-02, Leases (Topic 842). The Company adopted this standard as of January 1, 2019, resulting in the recognition of a right of-use (“ROU”) asset ($664.1 million) and lease liability ($705.7 million) in the Consolidated Balance Sheet for all operating leases with a term greater than 12 months. The Company adopted the ASU using the modified retrospective approach, with application at the adoption date and a cumulative-effect adjustment to the opening balance of retained earnings. Under this approach, comparative periods were not adjusted. We elected the package of practical expedients permitted under transition guidance, which allowed us to carry forward the historical lease classification. We also elected not to recognize a lease liability and associated ROU asset for short-term leases. We did not elect (1) the hindsight practical expedient when determining the lease term and (2) the practical expedient to not separate non-lease components from lease components. The ASU required the Company to accelerate the recognition of $18.7 million of previously deferred gains on sale-leaseback transactions, with such impact recorded to the opening balance of Retained earnings.

The ROU asset and lease liability will subsequently be de-recognized in a manner that effectively yields a straight-line lease expense over the lease term. Lessee accounting requirements for finance leases (previously described as capital leases) and lessor accounting requirements for operating, sales-type, and direct financing leases (sales-type and direct financing leases were both previously referred to as capital leases) are largely unchanged. This standard did not materially affect our Consolidated Statements of Operations or SCF.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract. This ASU aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The capitalized costs will be presented with Other assets on the balance sheet, and the amortization expense will be presented in the Technology, outside service, and marketing expense line of the Statement of Operations. The Company has early adopted this standard effective January 1, 2019 and it did not have a material impact on the Company's Condensed Consolidated Financial Statements and related disclosures.

The adoption of the following ASUs did not have an impact on the Company's financial position or results of operations:
ASU 2017-08, Receivables - Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities.
ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.
ASU 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.
ASU 2018-16, Derivatives and Hedging (Topic 815), Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as a Benchmark Interest Rate for Hedge Accounting Purposes.


13




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

Subsequent Events

The Company evaluated events from the date of the Condensed Consolidated Financial Statements on June 30, 2019 through the issuance of these Condensed Consolidated Financial Statements, and has determined that there have been no material events that would require recognition in its Condensed Consolidated Financial Statements or disclosure in the Notes to the Condensed Consolidated Financial Statements for the three-month and six-month periods ended June 30, 2019 other than the events disclosed in Note 10.


NOTE 2. RECENT ACCOUNTING DEVELOPMENTS

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments. This 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 guidance will be effective for the Company for the first reporting period beginning after December 15, 2019, including interim periods within that year. The Company does not intend to adopt this ASU early and is currently evaluating the impact the new guidance will have on its financial position, results of operations and cash flows; however, it is expected that the new current expected credit loss model will alter the assumptions used in calculating the Company's allowance for credit losses ("ACL"), given the change to estimated losses for the estimated life of the financial asset, and will likely result in material increases to the Company's ACL and related decreases to capital ratios.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. This ASU removes the requirement to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels, and the valuation processes for Level 3 fair value measurements. This ASU requires disclosure of changes in unrealized gains and losses for the period included in OCI (loss) for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. This new guidance will be effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect the new guidance will have on its Consolidated Financial Statements and related disclosures.

In addition to those described in detail above, the Company is in the process of evaluating ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities, but does not expect it to have a material impact on the Company's financial position, results of operations, or disclosures.




14




NOTE 3. INVESTMENT SECURITIES

Summary of Investment in Debt Securities - AFS and HTM

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of debt securities AFS at the dates indicated:
 
 
June 30, 2019
 
December 31, 2018
(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
 
$
3,122,838

 
$
4,514

 
$
(3,176
)
 
$
3,124,176

 
$
1,815,914

 
$
560

 
$
(11,729
)
 
$
1,804,745

Corporate debt securities
 
158,446

 
87

 
(33
)
 
158,500

 
160,164

 
12

 
(62
)
 
160,114

Asset-backed securities (“ABS”)
 
417,401

 
2,054

 
(1,531
)
 
417,924

 
435,464

 
3,517

 
(2,144
)
 
436,837

State and municipal securities
 
13

 

 

 
13

 
16

 

 

 
16

Mortgage-backed securities (“MBS”):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GNMA - Residential (1)
 
2,526,247

 
4,856

 
(17,651
)
 
2,513,452

 
2,829,075

 
861

 
(85,675
)
 
2,744,261

GNMA - Commercial
 
745,871

 
8,374

 
(429
)
 
753,816

 
954,651

 
1,250

 
(19,515
)
 
936,386

FHLMC and FNMA - Residential (2)
 
4,889,480

 
13,461

 
(41,731
)
 
4,861,210

 
5,687,221

 
267

 
(188,515
)
 
5,498,973

FHLMC and FNMA - Commercial
 
70,700

 
2,670

 
(6
)
 
73,364

 
51,808

 
384

 
(537
)
 
51,655

Total investments in debt securities AFS
 
$
11,930,996

 
$
36,016

 
$
(64,557
)
 
$
11,902,455

 
$
11,934,313

 
$
6,851

 
$
(308,177
)
 
$
11,632,987

(1) Government National Mortgage Association ("GNMA")
(2) Federal Home Loan Mortgage Corporation ("FHLMC") and Federal National Mortgage Association ("FNMA")

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of debt securities HTM at the dates indicated:
 
 
June 30, 2019
 
December 31, 2018
(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
 
$
1,729,543

 
$
11,782

 
$
(13,044
)
 
$
1,728,281

 
$
1,718,687

 
$
1,806

 
$
(54,184
)
 
$
1,666,309

GNMA - Commercial
 
1,226,208

 
15,951

 
(952
)
 
1,241,207

 
1,031,993

 
1,426

 
(23,679
)
 
1,009,740

Total investments in debt securities HTM
 
$
2,955,751

 
$
27,733

 
$
(13,996
)
 
$
2,969,488

 
$
2,750,680

 
$
3,232

 
$
(77,863
)
 
$
2,676,049


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 June 30, 2019 and December 31, 2018, the Company had investment securities with an estimated carrying value of $6.8 billion and $6.6 billion, respectively, pledged as collateral, which were comprised of the following: $2.3 billion and $3.0 billion, respectively, were pledged as collateral for the Company's borrowing capacity with the Federal Reserve Bank (the "FRB"); $3.6 billion and $2.7 billion, respectively, were pledged to secure public fund deposits; $185.5 million and $78.0 million, respectively, were pledged to various independent parties to secure repurchase agreements, support hedging relationships, and for recourse on loan sales; $424.1 million and $423.3 million, respectively, were pledged to deposits with clearing organizations; and $273.0 million and $415.1 million, respectively, were pledged to secure the Company's customer overnight sweep product.

At June 30, 2019 and December 31, 2018, the Company had $40.3 million and $40.2 million, respectively, of accrued interest related to investment securities which is included in the Other assets line of the Company's Condensed Consolidated Balance Sheets.

Contractual Maturity of Debt Securities
 
 
 
 
 
 
 
 
 
 
 
 
 
Contractual maturities of the Company’s AFS debt securities at June 30, 2019 were as follows:
(in thousands)
 
Amortized Cost
 
Fair Value
Due within one year
 
$
3,255,956

 
$
3,255,876

Due after 1 year but within 5 years
 
376,902

 
380,421

Due after 5 years but within 10 years
 
398,434

 
400,761

Due after 10 years
 
7,899,704

 
7,865,397

Total
 
$
11,930,996

 
$
11,902,455


15




NOTE 3. INVESTMENT SECURITIES (continued)

Contractual maturities of the Company’s HTM debt securities at June 30, 2019 were as follows:
 
 
 
 
 
(in thousands)
 
Amortized Cost
 
Fair Value
Due after 10 years
 
$
2,955,751

 
$
2,969,488

Total
 
$
2,955,751

 
$
2,969,488


Actual maturities may differ from contractual maturities when there is a right to call or prepay obligations with or without call or prepayment penalties.
 
 
 
 
 
 
 
 
 
 
 
 
 
Gross Unrealized Loss and Fair Value of Debt Securities AFS and HTM

The following tables present the aggregate amount of unrealized losses as of June 30, 2019 and December 31, 2018 on securities in the Company’s AFS investment portfolios classified according to the amount of time those securities have been in a continuous loss position:
 
 
June 30, 2019
 
December 31, 2018
 
 
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
 
$

 
$

 
$
897,154

 
$
(3,176
)
 
$
288,660

 
$
(315
)
 
$
914,212

 
$
(11,414
)
Corporate debt securities
 
114,826

 
(33
)
 

 

 
152,247

 
(62
)
 
13

 

ABS
 

 

 
67,419

 
(1,531
)
 
31,888

 
(249
)
 
77,766

 
(1,895
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GNMA - Residential
 
36,884

 
(91
)
 
1,946,255

 
(17,560
)
 
102,418

 
(2,0