Company Quick10K Filing
Quick10K
Santander Holdings
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 2019-06-28 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
BT BT Group 27,760
PKI Perkinelmer 10,280
ATR Aptargroup 7,140
AAT American Assets Trust 2,180
OVLY Oak Valley Bancorp 157
EEI Ecology & Environment 51
XELB XCel Brands 25
EPIX ESSA Pharma 17
BRS Bristow Group 11
OXF Westmoreland Resource Partners 0
SOV 2019-03-31
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_1q19exhibit311.htm
EX-31.2 a10-q_1q19exhibit312.htm
EX-32.1 a10-q_1q19exhibit321.htm
EX-32.2 a10-q_1q19exhibit322.htm

Santander Holdings Earnings 2019-03-31

SOV 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 santanderholdingsq12019.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 March 31, 2019
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number: 001-16581
SANTANDER HOLDINGS USA, INC.
 
(Exact name of registrant as specified in its charter)
  
Virginia
(State or other jurisdiction of
incorporation or organization)
 
23-2453088
(I.R.S. Employer
Identification No.)
 
 
 
75 State Street, Boston, Massachusetts
(Address of principal executive offices)
 
02109
(Zip Code)
(617) 346-7200
Registrant’s telephone number including area code
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ. No o.
Indicate by check mark whether the registrant has submitted electronically 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
 
 
 
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.

Title of each class
Trading Symbols
Name of each exchange on which registered
Outstanding at April 30, 2019
Common Stock (no par value)
Not Applicable
Not applicable
530,391,043 shares



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
 
DTI: Debt-to-income
ACL: Allowance for credit losses
 
ECOA: Equal Credit Opportunity Act
AFS: Available-for-sale
 
EPS: Enhanced Prudential Standards
ALLL: Allowance for loan and lease losses
 
ETR: Effective tax rate
ASC: Accounting Standards Codification
 
Exchange Act: Securities Exchange Act of 1934, as amended
ASU: Accounting Standards Update
 
FASB: Financial Accounting Standards Board
Bank: Santander Bank, National Association
 
FBO: Foreign banking organization
BHC: Bank holding company
 
FCA: Fiat Chrysler Automobiles US LLC
BOLI: Bank-owned life insurance
 
FDIA: Federal Deposit Insurance Corporation Improvement Act
BSI: Banco Santander International
 
FDIC: Federal Deposit Insurance Corporation
BSPR: Banco Santander Puerto Rico
 
Federal Reserve: Board of Governors of the Federal Reserve System
C&I: Commercial & industrial
 
FHLB: Federal Home Loan Bank
CBP: Citizens Bank of Pennsylvania
 
FHLMC: Federal Home Loan Mortgage Corporation
CCAR: Comprehensive Capital Analysis and Review
 
FICO®: Fair Isaac Corporation credit scoring model
CD: Certificate of deposit
 
Final Rule: Rule implementing certain of the EPS mandated by Section 165 of the DFA
CEF: Closed-end fund
 
FINRA: Financial Industrial Regulatory Authority
CEO: Chief Executive Officer
 
FNMA: Federal National Mortgage Association
CEVF: Commercial equipment vehicle financing
 
FOB: Financial Oversight and Management Board of Puerto Rico
CET1: Common equity Tier 1
 
FRB: Federal Reserve Bank
CFPB: Consumer Financial Protection Bureau
 
FVO: Fair value option
Change in Control: First quarter 2014 change in control and consolidation of SC
 
GAAP: Accounting principles generally accepted in the United States of America
Chrysler Agreement: Ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC, formerly Chrysler Group LLC, signed by SC
 
GAP: Guaranteed auto protection
Chrysler Capital: Trade name used in providing services under the Chrysler Agreement
 
HFI: Held for investment
CIB: Corporate and Investment Banking
 
HTM: Held to maturity
CID: Civil investigative demand
 
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
COSO: Committee of Sponsoring Organizations
 
LCR: Liquidity coverage ratio
Covered Fund: hedge fund or a private equity fund under the Volcker Rule
 
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

2




 
 
 
MSR: Mortgage servicing right
 
Santander NY: New York branch of Santander
MVE: Market value of equity
 
Santander UK: Santander UK plc
NCI: Non-controlling interest
 
SBNA: Santander Bank, National Association
NMD: Non-maturity deposits
 
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
 
 
VIE: Variable interest entity
 
 
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)

 
March 31, 2019
 
December 31, 2018
 
(in thousands)
ASSETS
 
 
 
Cash and cash equivalents
$
7,564,183

 
$
7,790,593

Investment securities:
 
 
 
Available-for-sale ("AFS") at fair value
11,469,199

 
11,632,987

Held-to-maturity ("HTM") (fair value of $2,674,628 and $2,676,049 as of March 31, 2019 and December 31, 2018, respectively)
2,711,701

 
2,750,680

Other investments (includes Trading securities of $6,228 and $10 as of March 31, 2019 and December 31, 2018, respectively)
893,544

 
805,357

Loans held-for-investment ("LHFI")(1) (5)
89,204,260

 
87,045,868

Allowance for loan and lease losses ("ALLL") (5)
(3,843,095
)
 
(3,897,130
)
Net LHFI
85,361,165

 
83,148,738

Loans held-for-sale ("LHFS") (2)
1,212,578

 
1,283,278

Premises and equipment, net (3)
754,109

 
805,940

Operating lease assets, net (5)(6)
14,490,099

 
14,078,793

Goodwill
4,444,389

 
4,444,389

Intangible assets, net
460,429

 
475,193

Bank-owned life insurance ("BOLI")
1,843,985

 
1,833,290

Restricted cash (5)
3,268,581

 
2,931,711

Other assets (4) (5)
4,482,633

 
3,653,336

TOTAL ASSETS
$
138,956,595

 
$
135,634,285

LIABILITIES
 
 
 
Accrued expenses and payables
$
3,687,091

 
$
3,035,848

Deposits and other customer accounts
62,946,844

 
61,511,380

Borrowings and other debt obligations (5)
45,647,858

 
44,953,784

Advance payments by borrowers for taxes and insurance
207,220

 
160,728

Deferred tax liabilities, net
1,304,197

 
1,212,538

Other liabilities (5)
1,034,980

 
912,775

TOTAL LIABILITIES
114,828,190

 
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 March 31, 2019 and December 31, 2018)
17,899,170

 
17,859,304

Accumulated other comprehensive loss
(217,033
)
 
(321,652
)
Retained earnings
3,894,037

 
3,783,405

TOTAL SANTANDER HOLDINGS USA, INC. ("SHUSA") STOCKHOLDER'S EQUITY
21,576,174

 
21,321,057

Noncontrolling interest ("NCI")
2,552,231

 
2,526,175

TOTAL STOCKHOLDER'S EQUITY
24,128,405

 
23,847,232

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
$
138,956,595

 
$
135,634,285

 
(1) LHFI includes $114.8 million and $126.3 million of loans recorded at fair value at March 31, 2019 and December 31, 2018, respectively.
(2) Includes $188.3 million and $209.5 million of loans recorded at the fair value option ("FVO") at March 31, 2019 and December 31, 2018, respectively.
(3) Net of accumulated depreciation of $1.4 billion and $1.4 billion at March 31, 2019 and December 31, 2018, respectively.
(4) Includes mortgage servicing rights ("MSRs") of $140.1 million and $149.7 million at March 31, 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 March 31, 2019 and December 31, 2018, LHFI included $24.8 billion and $24.1 billion, Operating leases assets, net included $14.4 billion and $14.0 billion, restricted cash included $1.8 billion and $1.6 billion, other assets included $667.4 million and $685.4 million, Borrowings and other debt obligations included $32.8 billion and $31.9 billion, and Other Liabilities included $109.4 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 $3.6 billion and $3.5 billion at March 31, 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 March 31,
 
2019
 
2018
 
(in thousands)
INTEREST INCOME:
 
 
 
Loans
$
1,999,338

 
$
1,802,137

Interest-earning deposits
44,018

 
32,513

Investment securities:
 
 
 
AFS
74,430

 
73,505

HTM
17,322

 
17,064

Other investments
5,935

 
5,248

TOTAL INTEREST INCOME
2,141,043

 
1,930,467

INTEREST EXPENSE:
 
 
 
Deposits and other customer accounts
130,288

 
75,424

Borrowings and other debt obligations
407,870

 
304,690

TOTAL INTEREST EXPENSE
538,158

 
380,114

NET INTEREST INCOME
1,602,885

 
1,550,353

Provision for credit losses
600,211

 
553,880

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
1,002,674

 
996,473

NON-INTEREST INCOME:
 
 
 
Consumer and commercial fees
133,018

 
138,561

Lease income
674,885

 
540,896

Miscellaneous income, net(1) (2)
89,543

 
122,406

TOTAL FEES AND OTHER INCOME
897,446

 
801,863

Net (loss) on sale of investment securities
(2,000
)
 
(663
)
Net (loss) recognized in earnings
(2,000
)
 
(663
)
TOTAL NON-INTEREST INCOME
895,446

 
801,200

GENERAL, ADMINISTRATIVE AND OTHER EXPENSES:
 
 
 
Compensation and benefits
476,563

 
469,406

Occupancy and equipment expenses
142,394

 
159,340

Technology, outside service, and marketing expense
151,706

 
152,282

Loan expense
106,716

 
96,814

Lease expense
479,304

 
424,266

Other expenses
185,731

 
139,253

TOTAL GENERAL, ADMINISTRATIVE AND OTHER EXPENSES
1,542,414

 
1,441,361

INCOME BEFORE INCOME TAX PROVISION
355,706

 
356,312

Income tax provision
116,214

 
96,062

NET INCOME INCLUDING NCI
239,492

 
260,250

LESS: NET INCOME ATTRIBUTABLE TO NCI
72,512

 
75,138

NET INCOME ATTRIBUTABLE TO SHUSA
$
166,980

 
$
185,112

(1) Includes impact of $67.7 million, and $70.5 million, for the three-month periods ended March 31, 2019 and 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 March 31,
 
2019
 
2018
 
(in thousands)
NET INCOME INCLUDING NCI
$
239,492

 
$
260,250

OTHER COMPREHENSIVE INCOME ("OCI"), NET OF TAX
 
 
 
Net unrealized gains/(losses) on cash flow hedge derivative financial instruments, net of tax (1) (2)
7,003

 
(7,736
)
Net unrealized gains/(losses) on AFS and HTM investment securities, net of tax (2)
91,505

 
(125,645
)
Pension and post-retirement actuarial gains, net of tax (2)
6,111

 
625

TOTAL OTHER COMPREHENSIVE GAIN / (LOSS), NET OF TAX
104,619

 
(132,756
)
COMPREHENSIVE INCOME
344,111

 
127,494

NET INCOME ATTRIBUTABLE TO NCI
72,512

 
75,138

COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA
$
271,599

 
$
52,356


(1) Excludes $6.3 million, and $4.1 million of OCI attributable to NCI for the three-month periods ended March 31, 2019 and 2018, respectively.
(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 three-month period ended March 31, 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, 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

 

 

 
(39,094
)
 
47,549

 

 
8,455

Comprehensive income attributable to SHUSA

 

 

 
(132,756
)
 
185,112

 

 
52,356

OCI attributable to NCI

 

 

 

 

 
4,079

 
4,079

Net income attributable to NCI

 

 

 

 

 
75,138

 
75,138

Impact of SC stock option activity

 

 

 

 

 
4,961

 
4,961

Contribution from shareholder and related tax impact (Note 17)

 

 
9,174

 

 

 

 
9,174

Dividends declared and paid on common stock

 

 

 

 
(5,000
)
 

 
(5,000
)
Dividends paid to NCI

 

 

 

 

 
(5,748
)
 
(5,748
)
Dividends declared and paid on preferred stock

 

 

 

 
(3,650
)
 

 
(3,650
)
Balance, March 31, 2018
530,391

 
$
195,445

 
$
17,732,184

 
$
(370,281
)
 
$
3,677,968

 
$
2,595,281

 
$
23,830,597

 
 
 
 
 
 
 
 
 
 
 
 
 
 
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

 

 

 
104,619

 
166,980

 

 
271,599

Other comprehensive loss attributable to NCI

 

 

 

 

 
(6,343
)
 
(6,343
)
Net income attributable to NCI

 

 

 

 

 
72,512

 
72,512

Impact of SC stock option activity

 

 

 

 

 
4,351

 
4,351

Contribution from shareholder (Note 17)

 

 
34,331

 

 

 

 
34,331

Dividends declared and paid on common stock

 

 

 

 
(75,000
)
 

 
(75,000
)
Dividends declared and paid to NCI

 

 

 

 

 
(21,149
)
 
(21,149
)
Stock repurchase attributable to NCI

 

 
5,535

 

 

 
(23,315
)
 
(17,780
)
Balance, March 31, 2019
530,391

 
$

 
$
17,899,170

 
$
(217,033
)
 
$
3,894,037

 
$
2,552,231

 
$
24,128,405


See accompanying notes to Condensed Consolidated Financial Statements.

7




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






Three-Month Period Ended March 31,
 
2019

2018
 
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net income including NCI
$
239,492

 
$
260,250

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Provision for credit losses
600,211

 
553,880

Deferred tax expense
72,942

 
85,308

Depreciation, amortization and accretion
530,112

 
437,506

Net loss on sale of loans
68,697

 
66,370

Net loss on sale of investment securities
2,000

 
663

Loss on debt extinguishment
18

 
2,212

Net loss on real estate owned and premises and equipment
1,768

 
1,476

Stock-based compensation
153

 
274

Equity loss on equity method investments
1,865

 
2,164

Originations of LHFS, net of repayments
(241,706
)
 
(1,225,975
)
Purchases of LHFS
(228
)
 
(550
)
Proceeds from sales of LHFS
296,558

 
1,789,969

Purchases of trading securities
(6,598
)
 
(3,776
)
Proceeds from sales of trading securities
465

 
1,640

Net change in:
 
 
 
Revolving personal loans
6,523

 
5,723

Other assets and BOLI
(217,064
)
 
(311,282
)
Other liabilities
166,513

 
346,354

NET CASH PROVIDED BY OPERATING ACTIVITIES
1,521,721

 
2,012,206

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of AFS investment securities
282,872

 
39,446

Proceeds from prepayments and maturities of AFS investment securities
794,505

 
605,286

Purchases of AFS investment securities
(787,404
)
 
(840,948
)
Proceeds from prepayments and maturities of HTM investment securities
62,604

 
86,097

Purchases of HTM investment securities
(25,938
)
 

Proceeds from sales of other investments
56,978

 
25,946

Purchases of other investments
(106,726
)
 
(109,576
)
Proceeds from sales of LHFI
17,842

 
681,754

Distributions from equity method investments
1,152

 
1,111

Contributions to equity method and other investments
(46,116
)
 
(23,832
)
Proceeds from settlements of BOLI policies
3,536

 
6,043

Purchases of LHFI
(181,247
)
 
(225,226
)
Net change in loans other than purchases and sales
(2,665,033
)
 
(470,312
)
Purchases and originations of operating leases
(1,981,228
)
 
(2,155,881
)
Proceeds from the sale and termination of operating leases
875,002

 
1,164,362

Manufacturer incentives
235,312

 
213,784

Proceeds from sales of real estate owned and premises and equipment
12,612

 
12,017

Purchases of premises and equipment
(46,173
)
 
(38,412
)
NET CASH USED IN INVESTING ACTIVITIES
(3,497,450
)
 
(1,028,341
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net change in deposits and other customer accounts
1,435,464

 
1,010,072

Net change in short-term borrowings
174,423

 
54,155

Net proceeds from long-term borrowings
9,747,474

 
11,482,934

Repayments of long-term borrowings
(9,088,857
)
 
(11,751,288
)
Proceeds from Federal Home Loan Bank ("FHLB") advances (with terms greater than 3 months)
1,400,000

 

Repayments of FHLB advances (with terms greater than 3 months)
(1,550,000
)
 
(450,000
)
Net change in advance payments by borrowers for taxes and insurance
46,492

 
49,767

Cash dividends paid to preferred stockholders

 
(3,650
)
Dividends paid on common stock
(75,000
)
 
(5,000
)
Dividends paid to NCI
(21,149
)
 
(5,748
)
Stock repurchase attributable to NCI
(17,780
)
 

Proceeds from the issuance of common stock
791

 
1,947

Capital contribution from shareholder
34,331

 
5,741

NET CASH PROVIDED BY FINANCING ACTIVITIES
2,086,189

 
388,930

 
 
 
 
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
110,460

 
1,372,795

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)
$
10,832,764

 
$
11,711,569

 
 
 
 
NON-CASH TRANSACTIONS
 
 
 
Loans transferred to/(from) other real estate owned
(44,706
)
 
(25,435
)
Loans transferred from/(to) held-for-investment ("HFI") (from)/to held-for-sale, net ("HFS")
44,312

 
700,160

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 three-month periods ended March 31, 2019 and 2018 include cash and cash equivalents balances and restricted cash balances of $7.6 billion and $3.3 billion; and $7.9 billion and $3.8 billion, respectively.

See accompanying notes to Condensed Consolidated Financial Statements.

8





NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Introduction

Santander Holdings USA, Inc. ("SHUSA" or the "Company") is the parent company (the "Parent Company") of Santander Bank, National Association (the "Bank" or "SBNA"), a national banking association; Santander Consumer USA Holdings Inc. (together with its subsidiaries, "SC"), a consumer finance company; 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. RICs and vehicle leases entered into with FCA customers as part of the Chrysler Agreement represent a significant concentration of those portfolios, and there is a risk that the Chrysler Agreement could be terminated prior to its expiration date. Termination of the Chrysler Agreement could result in a decrease in the amount of new RICs and vehicle leases entered into with FCA customers as well as dealer loans. Refer to Note 16 for additional details.

In June 2018, SC announced that it was in exploratory discussions with FCA regarding the future of FCA's U.S. finance operations. FCA has announced its intention to establish a captive U.S. auto finance unit and indicated that acquiring Chrysler Capital is one option it will consider. Under the Chrysler Agreement, FCA has the option to acquire, for fair market value, an equity participation in the business offering and providing financial services contemplated by the Chrysler Agreement. The likelihood, timing and structure of any such transaction, and the likelihood that the Chrysler Agreement will terminate, cannot be reasonably determined. In July 2018, FCA and the Company entered into a tolling agreement pursuant to which the parties agreed to preserve their respective rights, claims and defenses under the Chrysler Agreement as they existed on April 30, 2018 and to refrain from delivering a written notice to the other party under the Chrysler Agreement until December 31, 2018.

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 March 31, 2019, SC was owned approximately 69.8% by SHUSA and 30.2% by other shareholders. SC Common Stock is listed on the New York Stock Exchange (the "NYSE") under the trading symbol "SC."

9




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 $0.4 million for the three-month period ended March 31, 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 March 31, 2018 included within this Quarterly Report on Form 10-Q.


10




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
 
March 31, 2018
 
As Reported
 
Corrections
 
As Revised
INTEREST INCOME
 
 
 
 
 
Loans
$
1,747,734

 
$
54,403

 
$
1,802,137

TOTAL INTEREST INCOME
1,876,064

 
54,403

 
1,930,467

NET INTEREST INCOME
1,495,950

 
54,403

 
1,550,353

Provision for credit losses
502,534

 
51,346

 
553,880

NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES
993,416

 
3,057

 
996,473

Income tax provision / (benefit)
95,321

 
741

 
96,062

NET INCOME including NCI
257,935

 
2,315

 
260,250

Less: Net income attributable to NCI
74,397

 
741

 
75,138

NET INCOME ATTRIBUTABLE TO SHUSA
$
183,538

 
$
1,574

 
$
185,112

 
 
 
 
 
 

The following table summarizes the impacts of the corrections on the Company's Condensed Consolidated SCF for the period indicated:
 
For the three-month period ended
 
March 31, 2018
 
As Reported
 
Corrections
 
As Revised
Net cash provided by operating activities
$
1,963,089

 
$
49,117

 
$
2,012,206

Net cash provided by (used in) investing activities
$
(979,224
)
 
$
(49,117
)
 
$
(1,028,341
)

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:
 
March 31, 2018
 
As Reported
 
Corrections
 
As Revised
Non-performing - RICs and auto loans - originated
$
1,644,605

 
$
(770,541
)
 
$
874,064

Total non-performing loans
2,681,624

 
(770,541
)
 
1,911,083

Total non-performing assets
2,981,021

 
(770,541
)
 
2,210,480


 
March 31, 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
$
2,634,364

 
$
228,811

 
$
21,340,720

 
$
142,931

 
$
19,596

 
$
(67,072
)
 
$
2,777,295

 
$
248,407

 
$
21,273,648

Total loans
$
3,509,299

 
$
798,166

 
$
77,771,558

 
$
142,931

 
$
19,596

 
$
(67,072
)
 
$
3,652,230

 
$
817,762

 
$
77,704,486

(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.

11




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 March 31, 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 derecognized 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 Statement of Cash Flows.

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 Liabilities 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.


12




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

Subsequent Events

On April 22, 2019, SBNA entered into an agreement with First Commonwealth Bank for the sale of 14 bank branches and four ATMs located in central Pennsylvania, together with approximately $525 million of deposits and $120 million of retail and business loans (outstanding balances as of March 31, 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.

Puerto Rico Bankruptcy Litigation

On May 2, 2019, the Special Claims Committee of the Financial Oversight and Management Board for Puerto Rico and the Official Committee of Unsecured Creditors of the Commonwealth of Puerto Rico, as Co-Trustees of the Commonwealth of Puerto Rico, filed an adversary complaint against SSLLC, 17 other financial institutions and a law firm, alleging, among other things, that the defendants aided and abetted breaches of fiduciary duty by the Government Development Bank for Puerto Rico in connection with the issuance of various bonds by the Commonwealth and its instrumentalities. The case is pending in the United States District Court for the District of Puerto Rico and is captioned Special Claims Committee of the Financial Oversight and Management Board for Puerto Rico, et al. v. Barclays Capital, et al., Adv. Pro. No. 19-00280.   

The Company evaluated events from the date of the Condensed Consolidated Financial Statements on March 31, 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 periods ended March 31, 2019 other than the events disclosed above.


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 the following ASU, but does not expect it to have a material impact on the Company's financial position, results of operations, or disclosures:

ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities


13




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:
 
 
March 31, 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
 
$
2,136,711

 
$
1,707

 
$
(7,558
)
 
$
2,130,860

 
$
1,815,914

 
$
560

 
$
(11,729
)
 
$
1,804,745

Corporate debt securities
 
142,912

 
50

 
(23
)
 
142,939

 
160,164

 
12

 
(62
)
 
160,114

Asset-backed securities (“ABS”)
 
426,115

 
2,845

 
(1,954
)
 
427,006

 
435,464

 
3,517

 
(2,144
)
 
436,837

State and municipal securities
 
15

 

 

 
15

 
16

 

 

 
16

Mortgage-backed securities (“MBS”):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GNMA - Residential (1)
 
2,666,747

 
597

 
(48,826
)
 
2,618,518

 
2,829,075

 
861

 
(85,675
)
 
2,744,261

GNMA - Commercial
 
755,054

 
320

 
(12,523
)
 
742,851

 
954,651

 
1,250

 
(19,515
)
 
936,386

FHLMC and FNMA - Residential (2)
 
5,465,051

 
1,134

 
(111,224
)
 
5,354,961

 
5,687,221

 
267

 
(188,515
)
 
5,498,973

FHLMC and FNMA - Commercial
 
51,595

 
630

 
(176
)
 
52,049

 
51,808

 
384

 
(537
)
 
51,655

Total investments in debt securities AFS
 
$
11,644,200

 
$
7,283

 
$
(182,284
)
 
$
11,469,199

 
$
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:
 
 
March 31, 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
 
$
1,663,706

 
$
5,021

 
$
(29,260
)
 
$
1,639,467

 
$
1,718,687

 
$
1,806

 
$
(54,184
)
 
$
1,666,309

GNMA - Commercial
 
1,047,995

 
3,029

 
(15,863
)
 
1,035,161

 
1,031,993

 
1,426

 
(23,679
)
 
1,009,740

Total investments in debt securities HTM
 
$
2,711,701

 
$
8,050

 
$
(45,123
)
 
$
2,674,628

 
$
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 March 31, 2019 and December 31, 2018, respectively, the Company had investment securities with an estimated carrying value of $6.6 billion and $6.6 billion, pledged as collateral, which were comprised of the following: $2.9 billion and $3.0 billion, respectively, were pledged as collateral for the Company's borrowing capacity with the Federal Reserve Bank (the "FRB"); $2.8 billion and $2.7 billion, respectively, were pledged to secure public fund deposits; $126.3 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; $422.2 million and $423.3 million, respectively, were pledged to deposits with clearing organizations; and $317.1 million and $415.1 million, respectively, were pledged to secure the Company's customer overnight sweep product.

At March 31, 2019 and December 31, 2018, the Company had $38.9 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 March 31, 2019 were as follows:
(in thousands)
 
Amortized Cost
 
Fair Value
Due within one year
 
$
2,281,187

 
$
2,276,677

Due after 1 year but within 5 years
 
355,236

 
356,479

Due after 5 years but within 10 years
 
337,554

 
334,302

Due after 10 years
 
8,670,223

 
8,501,741

Total
 
$
11,644,200

 
$
11,469,199


14




NOTE 3. INVESTMENT SECURITIES (continued)

Contractual maturities of the Company’s HTM debt securities at March 31, 2019 were as follows:
 
 
 
 
 
(in thousands)
 
Amortized Cost
 
Fair Value
Due after 10 years
 
$
2,711,701

 
$
2,674,628

Total
 
$
2,711,701

 
$
2,674,628

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 March 31, 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:
 
 
March 31, 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
 
$
79,730

 
$
(8
)
 
$
1,000,876

 
$
(7,550
)
 
$
288,660

 
$
(315
)
 
$
914,212

 
$
(11,414
)
Corporate debt securities
 
92,223

 
(23
)
 

 

 
152,247

 
(62
)
 
13

 

ABS
 

 

 
100,912

 
(1,954
)
 
31,888

 
(249
)
 
77,766

 
(1,895
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GNMA - Residential
 
53,732

 
(369
)
 
2,351,854

 
(48,457
)
 
102,418

 
(2,014
)
 
2,521,278

 
(83,661
)
GNMA - Commercial
 
25,190

 
(162
)
 
661,536

 
(12,361
)
 
199,495

 
(2,982
)
 
622,989

 
(16,533
)
FHLMC and FNMA - Residential
 
5,524

 
(111
)
 
5,205,939

 
(111,113
)
 
237,050

 
(5,728
)
 
5,236,028

 
(182,787
)
FHLMC and FNMA - Commercial
 

 

 
22,014

 
(176
)
 

 

 
21,819

 
(537
)
Total investments in debt securities AFS
 
$
256,399

 
$
(673
)
 
$
9,343,131

 
$
(181,611
)
 
$
1,011,758

 
$
(11,350
)
 
$
9,394,105

 
$
(296,827
)

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

 
$

 
$
1,231,013

 
$
(29,260
)
 
$
205,573

 
$
(4,810
)
 
$
1,295,554

 
$
(49,374
)
GNMA - Commercial
 
25,885

 
(27
)
 
799,763

 
(15,836
)
 
221,250

 
(5,572
)
 
629,847

 
(18,107
)
Total investments in debt securities HTM
 
$
25,885

 
$
(27
)
 
$
2,030,776

 
$
(45,096
)
 
$
426,823

 
$
(10,382
)
 
$
1,925,401

 
$
(67,481
)

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

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

15




NOTE 3. INVESTMENT SECURITIES (continued)

The Company did not record any OTTI related to its investment securities for the three-month periods ended March 31, 2019 or 2018.

Management has concluded that the unrealized losses on its debt securities for which it has not recognized OTTI (which were comprised of 821 individual securities at March 31, 2019) 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 Investment Securities

Proceeds from sales of investments in debt securities and the realized gross gains and losses from those sales were as follows:
 
 
Three-Month Period Ended March 31,
(in thousands)
 
2019
 
2018
Proceeds from the sales of AFS securities
 
$
282,872

 
$
39,446

 
 
 
 
 
Gross realized gains
 
$
811

 
$
108

Gross realized losses
 
(2,811
)
 
(771
)
OTTI
 

 

    Net realized gains/(losses) (1)
 
$
(2,000
)
 
$
(663
)
(1)
Includes net realized gain/(losses) on trading securities of $(0.3) million, and $(0.6) million for the three-month periods ended March 31, 2019 and 2018, respectively.

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

Other Investments

Other Investments consisted of the following as of:
(in thousands)
March 31, 2019
 
December 31, 2018
FHLB of Pittsburgh and FRB stock
 
$
634,366

 
$
631,239

Low Income Housing Tax Credit investments ("LIHTC")
 
199,105

 
163,113

Equity securities not held for trading
 
53,845

 
10,995

Trading securities
 
6,228

 
10

Total
 
$
893,544

 
$
805,357


Other investments primarily include the Company's investment in the stock of the FHLB of Pittsburgh and the FRB. These stocks do not have readily determinable fair values because their ownership is restricted and they lack a market. The stocks can be sold back only at their par value of $100 per share, and FHLB stock can be sold back only to the FHLB or to another member institution. Accordingly, these stocks are carried at cost. During the three-month period ended March 31, 2019, the Company purchased $60.1 million of FHLB stock at par and redeemed $57.0 million of FHLB stock at par. There was no gain or loss associated with these redemptions. During the three-month period ended March 31, 2019, the Company did not purchase FRB stock.

Other investments also includes LIHTC investments, trading securities and $53.8 million of equity securities. Equity securities are measured at fair value as of March 31, 2019, with changes in fair value recognized in net income, and consist primarily of Community Reinvestment Act (“CRA") mutual fund investments. The Company's LIHTC investments are accounted for using the proportional amortization method.

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

16




NOTE 4. LOANS AND ALLOWANCE FOR CREDIT LOSSES

Overall

The Company's loans are reported at their outstanding principal balances net of any cumulative charge-offs, unamortized deferred fees and costs and unamortized premiums or discounts. The Company maintains an ACL to provide for losses inherent in its portfolios. Certain loans are pledged as collateral for borrowings, securitizations, or special purpose entities ("SPEs"). These loans totaled $50.4 billion at March 31, 2019 and $49.5 billion at December 31, 2018.

Loans that the Company intends to sell are classified as LHFS. The LHFS portfolio balance at March 31, 2019 was $1.2 billion, compared to $1.3 billion at December 31, 2018. LHFS in the residential mortgage portfolio are reported at either estimated fair value (if the FVO is elected) or the lower of cost or fair value. For a discussion on the valuation of LHFS at fair value, see Note 14 to the Condensed Consolidated Financial Statements. Loans under SC’s personal lending platform have been classified as HFS and adjustments to lower of cost or market are recorded through Miscellaneous income, net on the Condensed Consolidated Statements of Operations. As of March 31, 2019, the carrying value of the personal unsecured HFS portfolio was $1.0 billion.

Interest on loans is credited to income as it is earned. Loan origination fees and certain direct loan origination costs are deferred and recognized as adjustments to interest income in the Condensed Consolidated Statements of Operations over the contractual life of the loan utilizing the interest method. Loan origination costs and fees and premiums and discounts on RICs are deferred and recognized in interest income over their estimated lives using estimated prepayment speeds, which are updated on a monthly basis. At March 31, 2019 and December 31, 2018, accrued interest receivable on the Company's loans was $497.5 million and $524.0 million, respectively.

Loan and Lease Portfolio Composition

The following presents the composition of the gross loans and leases HFI by portfolio and by rate type:
 
 
March 31, 2019
 
December 31, 2018
(dollars in thousands)
 
Amount
 
Percent
 
Amount
 
Percent
Commercial LHFI:
 
 
 
 
 
 
 
 
Commercial real estate ("CRE") loans
 
$
8,709,750

 
9.8
%
 
$
8,704,481

 
10.0
%
Commercial and industrial ("C&I") loans
 
16,504,188

 
18.5
%
 
15,738,158

 
18.1
%
Multifamily loans
 
8,492,025

 
9.5
%
 
8,309,115

 
9.5
%
Other commercial(2)
 
7,887,508

 
8.8
%
 
7,630,004

 
8.8
%
Total commercial LHFI
 
41,593,471

 
46.6
%
 
40,381,758

 
46.4
%
Consumer loans secured by real estate:
 
 
 
 
 
 
 
 
Residential mortgages
 
9,952,521

 
11.2
%
 
9,884,462

 
11.4
%
Home equity loans and lines of credit
 
5,329,247

 
6.0
%
 
5,465,670

 
6.3
%
Total consumer loans secured by real estate
 
15,281,768

 
17.2
%
 
15,350,132

 
17.7
%
Consumer loans not secured by real estate:
 
 
 
 
 
 
 
 
RICs and auto loans - originated (4)
 
29,843,248

 
33.5
%
 
28,532,085

 
32.8
%
RICs and auto loans - purchased
 
613,649

 
0.7
%
 
803,135

 
0.9
%
Personal unsecured loans
 
1,468,889

 
1.6
%
 
1,531,708

 
1.8
%
Other consumer(3)
 
403,235

 
0.4
%
 
447,050

 
0.4
%
Total consumer loans
 
47,610,789

 
53.4
%
 
46,664,110

 
53.6
%
Total LHFI(1)
 
$
89,204,260

 
100.0
%
 
$
87,045,868

 
100.0
%
Total LHFI:
 
 
 
 
 
 
 
 
Fixed rate
 
$
58,101,354

 
65.1
%
 
$
56,696,491

 
65.1
%
Variable rate
 
31,102,906

 
34.9
%
 
30,349,377

 
34.9
%
Total LHFI(1)
 
$
89,204,260

 
100.0
%
 
$
87,045,868

 
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 $1.7 billion and $1.4 billion as of March 31, 2019 and December 31, 2018, 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.
(4)Beginning in 2018, the Bank has an agreement with SC by which SC provides the Bank with origination support services in connection with the processing, underwriting and purchase of RICs, primarily from Chrysler dealers.

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 similar categorization compared to the financial statement categorization of loans to model and calculate the ACL and track the credit quality, delinquency and impairment status of the underlying loan populations. In disaggregating its financing receivables portfolio, the Company’s methodology begins with the commercial and consumer segments.

17




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

The commercial segmentation reflects line of business distinctions. The CRE line of business includes C&I owner-occupied real estate and specialized lending for investment real estate. The Company's allowance methodology further classifies loans in this line of business into construction and non-construction loans; however, the methodology for development and determination of the allowance is generally consistent between the two portfolios. "C&I" includes non-real estate-related C&I 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 portfolio.

The Company's portfolio classes are substantially the same as its financial statement categorization of loans for 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 to the purchased loan portfolios acquired with evidence of credit deterioration, on which we elected to apply the FVO.

The RIC and auto loan portfolio is comprised of: (1) RICs originated by SC prior to the first quarter 2014 consolidation and change in control of SC (the “Change in Control"), (2) RICs originated by SC after the Change in Control, and (3) auto loans originated by SBNA. The composition of the portfolio segment is as follows:
 
(in thousands)
 
March 31, 2019
 
December 31, 2018
 
 
 
 
 
RICs - Purchased HFI:
 
 
 
 
Unpaid principal balance ("UPB") (1)
 
$
645,381

 
$
844,582

UPB - FVO (2)
 
7,492

 
9,678

Total UPB
 
652,873

 
854,260

Purchase marks (3)
 
(39,224
)
 
(51,125
)
Total RICs - Purchased HFI
 
613,649

 
803,135

 
 
 
 
 
RICs - Originated HFI:
 
 
 
 
UPB (1)
 
27,621,076

 
27,049,875

Net discount
 
(105,819
)
 
(135,489
)
Total RICs - Originated
 
27,515,257

 
26,914,386

SBNA auto loans
 
2,327,991

 
1,617,699

Total RICs - originated post-Change in Control
 
29,843,248

 
28,532,085

Total RICs and auto loans HFI
 
$
30,456,897

 
$
29,335,220

(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 $1.7 million and $2.1 million related to purchase loan portfolios on which we elected to apply the FVO at March 31, 2019 and December 31, 2018, respectively.

During the three-month periods March 31, 2019 and 2018, SC originated $2.4 billion and $2.0 billion, respectively, in Chrysler Capital loans (which excludes the SBNA originations program), which represented 61% and 46%, respectively, of the UPB of the Company's total RIC originations. As of March 31, 2019 and December 31, 2018, the Company's carrying value of its auto RIC portfolio consisted of $9.2 billion and $9.0 billion, respectively, of Chrysler Capital loans (excluding the SBNA originations program), which represented 36% and 36%, respectively, of the Company's auto RIC portfolio.


18




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

ACL Rollforward by Portfolio Segment
The activity in the ACL by portfolio segment for the three-month periods ended March 31, 2019, and 2018 was as follows:
 
 
 
 
 
 
 
 
 
 
 
Three-Month Period Ended March 31, 2019
(in thousands)
 
Commercial
 
Consumer
 
Unallocated
 
Total
ALLL, beginning of period
 
$
441,086

 
$
3,409,021

 
$
47,023

 
$
3,897,130

Provision for loan and lease losses
 
21,974

 
581,052

 

 
603,026

Charge-offs
 
(23,601
)
 
(1,424,618
)
 
(275