Company Quick10K Filing
Santander Holdings
Price-0.00 EPS2
Shares530 P/E-0
MCap-0 P/FCF-0
Net Debt-11,402 EBIT2,959
TEV-11,402 TEV/EBIT-4
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-03-31 Filed 2020-05-07
10-K 2019-12-31 Filed 2020-03-11
10-Q 2019-09-30 Filed 2019-11-12
10-Q 2019-06-30 Filed 2019-08-09
10-Q 2019-03-31 Filed 2019-05-09
10-K 2018-12-31 Filed 2019-03-15
10-Q 2018-09-30 Filed 2018-11-13
10-Q 2018-06-30 Filed 2018-08-09
10-Q 2018-03-31 Filed 2018-05-09
10-K 2017-12-31 Filed 2018-03-19
10-Q 2017-09-30 Filed 2017-11-13
10-Q 2017-06-30 Filed 2017-08-11
10-Q 2017-03-31 Filed 2017-05-11
10-K 2016-12-31 Filed 2017-03-20
10-Q 2016-09-30 Filed 2016-12-12
10-Q 2016-06-30 Filed 2016-12-08
10-Q 2016-03-31 Filed 2016-05-13
10-K 2015-12-31 Filed 2016-04-14
10-Q 2015-09-30 Filed 2015-11-13
10-Q 2015-06-30 Filed 2015-08-12
10-Q 2015-03-31 Filed 2015-05-13
10-K 2014-12-31 Filed 2015-03-18
10-Q 2014-09-30 Filed 2014-11-17
10-Q 2014-06-30 Filed 2014-08-14
10-Q 2014-03-31 Filed 2014-05-15
10-K 2013-12-31 Filed 2014-03-14
10-Q 2013-09-30 Filed 2013-11-08
10-Q 2013-06-30 Filed 2013-08-08
10-Q 2013-03-31 Filed 2013-05-10
10-K 2012-12-31 Filed 2013-03-15
10-Q 2012-09-30 Filed 2012-11-09
10-Q 2012-06-30 Filed 2012-08-09
10-Q 2012-03-31 Filed 2012-05-11
10-K 2011-12-31 Filed 2012-03-16
10-Q 2011-09-30 Filed 2011-11-14
10-Q 2011-06-30 Filed 2011-08-12
10-Q 2011-03-31 Filed 2011-05-12
10-K 2010-12-31 Filed 2011-03-10
10-Q 2010-09-30 Filed 2010-11-10
10-Q 2010-06-30 Filed 2010-08-11
10-Q 2010-03-31 Filed 2010-05-07
10-K 2009-12-31 Filed 2010-02-26
8-K 2020-07-31 Other Events, Exhibits
8-K 2020-05-27
8-K 2020-05-07
8-K 2020-03-11
8-K 2019-12-09
8-K 2019-12-02
8-K 2019-11-15
8-K 2019-10-21
8-K 2019-10-02
8-K 2019-10-01
8-K 2019-09-25
8-K 2019-08-21
8-K 2019-08-07
8-K 2019-06-28
8-K 2019-06-04
8-K 2019-05-24
8-K 2019-05-23
8-K 2019-05-17
8-K 2019-03-21
8-K 2018-11-28
8-K 2018-11-16
8-K 2018-11-01
8-K 2018-09-14
8-K 2018-08-17
8-K 2018-06-29
8-K 2018-06-28
8-K 2018-06-25
8-K 2018-06-22
8-K 2018-05-18
8-K 2018-03-30
8-K 2018-03-07
8-K 2018-02-15
8-K 2018-02-01

SOV 10Q Quarterly Report

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_1q20exhibit311.htm
EX-31.2 a10-q_1q20exhibit312.htm
EX-32.1 a10-q_1q20exhibit321.htm
EX-32.2 a10-q_1q20exhibit322.htm

Santander Holdings Earnings 2020-03-31

Balance SheetIncome StatementCash Flow
15012090603002012201420172020
Assets, Equity
1.91.10.4-0.4-1.1-1.92014201620182020
Rev, G Profit, Net Income
10.06.02.0-2.0-6.0-10.02012201420172020
Ops, Inv, Fin

10-Q 1 santanderholdingsq12020.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, 2020

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 registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading Symbols
 
Name of each exchange on which registered
Not Applicable
 
Not Applicable
 
Not Applicable
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.
Number of shares of common stock outstanding at April 30, 2020: 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




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

This Quarterly Report on Form 10-Q of SHUSA 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 adverse impact of COVID-19 on our business, financial condition, liquidity and results of operations;
the effects of regulation, actions and/or policies of the Federal Reserve, the FDIC, the OCC and 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 GAAP, including adoption of the FASB's CECL credit reserving framework, the failure to adhere to which could subject SHUSA and/or its subsidiaries 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 credit loss expense;
acts of God, including pandemics and other significant public health emergencies, and other natural disasters;
inflation, interest rate, market and monetary fluctuations, including effects from the pending discontinuation of LIBOR as an interest rate benchmark, may, among other things, reduce net interest margins and impact funding sources, revenue and expenses, the value of assets and obligations, and the ability to originate and distribute financial products in the primary and secondary markets;
the pursuit of protectionist trade or other related policies, including tariffs by the U.S., its global trading partners, and/or other countries, and/or trade disputes generally;
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;
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 subsidiaries' ability to continue to pay dividends to it;
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;
SC's agreement with 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;
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 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 by internal or external parties, and the possibility that SHUSA's controls will prove insufficient, fail or be circumvented;
changes to 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 actions or proceedings, including possible business restrictions resulting from such actions or proceedings;
adverse publicity, and negative public opinion, whether specific to SHUSA or regarding other industry participants or industry-wide factors, or other reputational harm;
acts of terrorism or domestic or foreign military conflicts; and
the other factors that are described in Part I, Item IA - Risk Factors of our 2019 Annual Report on Form 10-K,

If one or more of the factors affecting the Company’s forward-looking information and statements renders forward-looking information or statements incorrect, the Company’s actual results, performance or achievements could differ materially from those expressed in, or implied by, the forward-looking information and statements. Therefore, the Company cautions the reader not to place undue reliance on any forward-looking information or statements herein. The effect of these factors is difficult to predict. Factors other than these also could adversely affect the Company’s results, and the reader should not consider these factors to be a complete set of all potential risks or uncertainties as new factors emerge from time to time. Management cannot assess the impact of any such factor on the Company’s business or the extent to which any factor, or combination of factors, may cause results to differ materially from those contained in any forward-looking statement. Any forward-looking statements only speak as of the date of this document, and the Company undertakes no obligation to update any forward-looking information or statements, whether written or oral, to reflect any change, except as required by law. All forward-looking statements attributable to the Company are expressly qualified by these cautionary statements.

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
 
CODM: Chief Operating Decision Maker
ACL: Allowance for credit losses
 
Company: Santander Holdings USA, Inc.
AFS: Available-for-sale
 
Covered Fund: a hedge fund or private equity fund
ALLL: Allowance for loan and lease losses
 
COVID-19: a novel strain of coronavirus, declared a pandemic by the World Health Organization in March 2020.
AOCI: Accumulated other comprehensive income
 
CPRs: Constant prepayment rate
ASC: Accounting Standards Codification
 
CRA: Community Reinvestment Act
ASU: Accounting Standards Update
 
CRA NPR: The NPR related to the CRA issued by the OCC and FDIC on December 12, 2019
ATM: Automated teller machine
 
CRE: Commercial real estate
Bank: Santander Bank, National Association
 
CRE & VF: Commercial Real Estate and Vehicle Finance
BEA: Bureau of Economic Analysis
 
DCF: Discounted cash flow
BHC: Bank holding company
 
DFA: Dodd-Frank Wall Street Reform and Consumer Protection Act
BHCA: Bank Holding Company Act of 1956, as amended
 
DOJ: Department of Justice
BOLI: Bank-owned life insurance
 
DPD: Days past due
BSI: Banco Santander International
 
DTI: Debt-to-income
BSPR: Banco Santander Puerto Rico
 
EAD: Exposure at default
C&I: Commercial & industrial
 
ECL: Expected credit losses
CARES Act: Coronavirus Aid, Relief, and Economic Security Act
 
Economic Growth Act: The Economic Growth, Regulatory Relief, and Consumer Protection Act
CBB: Consumer and Business Banking
 
EIR: Effective interest rate
CBP: Citizens Bank of Pennsylvania
 
EPS: Enhanced Prudential Standards
CCAR: Comprehensive Capital Analysis and Review
 
ETR: Effective tax rate
CD: Certificate of deposit
 
Exchange Act: Securities Exchange Act of 1934, as amended
CECL: Current expected credit losses
 
FASB: Financial Accounting Standards Board
CECL Standard: Amendments based on ASU 2016-13, ASU 2019-04, and ASU 2019-11, Financial Instruments - Credit Losses
 
FBO: Foreign banking organization
CEF: Closed-end fund
 
FCA: Fiat Chrysler Automobiles US LLC
CEO: Chief Executive Officer
 
FDIC: Federal Deposit Insurance Corporation
CET1: Common equity Tier 1
 
Federal Reserve: Board of Governors of the Federal Reserve System
CEVF: Commercial equipment vehicle financing
 
FHLB: Federal Home Loan Bank
CFPB: Consumer Financial Protection Bureau
 
FHLMC: Federal Home Loan Mortgage Corporation
CFO: Chief Financial Officer
 
FICO®: Fair Isaac Corporation credit scoring model
CFTC: Commodity Futures Trading Commission
 
Final Rule: Rule implementing certain of the EPS mandated by Section 165 of the DFA
Chase: JPMorgan Chase & Co and certain of its subsidiaries, including EMC Mortgage LLC
 
FINRA: Financial Industrial Regulatory Authority
Chrysler Agreement: Ten-year private label financing agreement with Fiat Chrysler Automobiles US LLC, formerly Chrysler Group LLC, signed by SC
 
FNMA: Federal National Mortgage Association
Chrysler Capital: Trade name used in providing services under the Chrysler Agreement
 
FRB: Federal Reserve Bank
CIB: Corporate and Investment Banking
 
FVO: Fair value option
CID: Civil investigative demand
 
 
CLTV: Combined loan-to-value
 
 
CMO: Collateralized mortgage obligation
 
 
 
 
 
 
 
 
 
 
 

2




GAAP: Accounting principles generally accepted in the United States of America
 
PCD: Purchased credit deteriorated, assets the Company deems at acquisition to have more than insignificant deterioration in credit quality since origination
GBP: British pound sterling
 
PD: Probability of default
GDP: Gross domestic product
 
PSRT: Private Santander Retail Auto Lease Trust
GNMA: Government National Mortgage Association
 
REIT: Real estate investment trust
GSIB: Global systemically important bank
 
RIC: Retail installment contract
HFI: Held for investment
 
ROU: Right-of-use
HPI: Housing Price Index
 
RV: Recreational vehicle
HTM: Held to maturity
 
RWA: Risk-weighted asset
IDI: Insured depository institution
 
S&P: Standard & Poor's
IHC: U.S. intermediate holding company
 
SAF: Santander Auto Finance
IPO: Initial public offering
 
SAM: Santander Asset Management, LLC
IRS: Internal Revenue Service
 
Santander: Banco Santander, S.A.
ISDA: International Swaps and Derivatives Association, Inc.
 
Santander BanCorp: Santander BanCorp and its subsidiaries
IT: Information technology
 
Santander NY: New York branch of Santander
LCR: Liquidity coverage ratio
 
Santander UK: Santander UK plc
LGD: Loss given default
 
SBNA: Santander Bank, National Association
LHFI: Loans held for investment
 
SC: Santander Consumer USA Holdings Inc. and its subsidiaries
LHFS: Loans held for sale
 
SCB: Stress capital buffer
LIBOR: London Interbank Offered Rate
 
SC Common Stock: Common shares of SC
LIHTC: Low income housing tax credit
 
SCF: Statement of cash flows
LTD: Long-term debt
 
SCRA: Servicemembers' Civil Relief Act
LTV: Loan-to-value
 
SDART: Santander Drive Auto Receivables Trust
MBS: Mortgage-backed securities
 
SDGT: Specially Designated Global Terrorist
MD&A: Management's Discussion and Analysis of Financial Condition and Results of Operations
 
SEC: Securities and Exchange Commission
Mississippi AG: Attorney General of the State of Mississippi
 
Securities Act: Securities Act of 1933, as amended
Moody's: Moody's Investor Service, Inc.
 
SFS: Santander Financial Services, Inc.
MSPA: Master Securities Purchase Agreement
 
SHUSA: Santander Holdings USA, Inc.
MSR: Mortgage servicing right
 
SIS: Santander Investment Securities Inc.
MVE: Market value of equity
 
SPAIN: Santander Private Auto Issuing Note
NCI: Non-controlling interest
 
SPE: Special purpose entity
NMDs: Non-maturity deposits
 
SREV: Santander Revolving Auto Loan Trust
NMTC: New market tax credits
 
SRT: Santander Retail Auto Lease Trust
NPL: Non-performing loan
 
SSLLC: Santander Securities LLC
NPR: Notice of proposed rule-making
 
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.
NSFR: Net stable funding ratio
 
TALF: Term Asset-Backed Securities Loan Facility
NYSE: New York Stock Exchange
 
TDR: Troubled debt restructuring
OCC: Office of the Comptroller of the Currency
 
TLAC: Total loss-absorbing capacity
OCI: Other comprehensive income
 
TLAC Rule: The Federal Reserve's total loss-absorbing capacity rule
OIS: Overnight indexed swap
 
Trusts: Securitization trusts
OREO: Other real estate owned
 
U.K. United Kingdom
OTTI: Other-than-temporary impairment
 
UPB: Unpaid principal balance
Parent Company: The parent holding company of SBNA and other consolidated subsidiaries
 
VIE: Variable interest entity
 
 
VOE: Voting rights entity
 
 
YTD: Year-to-date
 
 
 

3




PART I. FINANCIAL INFORMATION

ITEM 1 - CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited (In thousands)
 
March 31, 2020
 
December 31, 2019
ASSETS
 
 
 
Cash and cash equivalents
$
11,883,540

 
$
7,644,372

Investment securities:
 
 
 
AFS at fair value
12,282,620

 
14,339,758

HTM (fair value of $4,506,103 and $3,957,227 as of March 31, 2020 and December 31, 2019, respectively)
4,389,615

 
3,938,797

Other investments (includes trading securities of $21,942 and $1,097 as of March 31, 2020 and December 31, 2019, respectively)
1,089,857

 
995,680

LHFI(1) (5)
93,005,846

 
92,705,440

ALLL (5)
(6,623,735
)
 
(3,646,189
)
Net LHFI
86,382,111

 
89,059,251

LHFS (2)
1,128,794

 
1,420,223

Premises and equipment, net (3)
787,411

 
798,122

Operating lease assets, net (5)(6)
16,772,681

 
16,495,739

Goodwill
4,444,389

 
4,444,389

Intangible assets, net
401,465

 
416,204

BOLI
1,871,555

 
1,860,846

Restricted cash (5)
5,316,657

 
3,881,880

Other assets (4) (5)
5,393,865

 
4,204,216

TOTAL ASSETS
$
152,144,560

 
$
149,499,477

LIABILITIES
 
 
 
Accrued expenses and payables
$
5,392,828

 
$
4,476,072

Deposits and other customer accounts
68,671,503

 
67,326,706

Borrowings and other debt obligations (5)
52,982,389

 
50,654,406

Advance payments by borrowers for taxes and insurance
193,671

 
153,420

Deferred tax liabilities, net
943,793

 
1,521,034

Other liabilities (5)
1,736,403

 
969,009

TOTAL LIABILITIES
129,920,587

 
125,100,647

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, 2020 and December 31, 2019)
17,870,442

 
17,954,441

Accumulated other comprehensive gain/(loss)
266,981

 
(88,207
)
Retained earnings
2,557,302

 
4,155,226

TOTAL SHUSA STOCKHOLDER'S EQUITY
20,694,725

 
22,021,460

NCI
1,529,248

 
2,377,370

TOTAL STOCKHOLDER'S EQUITY
22,223,973

 
24,398,830

TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY
$
152,144,560

 
$
149,499,477

 
(1) LHFI includes $87.4 million and $102.0 million of loans recorded at fair value at March 31, 2020 and December 31, 2019, respectively.
(2) Includes $148.8 million and $289.0 million of loans recorded at the FVO at March 31, 2020 and December 31, 2019, respectively.
(3) Net of accumulated depreciation of $1.5 billion and $1.5 billion at March 31, 2020 and December 31, 2019, respectively.
(4) Includes MSRs of $97.7 million and $130.9 million at March 31, 2020 and December 31, 2019, 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 Trusts that are considered VIEs for accounting purposes. At March 31, 2020 and December 31, 2019, LHFI included $24.5 billion and $26.5 billion, Operating leases assets, net included $16.7 billion and $16.5 billion, restricted cash included $1.6 billion and $1.6 billion, other assets included $700.1 million and $625.4 million, Borrowings and other debt obligations included $35.4 billion and $34.2 billion, and Other liabilities included $117.0 million and $188.1 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 $4.3 billion and $4.2 billion at March 31, 2020 and December 31, 2019, respectively.
See accompanying unaudited notes to Condensed Consolidated Financial Statements.

4




SANTANDER HOLDINGS USA, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited (In thousands)
 
Three-Month Period Ended March 31,
 
2020
 
2019
INTEREST INCOME:
 
 
 
Loans
$
1,977,748

 
$
1,999,338

Interest-earning deposits
32,149

 
44,018

Investment securities:
 
 
 
AFS
70,023

 
74,430

HTM
23,645

 
17,322

Other investments
6,410

 
5,935

TOTAL INTEREST INCOME
2,109,975

 
2,141,043

INTEREST EXPENSE:
 
 
 
Deposits and other customer accounts
128,613

 
130,288

Borrowings and other debt obligations
395,386

 
407,870

TOTAL INTEREST EXPENSE
523,999

 
538,158

NET INTEREST INCOME
1,585,976

 
1,602,885

Credit loss expense
1,185,610

 
600,211

NET INTEREST INCOME AFTER CREDIT LOSS EXPENSE
400,366

 
1,002,674

NON-INTEREST INCOME:
 
 
 
Consumer and commercial fees
124,247

 
133,018

Lease income
771,661

 
674,885

Miscellaneous income, net(1) (2)
121,972

 
89,543

TOTAL FEES AND OTHER INCOME
1,017,880

 
897,446

Net gain/(loss) on sale of investment securities
9,279

 
(2,000
)
TOTAL NON-INTEREST INCOME
1,027,159

 
895,446

GENERAL, ADMINISTRATIVE AND OTHER EXPENSES:
 
 
 
Compensation and benefits
489,273

 
476,563

Occupancy and equipment expenses
146,911

 
142,394

Technology, outside service, and marketing expense
134,990

 
151,706

Loan expense
93,921

 
106,716

Lease expense
590,360

 
479,304

Other expenses
128,347

 
185,731

TOTAL GENERAL, ADMINISTRATIVE AND OTHER EXPENSES
1,583,802

 
1,542,414

(LOSS)/INCOME BEFORE INCOME TAX (BENEFIT)/PROVISION
(156,277
)
 
355,706

Income tax (benefit)/provision
(33,362
)
 
116,214

NET (LOSS)/INCOME INCLUDING NCI
(122,915
)
 
239,492

LESS: NET INCOME ATTRIBUTABLE TO NCI
3,763

 
72,512

NET (LOSS)/INCOME ATTRIBUTABLE TO SHUSA
$
(126,678
)
 
$
166,980

(1) Netted down by impact of $62.9 million, and $67.7 million, for the three-month periods ended March 31, 2020, and 2019, respectively, 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 unaudited notes to Condensed Consolidated Financial Statements.

5




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

 
Three-Month Period Ended March 31,
 
2020
 
2019
NET (LOSS) / INCOME INCLUDING NCI
$
(122,915
)
 
$
239,492

OCI, NET OF TAX
 
 
 
Net unrealized gains on cash flow hedge derivative financial instruments, net of tax (1)
148,306

 
7,003

Net unrealized gains on AFS and HTM investment securities, net of tax
206,322

 
91,505

Pension and post-retirement actuarial gains, net of tax
560

 
6,111

TOTAL OTHER COMPREHENSIVE GAIN, NET OF TAX
355,188

 
104,619

COMPREHENSIVE INCOME
232,273

 
344,111

NET INCOME ATTRIBUTABLE TO NCI
3,763

 
72,512

COMPREHENSIVE INCOME ATTRIBUTABLE TO SHUSA
$
228,510

 
$
271,599


(1) Excludes $10.1 million, and $6.3 million, of Other comprehensive loss attributable to NCI for the three-month periods ended March 31, 2020 and 2019, respectively.


See accompanying unaudited 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, 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 and related tax impact (Note 17)

 

 
34,331

 

 

 

 
34,331

Dividends declared and paid on common stock

 

 

 

 
(75,000
)
 

 
(75,000
)
Dividends 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance, January 1, 2020
530,391

 

 
17,954,441

 
(88,207
)
 
4,155,226

 
2,377,370

 
24,398,830

Cumulative-effect adjustment upon adoption of CECL Standard (Note 1)

 

 

 

 
(1,346,246
)
 
(439,084
)
 
(1,785,330
)
Comprehensive income/(loss) attributable to SHUSA

 

 

 
355,188

 
(126,678
)
 

 
228,510

Other comprehensive loss attributable to NCI

 

 

 

 

 
(10,133
)
 
(10,133
)
Net income attributable to NCI

 

 

 

 

 
3,763

 
3,763

Impact of SC stock option activity

 

 

 

 

 
2,393

 
2,393

Dividends declared and paid on common stock

 

 

 

 
(125,000
)
 

 
(125,000
)
Dividends paid to NCI

 

 

 

 

 
(20,594
)
 
(20,594
)
Stock repurchase attributable to NCI

 

 
(83,999
)
 

 

 
(384,467
)
 
(468,466
)
Balance, March 31, 2020
530,391

 
$

 
$
17,870,442

 
$
266,981

 
$
2,557,302

 
$
1,529,248

 
$
22,223,973

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
See accompanying unaudited notes to Condensed Consolidated Financial Statements.

7




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






Three-Month Period Ended March 31,
 
2020

2019
CASH FLOWS FROM OPERATING ACTIVITIES:
 
 
 
Net (loss)/income including NCI
$
(122,915
)
 
$
239,492

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Credit loss expense
1,185,610

 
600,211

Deferred tax (benefit)/expense
(72,957
)
 
72,942

Depreciation, amortization and accretion
699,060

 
530,112

Net loss on sale of loans
59,527

 
68,697

Net (gain)/loss on sale of investment securities
(9,279
)
 
2,000

Loss on debt extinguishment
136

 
18

Net loss on real estate owned, premises and equipment, and other assets
1,533

 
1,768

Stock-based compensation
13

 
153

Equity loss on equity method investments
2,776

 
1,865

Originations of LHFS, net of repayments
(246,253
)
 
(241,706
)
Purchases of LHFS

 
(228
)
Proceeds from sales of LHFS
416,425

 
296,558

Net change in:
 
 
 
Revolving personal loans
19,012

 
6,523

Other assets, BOLI and trading securities
(1,071,554
)
 
(223,197
)
Other liabilities
1,581,586

 
166,513

NET CASH PROVIDED BY OPERATING ACTIVITIES
2,442,720

 
1,521,721

 
 
 
 
CASH FLOWS FROM INVESTING ACTIVITIES:
 
 
 
Proceeds from sales of AFS investment securities
922,101

 
282,872

Proceeds from prepayments and maturities of AFS investment securities
2,937,260

 
794,505

Purchases of AFS investment securities
(1,539,266
)
 
(787,404
)
Proceeds from prepayments and maturities of HTM investment securities
126,127

 
62,604

Purchases of HTM investment securities
(348,375
)
 
(25,938
)
Proceeds from sales of other investments
47,435

 
56,978

Proceeds from maturities of other investments
45

 

Purchases of other investments
(115,738
)
 
(106,726
)
Proceeds from sales of LHFI
37,981

 
17,842

Distributions from equity method investments
2,254

 
1,152

Contributions to equity method and other investments
(33,071
)
 
(46,116
)
Proceeds from settlements of BOLI policies
4,388

 
3,536

Purchases of LHFI
(77,136
)
 
(181,247
)
Net change in loans other than purchases and sales
(890,567
)
 
(2,665,033
)
Purchases and originations of operating leases
(2,030,936
)
 
(1,981,228
)
Proceeds from the sale and termination of operating leases
948,585

 
875,002

Manufacturer incentives
176,051

 
235,312

Proceeds from sales of real estate owned and premises and equipment
11,805

 
12,612

Purchases of premises and equipment
(44,314
)
 
(46,173
)
NET CASH PROVIDED BY/(USED IN) INVESTING ACTIVITIES
134,629

 
(3,497,450
)
 
 
 
 
CASH FLOWS FROM FINANCING ACTIVITIES:
 
 
 
Net change in deposits and other customer accounts
1,344,797

 
1,435,464

Net change in short-term borrowings
907,851

 
174,423

Net proceeds from long-term borrowings
11,874,959

 
9,747,474

Repayments of long-term borrowings
(11,357,598
)
 
(9,088,857
)
Proceeds from FHLB advances (with terms greater than 3 months)
2,500,000

 
1,400,000

Repayments of FHLB advances (with terms greater than 3 months)
(1,600,000
)
 
(1,550,000
)
Net change in advance payments by borrowers for taxes and insurance
40,251

 
46,492

Dividends paid on common stock
(125,000
)
 
(75,000
)
Dividends paid to NCI
(20,594
)
 
(21,149
)
Stock repurchase attributable to NCI
(468,466
)
 
(17,780
)
Proceeds from the issuance of common stock
396

 
791

Capital contribution from shareholder

 
34,331

NET CASH PROVIDED BY FINANCING ACTIVITIES
3,096,596

 
2,086,189

 
 
 
 
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH
5,673,945

 
110,460

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
11,526,252

 
10,722,304

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD (1)
$
17,200,197

 
$
10,832,764

 
 
 
 
NON-CASH TRANSACTIONS
 
 
 
Loans transferred to/(from) other real estate owned
(14,193
)
 
(44,706
)
Loans transferred from/(to) HFI (from)/to HFS, net
(47,414
)
 
44,312

Unsettled purchases of investment securities
235,272

 
3,632

Adoption of lease accounting standard:
 
 
 
ROU assets

 
664,057

Accrued expenses and payables

 
705,650


(1) The three-month periods ended March 31, 2020 and 2019 include cash and cash equivalents balances of $11.9 billion and $7.6 billion, respectively, and restricted cash balances of $5.3 billion and $3.3 billion, respectively.

See accompanying unaudited notes to Condensed Consolidated Financial Statements.

8





NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

Introduction

SHUSA is the Parent Company of SBNA, a national banking association; SC, a consumer finance company; Santander BanCorp, a financial holding company headquartered in Puerto Rico that offers a full range of financial services through its wholly-owned banking subsidiary, BSPR; SSLLC, a broker-dealer headquartered in Boston, Massachusetts; BSI, a financial services company headquartered in Miami, Florida that offers a full range of banking services to foreign individuals and corporations based primarily in Latin America; and SIS, a registered broker-dealer headquartered 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, SAM, are registered investment advisers with the SEC. SHUSA is headquartered in Boston and the Bank's home office is in Wilmington, Delaware. SHUSA is a wholly-owned subsidiary of 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 servicing of RICs and leases, principally through manufacturer-franchised dealers in connection with their sale of new and used vehicles to retail consumers. Additionally, SC sells consumer RICs through flow agreements and, when market conditions are favorable, it accesses the ABS market through securitizations of consumer RICs.

SAF is SC’s primary vehicle brand, and is available as a finance option for automotive dealers across the United States. Since May 2013, under its agreement with FCA, SC has operated as FCA's preferred provider for consumer loans, leases, and dealer loans and provides 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. In 2019, SC entered into an amendment to its agreement with FCA which modified that agreement to, among other things, adjust certain performance metrics, exclusivity commitments and payment provisions.

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 other consumer finance products.

As of March 31, 2020, SC was owned approximately 76.5% by SHUSA and 23.5% by other shareholders. SC Common Stock is listed on the NYSE under the trading symbol "SC."

The Company is taking numerous proactive steps to mitigate the negative financial and operational impacts of COVID-19. Business contingency plans have been implemented and will continue to be adjusted in response to the global situation. Refer to Item 2, Management Discussion & Analysis section "Economic and Business Environment" for additional details.


9




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

IHC

The EPS mandated by Section 165 of the DFA Final Rule were enacted by the Federal Reserve to strengthen regulatory oversight of FBOs. Under the Final Rule, FBOs with over $50 billion of U.S. non-branch assets, including Santander, were required to consolidate U.S. subsidiary activities under an IHC. Due to its U.S. non-branch total consolidated asset size, Santander is subject to the Final Rule. As a result of this rule, Santander transferred substantially all of its equity interests in U.S. bank and non-bank subsidiaries previously outside the Company to the Company, which became an IHC effective July 1, 2016. These subsidiaries included Santander BanCorp, BSI, SIS and SSLLC, as well as several other subsidiaries. On July 1, 2017, an additional Santander subsidiary, SFS, a finance company located in Puerto Rico, was transferred to the Company. Additionally, effective July 2, 2018, Santander transferred SAM to the IHC.

On October 21, 2019, the Company entered into an agreement to sell the stock of Santander BanCorp (the holding company that owns BSPR) for a total consideration of approximately $1.1 billion, subject to adjustment based on the consolidated Santander BanCorp balance sheet at closing. At December 31, 2019, BSPR had 27 branches, approximately 1,000 employees, and total assets of approximately $6.0 billion. Among other conditions precedent to the closing, the transaction requires the Company to transfer all of BSPR's non-performing assets and the equity of SAM to the Company or a third party prior to closing. In addition, the transaction requires review and approval of various regulators, whose input is uncertain. Taking into account the impact of the COVID-19 outbreak, the Company believes it is unlikely that all regulatory approvals will be received to close the transaction by the middle of 2020. Once it becomes apparent that this transaction is more likely than not to receive regulatory approval, the Company will recognize a deferred tax liability of approximately $37 million for the unremitted earnings of Santander BanCorp. Consummation of the transaction is not expected to result in any material gain or loss.

Basis of Presentation

The accompanying Condensed Consolidated Financial Statements include the accounts of the Company and its consolidated subsidiaries, and certain Trusts that are considered VIEs. The Company generally consolidates VIEs for which it is deemed to be the primary beneficiary and VOEs in which the Company has a controlling financial interest. All significant intercompany balances and transactions have been eliminated in consolidation.

The accompanying Condensed Consolidated Financial Statements have been prepared in accordance with GAAP for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Additionally, where applicable, the Company's accounting policies conform to the accounting and reporting guidelines prescribed by bank regulatory authorities. Accordingly, they do not include all of the information and footnotes required for GAAP for complete financial statements. In the opinion of management, the accompanying Condensed Consolidated Financial Statements contain all adjustments, consisting of normal and recurring adjustments necessary for a fair statement of the Condensed Consolidated Balance Sheets, Statements of Operations, Statements of Comprehensive Income, Statements of Stockholder's Equity and SCF for the periods indicated, and contain adequate disclosure for the fair statement of this interim financial information. 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, 2019.

Certain prior-year amounts have been reclassified to conform to the current year presentation. These reclassifications did not have a material impact on the Company's consolidated financial condition or results of operations.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates, and those differences may be material. The most significant estimates pertain to fair value measurements, the ACL, accretion of discounts and subvention on RICs, estimates of expected residual values of leased vehicles subject to operating leases, goodwill, and income taxes. Actual results may differ from the estimates, and the differences may be material to the Consolidated Financial Statements.

10




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

Recently Adopted Accounting Standards

Since January 1, 2020, the Company adopted the following FASB ASUs:
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 measured at amortized cost. The amendment introduces a new credit reserving framework known as CECL, which replaces the incurred loss impairment framework in current GAAP with one that reflects expected credit losses over the full expected life of financial assets and commitments, and requires consideration of a broader range of reasonable and supportable information, including estimation of future expected changes in macroeconomic conditions. Additionally, the standard changes the accounting framework for purchased credit-deteriorated HTM debt securities and loans, and dictates measurement of AFS debt securities using an allowance instead of reducing the carrying amount as it is under the current OTTI framework. The Company adopted the new guidance on January 1, 2020, on a modified retrospective basis which resulted in an increase in the ACL of approximately $2.5 billion, a decrease in stockholder's equity of approximately $1.8 billion and a decrease in deferred tax liabilities, net of approximately $0.7 billion at January 1, 2020.  The estimated increase was based on forecasts of expected future economic conditions and was primarily driven by the fact that the allowance will cover expected credit losses over the full expected life of the loan portfolios.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This guidance provides temporary optional expedients to reduce the costs and complexity associated with the high volume of contractual modifications expected in the transition away from LIBOR as the benchmark rate in contracts and hedges. These optional expedients allow entities to negate many of the accounting impacts of modifying contracts and hedging relationships necessitated by reference rate reform, allowing them to generally maintain the accounting as if a change had not occurred. The Company adopted this standard during the three month period ended March 31, 2020 electing the practical expedients relative to Company’s contracts and hedging relationship modified as a result of reference rate reform through December 31, 2022. These practical expedients did not have a material impact on the Company’s business, financial position, results of operations, or disclosures.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions to the general tax accounting principles and simplifying other specific tax scenarios. The Company adopted this standard as of January 1, 2020. This change will be reflected prospectively. It did not have a material impact to the Company’s business, financial position, results of operations, or disclosures.
 
The adoption of the following ASUs did not have a material impact on the Company's financial position or results of operations:
ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement
ASU 2018-17, Consolidation (Topic 810): Targeted Improvements to Related Party Guidance for Variable Interest Entities

As required by the adoption of the CECL Standard, the following additional accounting policy disclosures are required to update the disclosures included in our Annual Report on Form 10-K for the year ended December 31, 2019:

Significant Accounting Policies

Investment Securities and Other Investments

Investments in debt securities are classified as either AFS, HTM, trading, or other investments. Investments in equity securities are generally recorded at fair value with changes recorded in earnings. Management determines the appropriate classification at the time of purchase.

11




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

Debt securities that the Company has the positive intent and ability to hold until maturity are classified as HTM securities. HTM securities are reported at cost and adjusted for payments, chargeoffs, amortization of premium and accretion of discount. Impairment of HTM securities is recorded using a valuation reserve which represents management’s best estimate of expected credit losses during the lives of the securities. Securities for which management has an expectation that nonpayment of the amortized costs basis is zero do not have a reserve. The Company has a zero loss expectation when the securities are issued or guaranteed by certain US government entities, and those entities have a long history of no defaults and the highest credit ratings issued by rating agencies. Transfers of debt securities into the HTM category from the AFS category are made at fair value at the date of transfer. The unrealized holding gain or loss at the date of transfer is retained in OCI and in the carrying value of HTM securities. Such amounts are amortized over the remaining lives of the securities. Any allowance recorded for credit losses while the security was classified as AFS is reversed through provision expense. Thereafter, the allowance is recorded through provision using the HTM valuation reserve.

Debt securities expected to be held for an indefinite period of time are classified as AFS and recorded on the balance sheet at fair value. If the fair value of an AFS debt security declines below its amortized cost basis and the Company does not have the intention or requirement to sell the security before it recovers its amortized cost basis, declines due to credit factors will be recorded in earnings through an allowance on AFS securities, and declines due to non-credit factors will be recorded in AOCI, net of taxes. Subsequent to recognition of a credit loss, improvements to the expectation of collectability will be reversed through the allowance. If the Company has the intention or requirement to sell the security, the Company will record its fair value changes in earnings as a direct write down to the security. Increases in fair value above amortized cost basis are recorded in AOCI, net of taxes.

The Company conducts a comprehensive security-level impairment assessment quarterly on all AFS securities with a fair value that is less than their amortized cost basis to determine whether the loss is due to credit factors. The quarterly assessment takes into consideration whether (i) the Company has the intent to sell or, (ii) it is more likely than not that it will be required to sell the security before the expected recovery of its amortized cost. The Company also considers whether or not it would expect to receive all of the contractual cash flows from the investment based on its assessment of the security structure, recent security collateral performance metrics, external credit ratings, failure of the issuer to make scheduled interest or principal payments, judgment and expectations of future performance, and relevant independent industry research, analysis and forecasts. The Company also considers the severity of the impairment in its assessment. Similar to HTM securities, securities for which management expects risk of nonpayment of the amortized costs basis is zero, do not have a reserve. The Company has a zero loss expectation when the securities are issued or guaranteed by certain US government entities, and those entities have a long history of no defaults and the highest credit ratings issued by rating agencies. In the event of a credit loss, the credit component of the impairment is recognized within non-interest income as a separate line item, and by the recording of a valuation reserve. The non-credit component is recorded within AOCI.

The Company does not measure an ACL for accrued interest, and instead writes off uncollectible accrued interest balances in a timely manner. The Company places securities on nonaccrual and reverses any uncollectible accrued interest when the full and timely collection of interest or principal becomes uncertain, but no later than at 90 days past due.

See Note 3 to the Consolidated Financial Statements for details on the Company's investments.

LHFI

Purchased LHFI

Loans that at acquisition the company deems to have more than insignificant deterioration in credit quality since origination (i.e., Purchased Credit Deteriorated or PCD loans) require the recognition of an ACL at purchase. The ACL is added to the purchase price at the date of acquisition to determine the initial amortized cost basis of the PCD loan. The allowance for credit losses is calculated using the same methodology as originated loans, as described below. Alternatively, the Company can elect the FVO at the time of purchase for any financial asset. Under the FVO, loans are recorded at fair value with changes in value recognized immediately in income. There is no ACL for loans under a FVO.

12




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

Allowance for Credit Losses

General

The ALLL and reserve for off-balance sheet commitments (together, the ACL) are maintained at levels that represent management’s best estimate of expected credit losses in the Company’s HFI loan portfolios, excluding those loans accounted for under the FVO. The allowance for expected credit losses is measured based on a lifetime expected loss model, which means that it is not necessary for a loss event to occur before a credit loss is recognized. Management’s estimate of expected credit losses is based on an evaluation of relevant information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of the reported amounts. Management's evaluation takes into consideration the risks in the loan portfolio, past loan and lease loss experience, specific loans with loss potential, geographic and industry concentrations, delinquency trends, economic forecasts and other relevant factors. While management uses the best information available to make such evaluations, future adjustments to the ACL may be necessary if conditions differ substantially from the assumptions used in making the evaluations. Provisions for credit losses are charged to provision expense in amounts sufficient to maintain the ACL at levels considered adequate to cover expected credit losses in the Company’s HFI loan portfolios.

The ALLL is a valuation account that is deducted from, or added to, the amortized cost basis to present the net amount expected to be collected on the Company’s HFI loan portfolios. The reserve for off-balance sheet commitments represents the ECL for unfunded lending commitments and financial guarantees, and is presented within Other liabilities on the Company's Consolidated Balance Sheets. The reserve for off-balance sheet commitments, together with the ALLL, is generally referred to collectively throughout this Form 10-Q as the ACL, despite the presentation differences.

The Company measures expected losses of all components of the amortized cost basis of its loans. For all loans except TDRs and Credit Cards, the Company has elected to exclude accrued interest receivable balances from the measurement of expected credit losses because it applies a nonaccrual policy that results in the timely write off of accrued interest.

Off-balance sheet commitments which are not unconditionally cancellable by the Company are subject to credit risk. Additions to the reserve for off-balance sheet commitments are made by charges to the credit loss expense. The Company does not calculate a liability for expected credit losses for off-balance sheet credit exposures which are unconditionally cancellable by the lender, because these instruments do not expose the Company to credit risk. At SHUSA, this generally applies to credit cards and commercial demand lines of credit.

Methodology

The Company uses several methodologies for the measurement of ACL. The Company generally uses a DCF approach for determining ALLL for TDRs and other individually assessed loans, and loss rate or roll-rate models for other loans. The methodologies utilized by the Company to estimate expected credit losses may vary by product type.

Expected credit losses are estimated on a collective basis when similar risk characteristics exist. Expected credit losses are estimated on an individual basis only if the individual asset or exposure does not share similar risk attributes with other financial assets or exposures, including when an asset is treated as a collateral dependent asset. The estimate of expected credit losses reflects information about past events, current conditions, and reasonable and supportable forecasts that affect the future collectability of reported amounts. This information includes internal information, external information, or a combination of both. The Company uses historical loss experience as a starting point for estimating expected credit losses.

The ACL estimate includes significant assumptions including the reasonable and supportable economic forecast period, which considers the availability of forward-looking scenarios and their respective time horizons, as well as the reversion method to historical losses. The economic scenarios used by the Company are available up to the contractual maturities of the assets, and therefore the Company can project losses through the respective contractual maturities, using an input reversion approach. This method results in a single, quantitatively consistent credit model across the entire projection period as the macroeconomic effects in the historical data are controlled for the estimate of the long-run loss level.

13




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

The Company uses multiple scenarios in its CECL estimation process. The selection of scenarios is reviewed quarterly and governed by the ACL Committee. Additionally, the results from the CECL models are reviewed and adjusted if necessary, based on management’s judgment, as discussed in the section captioned "Qualitative Reserves" below.

CECL Models

The Company uses a statistical methodology based on an ECL approach that focuses on forecasting the ECL components (i.e., PD, payoff, loss given default and exposure at default) on a loan level basis to estimate the expected future lifetime losses. The individual loan balances used in the models are measured on an amortized cost basis.
In calculating the PD and payoff, the Company developed model forecasts which consider variables such as delinquency status, loan tenor and credit quality as measured by internal risk ratings assigned to individual loans and credit facilities.
The loss given default component forecasts the extent of losses given that a default has occurred and considers variables such as collateral, LTV and credit quality.
The exposure at default component captures the effects of expected partial prepayments and underpayments that are expected to occur during the forecast period and considers variables such as LTV, collateral and credit quality.

The above ECL components are used to compute an ACL based on the weighted average of the results of four macroeconomic scenarios. The weighting of these scenarios is governed and approved quarterly by management through established committee governance. These ECL components are inputs to both the Company’s DCF approach for TDRs and individually assessed loans, and non-DCF approach for other loans.

When using a non-DCF method to measure the ACL, the Company measures ECL over the asset’s contractual term, adjusted for (a) expected prepayments, (b) expected extensions associated with assets for which management has a reasonable expectation at the reporting date that it will execute a TDR with the borrower, and (c) expected extensions or renewal options (excluding those that are accounted for as derivatives) included in the original or modified contract at the reporting date that are not unconditionally cancellable by the Company.

In addition to the ALLL, management estimates expected losses related to off-balance sheet commitments using the same models and procedures used to estimate expected loan losses. Off-balance sheet commitments for commercial customers are analyzed and segregated by risk according to the Company's internal risk rating scale. These risk classifications, in conjunction with a forecast of expected usage of committed amounts and an analysis of historical loss experience, reasonable and supportable forecasts of economic conditions, performance trends within specific portfolio segments, and any other pertinent information result in the estimation of the reserve for off-balance sheet commitments.

DCF Approaches

A DCF method measures expected credit losses by forecasting expected future principal and interest cash flows and discounting them using the financial asset’s EIR. The ACL reflects the difference between the amortized cost basis and the present value of the expected cash flows. When using a DCF method to measure the ACL, the period of exposure is determined as a function of the Company’s expectations of the timing of principal and interest payments. The Company considers estimated prepayments in the future principal and interest cash flows when utilizing a DCF method. The Company generally uses a DCF approach for TDRs and impaired commercial loans.

Collateral-Dependent Assets

A loan is considered a collateral-dependent financial asset when:
The Company determines foreclosure is probable or
The borrower is experiencing financial difficulty and the Company expects repayment to be provided substantially through the operation or sale of the collateral.

For all collateral-dependent loans, the Company measures the allowance for expected credit losses as the difference between the asset’s amortized cost basis and the fair value of the underlying collateral as of the reporting date, adjusted for expected costs to sell if repayment of the asset depends on the sale of the collateral. If repayment or satisfaction of the loan is dependent only on the operation, rather than the sale, of the collateral, the measure of credit losses does not incorporate estimated costs to sell.

14




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

A collateral dependent loan is written down (i.e., charged-off) to the fair value of the collateral adjusted for costs to sell (if repayment from sale is expected.) Any subsequent increase or decrease in the collateral’s fair value less cost to sell is recognized as an adjustment to the related loan’s ACL. Negative ACLs are limited to the amount previously charged-off.

Collateral Maintenance Provisions

For certain loans with collateral maintenance provisions which are secured by highly liquid collateral, the Company expects nonpayment of the amortized cost basis to be zero when such provisions require the borrower to continually replenish collateral in the event the fair value of the collateral changes. For these loans, the Company records no ACL.

Negative Allowance
Negative allowance is defined as the amount of future recovery expected for accounts that have already been charged off. The Company performs an analysis of the actual historical recovery values to determine the pattern of recovery and expected rate of recovery over a given historic period, and uses the results of this analysis to determine negative allowance. Negative allowance reduces the ACL.

Qualitative Reserves

Regardless of the extent of the Company's analysis of customer performance, portfolio evaluations, trends or risk management processes established, a level of imprecision will always exist due to the judgmental nature of loan portfolio and/or individual loan evaluations. The Company maintains a qualitative reserve to the ACL to recognize the existence of these exposures. Imprecisions include loss factors inherent in the loan portfolio that may not have been discreetly contemplated in the modelled approach to the allowance, as well as potential variability in estimates.

The qualitative adjustment is also established in consideration of several factors such as changes in the Company’s underwriting standards, the interpretation of economic trends, delays in obtaining information regarding a customer's financial condition and changes in its unique business conditions. This analysis is conducted at least quarterly, and the Company revises the allowance factors whenever necessary in order to address improving or deteriorating credit quality trends or specific risks associated with a loan pool classification.

Governance

A comprehensive analysis of the ACL is performed by the Company on a quarterly basis. Management regularly monitors the condition of borrowers and assesses both internal and external factors in determining whether any relationships have deteriorated considering factors such as historical loss experience, trends in delinquency and NPLs, changes in risk composition and underwriting standards, experience and ability of staff and regional and national economic conditions, trends and forecasts. Risk factors are continuously reviewed and revised by management when conditions warrant.

The Company's reserves are principally based on various models subject to the Company's model risk management framework. New models are approved by the Company's Model Risk Management Committee, and inputs are reviewed periodically by the Company's Internal Audit function. Models, inputs and documentation are further reviewed and validated at least annually, and the Company completes a detailed variance analysis of historical model projections against actual observed results on a quarterly basis. Required actions resulting from the Company's analysis, if necessary, are governed by its ACL Committee.

In addition, a review of allowance levels based on nationally published statistics is conducted on at least an annual basis. Reserve levels are collectively reviewed for adequacy and approved quarterly by Board-level committees.

The ACL is subject to review by banking regulators. The Company's primary bank regulators conduct examinations of the ACL and make assessments regarding its adequacy and the methodology employed in its determination.

15




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

Changes in the assumptions used in these estimates could have a direct material impact on credit loss expense in the Condensed Consolidated Statements of Operations and in the allowance for loan losses. The loan portfolio represents the largest asset on the Condensed Consolidated Balance Sheets. The Company’s models incorporate a variety of assumptions based on historical experience, current conditions and forecasts. Management also applies its judgement in evaluating the appropriateness of the allowance. Material changes to the ACL might be necessary if prevailing conditions differ materially from the assumptions and estimates utilized in calculating the ACL.

TDRs

TDR Impact to ACL

The Company’s policies for estimating the ACL also apply to TDRs as follows:

The Company reflects the impact of the concession in the ALLL for TDRs. Interest rate concessions and significant term deferrals can only be captured within the ALLL by using a DCF method. Therefore, in circumstances in which the Company offers such extensions in its TDR modification, it uses a DCF method to calculate the ALLL.

The Company recognizes the impact of a TDR modification to the ALLL when the Company has a reasonable expectation that the TDR modification will be executed.

Subsequent Events

The Company evaluated events from the date of these Condensed Consolidated Financial Statements on March 31, 2020 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 period ended March 31, 2020 other than the transaction disclosed in Note 10.


NOTE 2. RECENT ACCOUNTING DEVELOPMENTS

There are no recently issued GAAP accounting developments that we expect will have a material impact on the Company's business, financial position, results of operations, or disclosures upon adoption.


 



16




NOTE 3. INVESTMENT SECURITIES

Summary of Investments in Debt Securities - AFS and HTM

The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of investments in debt securities AFS at the dates indicated:
 
 
March 31, 2020
 
December 31, 2019
(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
 
$
2,407,661

 
$
23,007

 
$

 
$
2,430,668

 
$
4,086,733

 
$
4,497

 
$
(292
)
 
$
4,090,938

Corporate debt securities
 
127,883

 
27

 
(62
)
 
127,848

 
139,696

 
39

 
(22
)
 
139,713

ABS
 
130,032

 
1,021

 
(1,349
)
 
129,704

 
138,839

 
1,034

 
(1,473
)
 
138,400

State and municipal securities
 
7

 

 

 
7

 
9

 

 

 
9

MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GNMA - Residential
 
4,289,061

 
115,941

 
(1,480
)
 
4,403,522

 
4,868,512

 
12,895

 
(16,066
)
 
4,865,341

GNMA - Commercial
 
662,425

 
15,986

 
(12
)
 
678,399

 
773,889

 
6,954

 
(1,785
)
 
779,058

FHLMC and FNMA - Residential
 
4,341,222

 
99,298

 
(1,748
)
 
4,438,772

 
4,270,426

 
14,296

 
(30,325
)
 
4,254,397

FHLMC and FNMA - Commercial
 
69,037

 
4,667

 
(4
)
 
73,700

 
69,242

 
2,665

 
(5
)
 
71,902

Total investments in debt securities AFS
 
$
12,027,328

 
$
259,947

 
$
(4,655
)
 
$
12,282,620

 
$
14,347,346

 
$
42,380

 
$
(49,968
)
 
$
14,339,758


The following tables present the amortized cost, gross unrealized gains and losses and approximate fair values of investments in debt securities HTM at the dates indicated:
 
 
March 31, 2020
 
December 31, 2019
(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
 
$
1,919,517

 
$
60,432

 
$

 
$
1,979,949

 
$
1,948,025

 
$
11,354

 
$
(7,670
)
 
$
1,951,709

GNMA - Commercial
 
2,470,098

 
58,725

 
(2,669
)
 
2,526,154

 
1,990,772

 
20,115

 
(5,369
)
 
2,005,518

Total investments in debt securities HTM
 
$
4,389,615

 
$
119,157

 
$
(2,669
)
 
$
4,506,103

 
$
3,938,797

 
$
31,469

 
$
(13,039
)
 
$
3,957,227


As of March 31, 2020 and December 31, 2019, the Company had investment securities with an estimated carrying value of $7.5 billion and $7.5 billion, respectively, pledged as collateral, which were comprised of the following: $2.7 billion and $2.7 billion, respectively, were pledged as collateral for the Company's borrowing capacity with the FRB; $3.7 billion and $3.5 billion, respectively, were pledged to secure public fund deposits; $127.6 million and $148.5 million, respectively, were pledged to various independent parties to secure repurchase agreements, support hedging relationships, and for recourse on loan sales; $399.9 million and $699.1 million, respectively, were pledged to deposits with clearing organizations; and $504.0 million and $461.9 million, respectively, were pledged to secure the Company's customer overnight sweep product.

At March 31, 2020 and December 31, 2019, the Company had $40.6 million and $46.0 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. No accrued interest related to investment securities was written off during the periods ended March 31, 2020 or December 31, 2019.

There were no transfers of securities between AFS and HTM during the periods ended March 31, 2020 or December 31, 2019.


17




NOTE 3. INVESTMENT SECURITIES (continued)

Contractual Maturity of Investments in Debt Securities

Contractual maturities of the Company’s investments in debt securities AFS at March 31, 2020 were as follows:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
(in thousands)
 
Amortized Cost
 
Fair Value
Due within one year
 
$
1,898,969

 
$
1,905,922

Due after 1 year but within 5 years
 
720,064

 
737,376

Due after 5 years but within 10 years
 
385,515

 
397,854

Due after 10 years
 
9,022,780

 
9,241,468

Total
 
$
12,027,328

 
$
12,282,620


Contractual maturities of the Company’s investments in debt securities HTM at March 31, 2020 were as follows:
 
 
 
 
 
(in thousands)
 
Amortized Cost
 
Fair Value
Due after 10 years
 
$
4,389,615

 
$
4,506,103

Total
 
$
4,389,615

 
$
4,506,103

 
 
 
 
 
 
 
 
 
 
 
 
 
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 Investments in Debt Securities AFS and HTM

The following table presents the aggregate amount of unrealized losses as of March 31, 2020 and December 31, 2019 on debt 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, 2020
 
December 31, 2019
 
 
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
 
$

 
$

 
$

 
$

 
$
200,096

 
$
(167
)
 
$
499,883

 
$
(125
)
Corporate debt securities
 
89,642

 
(62
)
 

 

 
110,802

 
(22
)
 

 

ABS
 
26,080

 
(66
)
 
41,631

 
(1,283
)
 
27,662

 
(44
)
 
47,616

 
(1,429
)
MBS:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
GNMA - Residential
 
83,016

 
(1,185
)
 
32,753

 
(295
)
 
2,053,763

 
(6,895
)
 
997,024

 
(9,171
)
GNMA - Commercial
 
4,069

 
(7
)
 
2,458

 
(5
)
 
217,291

 
(1,756
)
 
14,300

 
(29
)
FHLMC and FNMA - Residential
 
71,126

 
(964
)
 
46,481

 
(784
)
 
660,078

 
(4,110
)
 
1,344,057

 
(26,215
)
FHLMC and FNMA - Commercial
 

 

 
427

 
(4
)
 

 

 
430

 
(5
)
Total investments in debt securities AFS
 
$
273,933

 
$
(2,284
)
 
$
123,750

 
$
(2,371
)
 
$
3,269,692

 
$
(12,994
)
 
$
2,903,310

 
$
(36,974
)

The following table presents the aggregate amount of unrealized losses as of March 31, 2020 and December 31, 2019 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, 2020
 
December 31, 2019
 
 
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
 
$

 
$

 
$

 
$

 
$
559,058

 
$
(2,004
)
 
$
657,733

 
$
(5,666
)
GNMA - Commercial
 
206,370

 
(2,669
)
 

 

 
731,445

 
(5,369
)
 

 

Total investments in debt securities HTM
 
$
206,370

 
$
(2,669
)
 
$

 
$

 
$
1,290,503

 
$
(7,373
)
 
$
657,733

 
$
(5,666
)


18




NOTE 3. INVESTMENT SECURITIES (continued)

Allowance for credit-related losses on AFS securities

The Company did not record an allowance for credit-related losses on AFS securities against its investments in debt securities at March 31, 2020 or 2019.

Management has concluded that the unrealized losses on its investments in debt securities for which it has not recorded an allowance (which were comprised of 397 individual securities at March 31, 2020) are not credit related since (1) they are not related to the underlying credit quality of the issuers, (2) the entire contractual principal and interest due on these securities is currently expected to be recoverable, (3) the Company does not intend to sell these investments at a loss and (4) 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.

Gains (Losses) and Proceeds on Sales of Investments in Debt 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)
 
2020
 
2019
Proceeds from the sales of AFS securities
 
$
922,101

 
$
282,872

 
 
 
 
 
Gross realized gains
 
$
10,755

 
$
811

Gross realized losses
 
(1,476
)
 
(2,811
)
    Net realized gains/(losses) (1)
 
$
9,279

 
$
(2,000
)
(1)
Includes net realized gain/(losses) on trading securities of $(1.4) million and $(0.3) million for the three-month periods ended March 31, 2020 and 2019, 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: