Derivatives represent contracts between parties that usually require little or no initial net investment and result in one or both parties delivering cash or another type of asset to the other party based on a notional amount and an underlying asset, index, interest rate or future purchase commitment or option as specified in the contract. Derivative transactions are often measured in terms of notional amount, but this amount is generally not exchanged, is not recorded on the balance sheet, and does not represent the Company`s exposure to credit loss. The notional amount is the basis on which the financial obligation of each party to the derivative contract is calculated to determine required payments under the contract. The Company controls the credit risk of its derivative contracts through credit approvals, limits and monitoring procedures. The underlying asset is typically a referenced interest rate (commonly the OIS rate or LIBOR), security, credit spread or index.

The Company’s capital markets and mortgage banking activities are subject to price risk. The Company employs various tools to measure and manage price risk in its portfolios. In addition, the Board of Directors has established certain limits relative to positions and activities. The level of price risk exposure at any given time depends on the market environment and expectations of future price and market movements and will vary from period to period.

The Company has entered into certain derivative contracts that require the posting of collateral to counterparties when those contracts are in a net liability position. The amount of collateral to be posted is based on the amount of the net liability and thresholds generally related to the Company's long-term senior unsecured credit ratings. In a limited number of instances, counterparties also have the right to terminate their ISDA Master Agreements if the Company's ratings fall below a specified level, typically investment grade. As of June 30, 2020, derivatives in this category had a fair value of $0.2 million. The credit ratings of the Company and the Bank are currently considered investment grade. During the second quarter of 2020, no additional collateral would be required if there were a further 1- or 2- notch downgrade by either S&P or Moody's.

As of June 30, 2020 and December 31, 2019, the aggregate fair value of all derivative contracts with credit risk contingent features (i.e., those containing collateral posting or termination provisions based on the Company's ratings) that were in a net liability position totaled $11.3 million and $7.8 million, respectively. The Company had $36.0 million and $8.6 million in cash and securities collateral posted to cover those positions as of June 30, 2020 and December 31, 2019, respectively.

Management uses derivative instruments designated as hedges to mitigate the impact of interest rate and foreign exchange rate movements on the fair value of certain assets and liabilities and on highly probable forecasted cash flows. These instruments primarily include interest rate swaps that have underlying interest rates based on key benchmark indices. The nature and volume of the derivative instruments used to manage interest rate risk depend on the level and type of assets and liabilities on the balance sheet and the risk management strategies for the current and anticipated interest rate environment.

Interest rate swaps are generally used to convert fixed-rate assets and liabilities to variable rate assets and liabilities and vice versa. The Company utilizes interest rate swaps that have a high degree of correlation to the related financial instrument.

The Company has outstanding interest rate swap agreements designed to hedge a portion of the Company’s floating rate assets and liabilities (including its borrowed funds). All of these swaps have been deemed highly effective cash flow hedges. The gain or loss on the derivative instrument is reported as a component of accumulated OCI and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings and is presented in the same Condensed Consolidated Statements of Operations line item as the earnings effect of the hedged item.

The last of the hedges is scheduled to expire in March 2024. The Company includes all components of each derivative's gain or loss in the assessment of hedge effectiveness. As of June 30, 2020, the Company expected $32.3 million of gains recorded in accumulated other comprehensive loss to be reclassified to earnings during the subsequent twelve months as the future cash flows occur.


(dollars in thousands)	Notional Amount		Asset		Liability		Weighted Average Receive Rate		Weighted Average Pay Rate		Weighted Average Life (Years)
June 30, 2020



Cash flow hedges:
Pay fixed — receive variable interest rate swaps	$	2,750,000	$	—	$	88,512	0.23 %		1.49 %		2.19
Pay variable - receive fixed interest rate swaps	7,070,000		194,232		—		1.41 %		0.18 %		2.19
Interest rate floor	3,950,000		56,194		—		1.75 %		—	%	0.84
Total	$	13,770,000	$	250,426	$	88,512	1.27 %		0.39 %		1.80

December 31, 2019



Cash flow hedges:
Pay fixed — receive variable interest rate swaps	$	2,650,000	$	2,807	$	39,128	1.85	%	1.91	%	1.86
Pay variable - receive fixed interest rate swaps	7,570,000		7,462		29,209		1.43	%	1.73	%	2.39
Interest rate floor	3,800,000		18,762		—		0.19	%	—	%	1.28
Total	$	14,020,000	$	29,031	$	68,337	1.17	%	1.29	%	1.99

The Company also enters into derivatives that are not designated as accounting hedges under GAAP. The majority of these derivatives are customer-related derivatives relating to foreign exchange and lending arrangements, as well as derivatives to hedge interest rate risk on SC's secured structured financings and the borrowings under its revolving credit facilities. SC uses both interest rate swaps and interest rate caps to satisfy these requirements and to hedge the variability of cash flows on securities issued by Trusts and borrowings under its warehouse facilities. In addition, derivatives are used to manage risks related to residential and commercial mortgage banking and investing activities. Although these derivatives are used to hedge risk and are considered economic hedges, they are not designated as accounting hedges because the contracts they are hedging are carried at fair value on the balance sheet, resulting in generally symmetrical accounting treatment for the hedging instrument and the hedged item.

The Company's derivatives portfolio includes mortgage banking interest rate lock commitments, forward sale commitments and interest rate swaps. As part of its overall business strategy, the Company originates fixed-rate and adjustable rate residential mortgages. It sells a portion of this production to the FHLMC, the FNMA, and private investors. The Company uses forward sales as a means of hedging against the economic impact of changes in interest rates on the mortgages that are originated for sale and on interest rate lock commitments.

The Company typically retains the servicing rights related to residential mortgage loans that are sold. Most of the Company`s residential MSRs are accounted for at fair value. As deemed appropriate, the Company economically hedges MSRs using interest rate swaps and forward contracts to purchase MBS.

The Company offers derivatives to its customers in connection with their risk management needs and requirements. These financial derivative transactions primarily consist of interest rate swaps, caps, floors and foreign exchange contracts. Risk exposure from customer positions is managed through transactions with other dealers, including Santander.

The Company uses foreign exchange contracts to manage the foreign exchange risk associated with certain foreign currency-denominated assets and liabilities. Foreign exchange contracts, which include spot and forward contracts as well as cross-currency swaps, represent agreements to exchange the currency of one country for the currency of another country at an agreed-upon price on an agreed-upon settlement date and may or may not be physically settled depending on the Company’s needs. Exposure to gains and losses on these contracts will increase or decrease over their respective lives as currency exchange and interest rates fluctuate.

Other derivative instruments primarily include forward contracts related to certain investment securities sales, an OIS, a total return swap on Visa, Inc. Class B common shares, and equity options, which manage the Company's market risk associated with certain investments and customer deposit products.


	Notional						Asset derivatives Fair value						Liability derivatives Fair value
(in thousands)	June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019		June 30, 2020		December 31, 2019
Mortgage banking derivatives:
Forward commitments to sell loans	$	549,805	$	452,994	$	51	$	18	$	3,483	$	360
Interest rate lock commitments	322,558		167,423		16,435		3,042		—		—
Mortgage servicing	620,000		510,000		47,369		15,134		18,733		2,547
Total mortgage banking risk management	1,492,363		1,130,417		63,855		18,194		22,216		2,907

Customer-related derivatives:
Swaps receive fixed	16,635,322		11,225,376		1,251,458		375,541		397		12,330
Swaps pay fixed	17,081,403		11,975,313		2,299		23,271		1,223,746		336,361

Other	3,637,631		3,532,959		7,507		3,457		14,760		4,848
Total customer-related derivatives	37,354,356		26,733,648		1,261,264		402,269		1,238,903		353,539

Other derivative activities:

Foreign exchange contracts	3,700,790		3,724,007		42,671		33,749		35,118		34,428
Interest rate swap agreements	258,747		1,290,560		—		—		17,797		11,626
Interest rate cap agreements	10,894,523		9,379,720		6,461		62,552		—		—
Options for interest rate cap agreements	10,894,523		9,379,720		—		—		6,461		62,552

Other	691,071		1,087,986		20,709		10,536		25,876		13,025

Total	$	65,286,373	$	52,726,058	$	1,394,960	$	527,300	$	1,346,371	$	478,077


(in thousands)		Three-Month Period Ended June 30,						Six-Month Period Ended June 30,
	Line Item	2020		2019		2020		2019








Derivative Activity⁽¹⁾
Cash flow hedges:
Pay fixed-receive variable interest rate swaps	Interest expense on borrowings	$	(7,497)	$	13,842	$	(8,321)	$	26,782
Pay variable receive-fixed interest rate swap	Interest income on loans	26,079		(11,250)		22,924		(22,698)
Other derivative activities:
Forward commitments to sell loans	Miscellaneous income, net	7,741		(819)		(3,090)		834
Interest rate lock commitments	Miscellaneous income, net	1,395		1,495		13,392		1,794
Mortgage servicing	Miscellaneous income, net	2,727		12,947		32,113		21,301
Customer-related derivatives	Miscellaneous income, net	23,739		(2,291)		8,120		(16,350)

Foreign exchange	Miscellaneous income, net	1,783		6,044		12,805		29,977
Interest rate swaps, caps, and options	Miscellaneous income, net	(1,028)		5,421		(10,686)		7,866


Other	Miscellaneous income, net	(4,149)		843		(3,919)		(368)

The net amount of change recognized in OCI for cash flow hedge derivatives were gains of $7.2 million and $155.4 million, net of tax, for the three-month and six-month periods ended June 30, 2020, respectively, and gains of $4.8 million and $13.2 million, net of tax, for the three-month and six-month periods ended June 30, 2019, respectively.

The net amount of changes reclassified from OCI into earnings for cash flow hedge derivatives were losses of $0.1 million and $0.2 million, net of tax, for the three-month and six-month periods ended June 30, 2020, respectively, and gains of $3.7 million and $5.1 million, net of tax, for the three-month and six-month periods ended June 30, 2019, respectively.

The Company enters into legally enforceable master netting agreements, which reduce risk by permitting netting of transactions with the same counterparty on the occurrence of certain events. A master netting agreement allows two counterparties the ability to net-settle amounts under all contracts, including any related collateral posted, through a single payment and in a single currency. The right to offset and certain terms regarding the collateral process, such as valuation, credit events and settlement, are contained in the applicable master agreement. The Company's financial instruments, including resell and repurchase agreements, securities lending arrangements, derivatives and cash collateral, may be eligible for offset on its Condensed Consolidated Balance Sheets.

The Company has elected to present derivative balances on a gross basis even if the derivative is subject to a legally enforceable nettable ISDA Master Agreement for all trades executed after April 1, 2013. Collateral that is received or pledged for these transactions is disclosed within the “Gross Amounts Not Offset in the Condensed Consolidated Balance Sheets” section of the tables below. Prior to April 1, 2013, the Company had elected to net all caps, floors, and interest rate swaps when it had an ISDA Master Agreement with the counterparty. The collateral received or pledged in connection with these transactions is disclosed within the “Gross Amounts Offset in the Condensed Consolidated Balance Sheets" section of the tables below.


	Offsetting of Financial Assets
							Gross Amounts Not Offset in the Consolidated Balance Sheets
(in thousands)	Gross Amounts of Recognized Assets		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Assets Presented in the Consolidated Balance Sheets		Collateral Received ⁽³⁾		Net Amount
June 30, 2020

Cash flow hedges	$	250,427	$	—	$	250,427	$	144,680	$	105,747
Other derivative activities⁽¹⁾	1,378,524		602		1,377,922		11,880		1,366,042
Total derivatives subject to a master netting arrangement or similar arrangement	1,628,951		602		1,628,349		156,560		1,471,789
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	16,435		—		16,435		—		16,435
Total Derivative Assets	$	1,645,386	$	602	$	1,644,784	$	156,560	$	1,488,224




December 31, 2019

Cash flow hedges	$	29,031	$	—	$	29,031	$	17,790	$	11,241
Other derivative activities⁽¹⁾	524,258		435		523,823		51,437		472,386
Total derivatives subject to a master netting arrangement or similar arrangement	553,289		435		552,854		69,227		483,627
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	3,042		—		3,042		—		3,042
Total Derivative Assets	$	556,331	$	435	$	555,896	$	69,227	$	486,669

(3)Collateral received includes cash, cash equivalents, and other financial instruments. Cash collateral received is reported in Other liabilities, as applicable, in the Condensed Consolidated Balance Sheets. Financial instruments that are pledged to the Company are not reflected in the accompanying Condensed Consolidated Balance Sheets since the Company does not control or have the ability to re-hypothecate these instruments.


	Offsetting of Financial Liabilities
							Gross Amounts Not Offset in the Consolidated Balance Sheets
(in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts Offset in the Consolidated Balance Sheets		Net Amounts of Liabilities Presented in the Consolidated Balance Sheets		Collateral Pledged ⁽³⁾		Net Amount
June 30, 2020

Cash flow hedges	$	88,512	$	—	$	88,512	$	88,512	$	—
Other derivative activities⁽¹⁾	1,342,888		10,625		1,332,263		708,705		623,558
Total derivatives subject to a master netting arrangement or similar arrangement	1,431,400		10,625		1,420,775		797,217		623,558
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	3,483		—		3,483		2,800		683
Total Derivative Liabilities	$	1,434,883	$	10,625	$	1,424,258	$	800,017	$	624,241




December 31, 2019

Cash flow hedges	$	68,337	$	—	$	68,337	$	68,337	$	—
Other derivative activities⁽¹⁾	477,717		9,406		468,311		436,301		32,010
Total derivatives subject to a master netting arrangement or similar arrangement	546,054		9,406		536,648		504,638		32,010
Total derivatives not subject to a master netting arrangement or similar arrangement⁽²⁾	360		—		360		273		87
Total Derivative Liabilities	$	546,414	$	9,406	$	537,008	$	504,911	$	32,097

(3)Cash collateral pledged and financial instruments pledged is reported in Other assets in the Condensed Consolidated Balance Sheets. In certain instances, the Company is over-collateralized since the actual amount of collateral pledged exceeds the associated financial liability. As a result, the actual amount of collateral pledged that is reported in Other assets may be greater than the amount shown in the table above.