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Fair Value of Financial Instruments (Tables)

6 Months Ended

Jun. 30, 2020

Fair Value Hierarchy Tables Present Information about Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following fair value hierarchy table presents information about our assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2020:



(Dollars in thousands)	Level 1		Level 2		Level 3		Balance at June 30, 2020
Assets:
Available-for-sale securities:
U.S. Treasury securities	$	4,535,235	$	—	$	—	$	4,535,235
U.S. agency debentures	—		102,659		—		102,659
Foreign government debt securities	22,525		—		—		22,525
Residential mortgage-backed securities:
Agency-issued mortgage-backed securities	—		7,655,556		—		7,655,556
Agency-issued collateralized mortgage obligations—fixed rate	—		2,979,540		—		2,979,540
Agency-issued commercial mortgage-backed securities	—		3,156,398		—		3,156,398
Total available-for-sale securities	4,557,760		13,894,153		—		18,451,913
Non-marketable and other equity securities (fair value accounting):
Non-marketable securities:
Venture capital and private equity fund investments measured at net asset value	—		—		—		213,201
Venture capital and private equity fund investments not measured at net asset value (1)	—		—		134		134
Other equity securities in public companies	25,233		20,055		—		45,288
Total non-marketable and other equity securities (fair value accounting)	25,233		20,055		134		258,623
Other assets:
Foreign exchange forward and option contracts	—		182,093		—		182,093
Equity warrant assets	—		5,857		165,225		171,082
Client interest rate derivatives	—		87,255		—		87,255
Total assets	$	4,582,993	$	14,189,413	$	165,359	$	19,150,966
Liabilities:
Foreign exchange forward and option contracts	$	—	$	152,538	$	—	$	152,538
Client interest rate derivatives	—		28,676		—		28,676
Total liabilities	$	—	$	181,214	$	—	$	181,214


(1)	Included in Level 3 assets is $120 thousand attributable to noncontrolling interests calculated based on the ownership percentages of the noncontrolling interests.

The following fair value hierarchy table presents information about our assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2019:



(Dollars in thousands)	Level 1		Level 2		Level 3		Balance at December 31, 2019
Assets:
Available-for-sale securities:
U.S. Treasury securities	$	6,894,010	$	—	$	—	$	6,894,010
U.S. agency debentures	—		99,547		—		99,547
Foreign government debt securities	9,038		—		—		9,038
Residential mortgage-backed securities:
Agency-issued mortgage-backed securities	—		4,148,791		—		4,148,791
Agency-issued collateralized mortgage obligations—fixed rate	—		1,538,343		—		1,538,343
Agency-issued commercial mortgage-backed securities	—		1,325,190		—		1,325,190
Total available-for-sale securities	6,903,048		7,111,871		—		14,014,919
Non-marketable and other equity securities (fair value accounting):
Non-marketable securities:
Venture capital and private equity fund investments measured at net asset value	—		—		—		265,263
Venture capital and private equity fund investments not measured at net asset value (1)	—		—		134		134
Other equity securities in public companies	17,290		41,910		—		59,200
Total non-marketable and other equity securities (fair value accounting)	17,290		41,910		134		324,597
Other assets:
Foreign exchange forward and option contracts	—		115,854		—		115,854
Equity warrant assets	—		4,435		161,038		165,473
Interest rate swaps	—		22,676		—		22,676
Client interest rate derivatives	—		28,811		—		28,811
Total assets	$	6,920,338	$	7,325,557	$	161,172	$	14,672,330
Liabilities:
Foreign exchange forward and option contracts	$	—	$	98,207	$	—	$	98,207
Interest rate swaps	—		25,623		—		25,623
Client interest rate derivatives	—		14,154		—		14,154
Total liabilities	$	—	$	137,984	$	—	$	137,984

(1)

Included in Level 3 assets is $120 thousand attributable to noncontrolling interests calculated based on the ownership percentages of the noncontrolling interests.

Additional Information about Level 3 Assets Measured at Fair Value on a Recurring Basis

The following table presents additional information about Level 3 assets measured at fair value on a recurring basis for the three and six months ended June 30, 2020 and 2019:



(Dollars in thousands)	Beginning Balance		Total Net Gains (Losses) Included in Net Income			Purchases		Sales/Exits			Issuances		Distributions and Other Settlements		Transfers Out of Level 3			Ending Balance
Three months ended June 30, 2020
Non-marketable and other equity securities (fair value accounting):
Venture capital and private equity fund investments not measured at net asset value (1)	$	134	$	—		$	—	$	—		$	—	$	—	$	—		$	134
Other assets:
Equity warrant assets (2)	149,858		24,086			—		(15,316		)	6,770		—		(173		)	165,225
Total assets	$	149,992	$	24,086		$	—	$	(15,316	)	$	6,770	$	—	$	(173	)	$	165,359
Three months ended June 30, 2019
Non-marketable and other equity securities (fair value accounting):
Venture capital and private equity fund investments not measured at net asset value (1)	$	1,035	$	2		$	—	$	(596	)	$	—	$	—	$	—		$	441
Other assets:
Equity warrant assets (2)	156,749		46,645			—		(55,568		)	3,041		—		(3,097		)	147,770
Total assets	$	157,784	$	46,647		$	—	$	(56,164	)	$	3,041	$	—	$	(3,097	)	$	148,211
Six months ended June 30, 2020
Non-marketable and other equity securities (fair value accounting):
Venture capital and private equity fund investments not measured at net asset value (1)	$	134	$	5		$	—	$	(5	)	$	—	$	—	$	—		$	134
Other assets:
Equity warrant assets (2)	161,038		38,687			—		(45,350		)	11,289		—		(439		)	165,225
Total assets	$	161,172	$	38,692		$	—	$	(45,355	)	$	11,289	$	—	$	(439	)	$	165,359
Six months ended June 30, 2019
Non-marketable and other equity securities (fair value accounting):
Venture capital and private equity fund investments not measured at net asset value (1)	$	1,079	$	(45	)	$	—	$	(596	)	$	—	$	3	$	—		$	441
Other assets:
Equity warrant assets (2)	145,199		65,811			575		(67,873		)	7,584		—		(3,526		)	147,770
Total assets	$	146,278	$	65,766		$	575	$	(68,469	)	$	7,584	$	3	$	(3,526	)	$	148,211


(1)	Realized and unrealized gains (losses) are recorded in the line item “Gains on investment securities, net," a component of noninterest income.

(2)

Realized and unrealized gains (losses) are recorded in the line item “Gains on equity warrant assets, net," a component of noninterest income.

Unrealized Gains Included in Earnings Attributable to Level 3 Assets Held

The following table presents the amount of net unrealized gains and losses included in earnings (which is inclusive of noncontrolling interest) attributable to Level 3 assets still held at June 30, 2020 and 2019:



	Three months ended June 30,					Six months ended June 30,
(Dollars in thousands)	2020		2019			2020		2019
Non-marketable and other equity securities (fair value accounting):
Venture capital and private equity fund investments not measured at net asset value (1)	$	—	$	2		$	—	$	(45	)
Other assets:
Equity warrant assets (2)	11,267		4,416			7,122		19,188
Total unrealized (losses) gains, net	$	11,267	$	4,418		$	7,122	$	19,143
Unrealized losses attributable to noncontrolling interests (1)	$	—	$	(1	)	$	—	$	(40	)


(1)	Unrealized gains (losses) are recorded in the line item “Gains on investment securities, net," a component of noninterest income.

(2)

Unrealized gains (losses) are recorded in the line item “Gains on equity warrant assets, net," a component of noninterest income.

Quantitative Information About Significant Unobservable Inputs

The following table presents quantitative information about the significant unobservable inputs used for certain of our Level 3 fair value measurements at June 30, 2020 and December 31, 2019. We have not included in this table our venture capital and private equity fund investments (fair value accounting) as we use net asset value per share (as obtained from the general partners of the investments) as a practical expedient to determine fair value.



(Dollars in thousands)	Fair value		Valuation Technique	Significant Unobservable Inputs	Input Range	Weighted Average
June 30, 2020:
Venture capital and private equity fund investments (fair value accounting)	$	134	Private company equity pricing	(1)	(1)	(1	)
Equity warrant assets (public portfolio)	1,085		Black-Scholes option pricing model	Volatility	56.6%	56.6	%
				Risk-Free interest rate	0.7	0.7
				Sales restrictions discount (2)	10.0 - 20.0	14.4
Equity warrant assets (private portfolio)	164,140		Black-Scholes option pricing model	Volatility	23.1% - 56.6%	43.1
				Risk-Free interest rate	0.01 - 0.66	0.2
				Marketability discount (3)	21.8	21.8
				Remaining life assumption (4)	45.0	45.0
December 31, 2019:
Venture capital and private equity fund investments (fair value accounting)	$	134	Private company equity pricing	(1)	(1)	(1	)
Equity warrant assets (public portfolio)	346		Black-Scholes option pricing model	Volatility	39.2% - 54.8%	50.7	%
				Risk-Free interest rate	1.9	1.9
				Sales restrictions discount (2)	10.0 - 20.0	13.6
Equity warrant assets (private portfolio)	160,692		Black-Scholes option pricing model	Volatility	23.6% - 54.8%	38.2
				Risk-Free interest rate	0.5 - 1.9	1.6
				Marketability discount (3)	17.5	17.5
				Remaining life assumption (4)	45.0	45.0

(1)

In determining the fair value of our venture capital and private equity fund investment portfolio (not measured at net asset value), we evaluate a variety of factors related to each underlying private portfolio company including, but not limited to, actual and forecasted results, cash position, recent or planned transactions and market comparable companies. Additionally, we have ongoing communication with the portfolio companies and venture capital fund managers, to determine whether there is a material change in fair value. We use company provided valuation reports, if available, to support our valuation

assumptions. These factors are specific to each portfolio company and a weighted average or range of values of the unobservable inputs is not meaningful.


(2)	We adjust quoted market prices of public companies, which are subject to certain sales restrictions. Sales restriction discounts generally range from 10 percent to 20 percent depending on the duration of the sales restrictions, which typically range from three to six months.


(3)	Our marketability discount is applied to all private company warrants to account for a general lack of liquidity due to the private nature of the associated underlying company. The quantitative measure used is based upon various option-pricing models. On a quarterly basis, a sensitivity analysis is performed on our marketability discount.

(4)

We adjust the contractual remaining term of private company warrants based on our estimate of the actual remaining life, which we determine by utilizing historical data on terminations and exercises. At June 30, 2020, the weighted average contractual remaining term was 6.2 years, compared to our estimated remaining life of 2.8 years. On a quarterly basis, a sensitivity analysis is performed on our remaining life assumption.

Summary of Estimated Fair Values of Financial Instruments Not Carried at Fair Value

The following fair value hierarchy table presents the estimated fair values of our financial instruments that are not carried at fair value at June 30, 2020 and December 31, 2019:



			Estimated Fair Value
(Dollars in thousands)	Carrying Amount		Total		Level 1		Level 2		Level 3
June 30, 2020:
Financial assets:
Cash and cash equivalents	$	14,202,106	$	14,202,106	$	14,202,106	$	—	$	—
Held-to-maturity securities	12,858,823		13,541,461		—		13,541,461		—
Non-marketable securities not measured at net asset value	226,236		226,236		—		—		226,236
Non-marketable securities measured at net asset value	252,513		252,513		—		—		—
Net commercial loans	32,412,462		32,728,159		—		—		32,728,159
Net consumer loans	3,724,932		3,761,539		—		—		3,761,539
FHLB and Federal Reserve Bank stock	60,673		60,673		—		—		60,673
Financial liabilities:
Short-term borrowings	50,924		50,924		—		50,924		—
Non-maturity deposits (1)	74,128,263		74,128,263		74,128,263		—		—
Time deposits	377,501		376,762		—		376,762		—
3.50% Senior Notes	348,166		380,314		—		380,314		—
3.125% Senior Notes	495,054		537,115		—		537,115		—
Off-balance sheet financial assets:
Commitments to extend credit	—		31,432		—		—		31,432
December 31, 2019:
Financial assets:
Cash and cash equivalents	$	6,781,783	$	6,781,783	$	6,781,783	$	—	$	—
Held-to-maturity securities	13,842,946		14,115,272		—		14,115,272		—
Non-marketable securities not measured at net asset value	195,405		195,405		—		—		195,405
Non-marketable securities measured at net asset value	235,351		235,351		—		—		—
Net commercial loans	29,104,532		29,615,176		—		—		29,615,176
Net consumer loans	3,755,180		3,820,804		—		—		3,820,804
FHLB and Federal Reserve Bank stock	60,258		60,258		—		—		60,258
Financial liabilities:
Short-term borrowings	17,430		17,430		—		17,430		—
Non-maturity deposits (1)	61,569,714		61,569,714		61,569,714		—		—
Time deposits	188,093		187,980		—		187,980		—
3.50% Senior Notes	347,987		366,856		—		366,856		—
Off-balance sheet financial assets:
Commitments to extend credit	—		27,197		—		—		27,197


(1)	Includes noninterest-bearing demand deposits, interest-bearing checking accounts, money market accounts and interest-bearing sweep deposits.

Summary of Estimated Fair Values of Investments and Remaining Unfunded Commitments for Each Major Category of Investments

The following table is a summary of the estimated fair values of these investments and remaining unfunded commitments for each major category of these investments as of June 30, 2020:



(Dollars in thousands)	Carrying Amount		Fair Value		Unfunded Commitments
Non-marketable securities (fair value accounting):
Venture capital and private equity fund investments (1)	$	213,201	$	213,201	$	9,462
Non-marketable securities (equity method accounting):
Venture capital and private equity fund investments (2)	233,996		233,996		10,457
Debt funds (2)	7,004		7,004		—
Other investments (2)	11,513		11,513		886
Total	$	465,714	$	465,714	$	20,805

(1)

Venture capital and private equity fund investments within non-marketable securities (fair value accounting) include investments made by our managed funds of funds and one of our direct venture funds (consolidated VIEs) and investments in venture capital and private equity fund investments (unconsolidated VIEs). Collectively, these investments in venture capital and private equity funds are primarily in U.S. and global technology and life science/healthcare companies. Included in the fair value and unfunded commitments of fund investments under fair value accounting are $50.7 million and $3.2 million, respectively, attributable to noncontrolling interests. It is estimated that we will receive distributions from the fund investments over the next 10 to 13 years, depending on the age of the funds and any potential extensions of terms of the funds.

(2)

Venture capital and private equity fund investments, debt funds, and other fund investments within non-marketable securities (equity method accounting) include funds that invest in or lend money to primarily U.S. and global technology and life science/healthcare companies. It is estimated that we will receive distributions from the funds over the next 5 to 8 years, depending on the age of the funds and any potential extensions of the terms of the funds.