Derivative Financial Instruments

12 Months Ended

Dec. 31, 2020

Derivative Instruments and Hedging Activities Disclosure [Abstract]

We primarily use derivative financial instruments to manage interest rate risk and currency exchange rate risk and to assist customers with their risk management objectives, which may include currency exchange rate risks and interest rate risks. Also, in connection with negotiating credit facilities and certain other services, we often obtain equity warrant assets giving us the right to acquire stock in private, venture-backed companies in the technology and life science/healthcare industries.

Interest Rate Risk

Interest rate risk is our primary market risk and can result from timing and volume differences in the repricing of our interest rate sensitive assets and liabilities and changes in market interest rates. To manage interest rate risk on our variable-interest rate loan portfolio, we enter into interest rate swap contracts to hedge against future changes in interest rates by using hedging instruments to lock in future cash inflows that would otherwise be impacted by movements in the market interest rates. We designate these interest rate swap contracts as cash flow hedges that qualify for hedge accounting under ASC 815, Derivatives and Hedging ("ASC 815"), and record them in other assets and other liabilities. For qualifying cash flow hedges, changes in the fair value of the derivative are recorded in accumulated other comprehensive income and recognized in earnings as the hedged item affects earnings. Derivative amounts affecting earnings are recognized consistent with the classification of the hedged item in the line item "Loans" as part of interest income, a component of consolidated net income.

We assess hedge effectiveness under ASC 815 on a quarterly basis to ensure all hedges remain highly effective to ensure hedge accounting under ASC 815 can be applied. If the hedging relationship no longer exists or no longer qualifies as a hedge per ASC 815, any amounts remaining as gain or loss in accumulated other comprehensive income are reclassified into earnings in the line item "loans" as part of interest income, a component of consolidated net income. As of March 31, 2020, all derivatives previously classified as hedges with notional balances totaling $5.0 billion and a net asset fair value of $227.5 million were terminated. As of December 31, 2020, the total unrealized gains on terminated cash flow hedges remaining in AOCI is $179.0 million, or $129.3 million net of tax. The unrealized gains will be reclassified into interest income as the underlying forecasted transactions impact earnings through the original maturity of the hedged forecasted transactions. The total remaining term over which the unrealized gains will be reclassified into earnings is approximately four years.

Currency Exchange Risk

We enter into foreign exchange forward contracts to economically reduce our foreign exchange exposure risk associated with the net difference between foreign currency denominated assets and liabilities. We do not designate any foreign exchange forward contracts as derivative instruments that qualify for hedge accounting. Gains or losses from changes in currency rates on foreign currency denominated instruments are recorded in the line item "other" as part of noninterest income, a component of consolidated net income. We may experience ineffectiveness in the economic hedging relationship, because the instruments are revalued based upon changes in the currency’s spot rate on the principal value, while the forwards are revalued on a discounted cash flow basis. We record forward agreements in gain positions in other assets and loss positions in other liabilities, while net changes in fair value are recorded in the line item "other" as part of noninterest income, a component of consolidated net income.

Other Derivative Instruments

Also included in our derivative instruments are equity warrant assets and client forward and option contracts, and client interest rate contracts. For further description of these other derivative instruments, refer to Note 2—“Summary of Significant Accounting Policies.”

Counterparty Credit Risk

We are exposed to credit risk if counterparties to our derivative contracts do not perform as expected. We mitigate counterparty credit risk through credit approvals, limits, monitoring procedures and obtaining collateral, as appropriate. With respect to measuring counterparty credit risk for derivative instruments, we measure the fair value of a group of financial assets and financial liabilities on a net risk basis by counterparty portfolio.

The total notional or contractual amounts and fair value of our derivative financial instruments at December 31, 2020 and 2019 were as follows:


	December 31, 2020						December 31, 2019
	Notional or Contractual Amount		Fair Value				Notional or Contractual Amount		Fair Value
(Dollars in thousands)			Derivative Assets (1)		Derivative Liabilities (1)				Derivative Assets (1)		Derivative Liabilities (1)
Derivatives designated as hedging instruments:
Interest rate risks:
Interest rate swaps	$	—	$	—	$	—	$	1,915,000	$	22,676	$	—
Interest rate swaps	—		—		—		3,085,000		—		25,623
Derivatives not designated as hedging instruments:
Currency exchange risks:
Foreign exchange forwards	68,381		306		—		—		—		—
Foreign exchange forwards	566,988		—		20,566		300,250		—		2,154
Other derivative instruments:
Equity warrant assets	253,153		203,438		—		225,893		165,473		—
Client foreign exchange forwards	8,025,973		214,969		—		4,661,517		114,546		—
Client foreign exchange forwards	7,490,723		—		188,565		4,326,059		—		94,745
Client foreign currency options	97,529		1,702		—		154,985		1,308		—
Client foreign currency options	97,522		—		1,702		154,985		—		1,308
Client interest rate derivatives	1,082,265		67,854		—		1,275,190		28,811		—
Client interest rate derivatives (2)	1,250,975		—		26,646		1,372,914		—		14,154
Total derivatives not designated as hedging instruments			488,269		237,479				310,138		112,361
Total derivatives			$	488,269	$	237,479			$	332,814	$	137,984

(1)Derivative assets and liabilities are included in "accrued interest receivable and other assets" and "other liabilities", respectively, on our consolidated balance sheets.

(2)The amount reported reflects reductions of approximately $45.4 million and $17.4 million of derivative liabilities at December 31, 2020 and 2019, respectively, reflecting variation margin treated as settlement of the related derivative fair values for legal and accounting purposes as required by central clearing houses.

A summary of our derivative activity and the related impact on our consolidated statements of income for 2020, 2019 and 2018 is as follows:


		Year ended December 31,
(Dollars in thousands)	Statement of income location	2020		2019		2018
Derivatives designated as hedging instruments:
Interest rate risks:
Amounts reclassified from accumulated other comprehensive income into income	Interest income—loans	$	49,928	$	(5,358)	$	—


Derivatives not designated as hedging instruments:
Currency exchange risks:
Gains (losses) on revaluations of internal foreign currency instruments, net	Other noninterest income	$	39,247	$	1,444	$	(373)
(Losses) gains on internal foreign exchange forward contracts, net	Other noninterest income	(39,716)		(1,853)		52
Net losses associated with internal currency risk		$	(469)	$	(409)	$	(321)
Other derivative instruments:
Gains (losses) on revaluations of client foreign currency instruments, net	Other noninterest income	$	2,560	$	(15,146)	$	4,998
(Losses) gains on client foreign exchange forward contracts, net	Other noninterest income	(3,017)		15,900		(4,011)
Net (losses) gains associated with client currency risk		$	(457)	$	754	$	987
Net gains on equity warrant assets	Gains on equity warrant assets, net	$	237,428	$	138,078	$	89,142
Net gains (losses) on other derivatives	Other noninterest income	$	28,056	$	(1,190)	$	(179)

Balance Sheet Offsetting

Certain of our derivative and other financial instruments are subject to enforceable master netting arrangements with our counterparties. These agreements provide for the net settlement of multiple contracts with a single counterparty through a single payment, in a single currency, in the event of default on or termination of any one contract. The following table summarizes our assets subject to enforceable master netting arrangements as of December 31, 2020 and 2019:


(Dollars in thousands)	Gross Amounts of Recognized Assets		Gross Amounts offset in the Statement of Financial Position		Net Amounts of Assets Presented in the Statement of Financial Position		Gross Amounts Not Offset in the Statement of Financial Position But Subject to Master Netting Arrangements				Net Amount
							Financial Instruments		Cash Collateral Received (1)
December 31, 2020:
Derivative Assets:
Interest rate swaps	$	—	$	—	$	—	$	—	$	—	$	—
Foreign exchange forwards	215,275		—		215,275		(75,983)		(20,550)		118,742
Foreign currency options	1,702		—		1,702		(1,045)		(3)		654
Client interest rate derivatives	67,854		—		67,854		(67,854)		—		—
Total derivative assets:	284,831		—		284,831		(144,882)		(20,553)		119,396
Reverse repurchase, securities borrowing, and similar arrangements	226,847		—		226,847		(226,847)		—		—
Total	$	511,678	$	—	$	511,678	$	(371,729)	$	(20,553)	$	119,396
December 31, 2019:
Derivative Assets:
Interest rate swaps	$	22,676	$	—	$	22,676	$	(22,598)	$	—	$	78
Foreign exchange forwards	114,546		—		114,546		(36,855)		(17,095)		60,596
Foreign currency options	1,308		—		1,308		(848)		(335)		125
Client interest rate derivatives	28,811		—		28,811		(28,811)		—		—
Total derivative assets:	167,341		—		167,341		(89,112)		(17,430)		60,799
Reverse repurchase, securities borrowing, and similar arrangements	289,340		—		289,340		(289,340)		—		—
Total	$	456,681	$	—	$	456,681	$	(378,452)	$	(17,430)	$	60,799

(1)Cash collateral received from our counterparties in relation to market value exposures of derivative contracts in our favor is recorded as a component of “short-term borrowings” on our consolidated balance sheets.

The following table summarizes our liabilities subject to enforceable master netting arrangements as of December 31, 2020 and 2019:


(Dollars in thousands)	Gross Amounts of Recognized Liabilities		Gross Amounts offset in the Statement of Financial Position		Net Amounts of Liabilities Presented in the Statement of Financial Position		Gross Amounts Not Offset in the Statement of Financial Position But Subject to Master Netting Arrangements				Net Amount
							Financial Instruments		Cash Collateral Pledged (1)
December 31, 2020:
Derivative Liabilities:
Interest rate swaps	$	—	$	—	$	—	$	—	$	—	$	—
Foreign exchange forwards	209,131		—		209,131		(84,547)		(45,367)		79,217
Foreign currency options	1,702		—		1,702		(645)		(8)		1,049
Client interest rate derivatives	26,646		—		26,646		—		(26,100)		546
Total derivative liabilities:	237,479		—		237,479		(85,192)		(71,475)		80,812
Repurchase, securities lending, and similar arrangements	—		—		—		—		—		—
Total	$	237,479	$	—	$	237,479	$	(85,192)	$	(71,475)	$	80,812
December 31, 2019:
Derivative Liabilities:
Interest rate swaps	$	25,623	$	—	$	25,623	$	(22,676)	$	(2,947)	$	—
Foreign exchange forwards	96,899		—		96,899		(33,314)		(22,030)		41,555
Foreign currency options	1,308		—		1,308		(531)		—		777
Client interest rate derivatives	14,154		—		14,154		—		(13,936)		218
Total derivative liabilities:	137,984		—		137,984		(56,521)		(38,913)		42,550
Repurchase, securities lending, and similar arrangements	—		—		—		—		—		—
Total	$	137,984	$	—	$	137,984	$	(56,521)	$	(38,913)	$	42,550

(1)Cash collateral pledged to our counterparties in relation to market value exposures of derivative contracts in a liability position and repurchase agreements are recorded as a component of “cash and cash equivalents" on our consolidated balance sheets.