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Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2020

Fair Value Measurements

Our available-for-sale securities, derivative instruments and certain non-marketable and other equity securities are financial instruments recorded at fair value on a recurring basis. We make estimates regarding valuation of assets and liabilities measured at fair value in preparing our consolidated financial statements.

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, 2020:


(Dollars in thousands)	Level 1		Level 2		Level 3		Balance at December 31, 2020
Assets
Available-for-sale securities:
U.S. Treasury securities	$	4,469,728	$	—	$	—	$	4,469,728
U.S. agency debentures	—		237,307		—		237,307
Foreign government debt securities	24,492		—		—		24,492
Residential mortgage-backed securities:
Agency-issued mortgage-backed securities	—		13,503,681		—		13,503,681
Agency-issued collateralized mortgage obligations—fixed rate	—		8,106,564		—		8,106,564

Agency-issued commercial mortgage-backed securities	—		4,570,666		—		4,570,666
Total available-for-sale securities	4,494,220		26,418,218		—		30,912,438
Non-marketable and other equity securities (fair value accounting):
Non-marketable securities:
Venture capital and private equity fund investments measured at net asset value	—		—		—		273,823

Other equity securities in public companies	43,344		237,460		—		280,804
Total non-marketable and other equity securities (fair value accounting)	43,344		237,460		—		554,627
Other assets:

Foreign exchange forward and option contracts	—		216,977		—		216,977
Equity warrant assets	—		11,221		192,217		203,438

Client interest rate derivatives	—		67,854		—		67,854
Total assets	$	4,537,564	$	26,951,730	$	192,217	$	31,955,334
Liabilities
Foreign exchange forward and option contracts	$	—	$	210,833	$	—	$	210,833

Client interest rate derivatives	—		26,646		—		26,646
Total liabilities	$	—	$	237,479	$	—	$	237,479

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.

The following table presents additional information about Level 3 assets measured at fair value on a recurring basis for 2020, 2019 and 2018, respectively:


(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
Year ended December 31, 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	$	(30)	$	—	$	(104)	$	—	$	—	$	—	$	—
Other assets:
Equity warrant assets (2)	161,038		228,944		—		(214,933)		19,014		—		(1,846)		192,217
Total assets	$	161,172	$	228,914	$	—	$	(215,037)	$	19,014	$	—	$	(1,846)	$	192,217
Year ended December 31, 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	$	12	$	—	$	(960)	$	—	$	3	$	—	$	134
Other assets:
Equity warrant assets (2)	145,199		133,910		575		(130,392)		16,453		—		(4,707)		161,038
Total assets	$	146,278	$	133,922	$	575	$	(131,352)	$	16,453	$	3	$	(4,707)	$	161,172
Year ended December 31, 2018:
Non-marketable and other equity securities (fair value accounting):
Venture capital and private equity fund investments not measured at net asset value (1)	$	919	$	457	$	—	$	—	$	—	$	(297)	$	—	$	1,079
Other assets:
Equity warrant assets (2)	121,331		87,982		—		(78,752)		17,941		—		(3,303)		145,199
Total assets	$	122,250	$	88,439	$	—	$	(78,752)	$	17,941	$	(297)	$	(3,303)	$	146,278

(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.

The following table presents the amount of unrealized gains (losses) included in earnings (which is inclusive of noncontrolling interest) attributable to Level 3 assets still held at December 31, 2020 and 2019, respectively:


	Year ended December 31,
(Dollars in thousands)	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)	$	—	$	(222)


Other assets:
Equity warrant assets (2)	54,417		34,691
Total unrealized gains, net	$	54,417	$	34,469
Unrealized losses attributable to noncontrolling interests (1)	$	—	$	(199)

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

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

The extent to which any unrealized gains or losses will become realized is subject to a variety of factors, including, among other things, the expiration of current sales restrictions to which these securities are subject, the actual sales of securities and the timing of such actual sales.

The following table presents quantitative information about the significant unobservable inputs used for certain of our Level 3 fair value measurements at December 31, 2020 and 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 Rage	Weighted Average
December 31, 2020:

Equity warrant assets (public portfolio)	$	1,036	Black-Scholes option pricing model	Volatility	46.0% - 56.8%	49.1	%
				Risk-Free interest rate	0.3 - 0.9	0.6
				Sales restrictions discount (2)	10.0- 20.0	10.2
Equity warrant assets (private portfolio)	191,181		Black-Scholes option pricing model	Volatility	24.4 - 56.8	43.2
				Risk-Free interest rate	0.01 - 0.5	0.1
				Marketability discount (3)	20.6	20.6
				Remaining life assumption (4)	40.0	40.0
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 December 31, 2020, the weighted average contractual remaining term was 6.0 years, compared to our estimated remaining life of 2.4 years. On a quarterly basis, a sensitivity analysis is performed on our remaining life assumption.

During 2020, 2019 and 2018, we did not have any transfers between Level 3 and Level 1. All other transfers from Level 3 to Level 2 during 2020, 2019 and 2018 were due to the transfer of equity warrant assets from our private portfolio to our public portfolio (see our Level 3 reconciliation above).

Financial Instruments not Carried at Fair Value

FASB guidance over financial instruments requires that we disclose estimated fair values for our 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 December 31, 2020 and 2019:


			Estimated Fair Value
(Dollars in thousands)	Carrying Amount		Total		Level 1		Level 2		Level 3
December 31, 2020:
Financial assets:
Cash and cash equivalents	$	17,674,763	$	17,674,763	$	17,674,763	$	—	$	—
Held-to-maturity securities	16,592,153		17,216,871		—		17,216,871		—
Non-marketable securities not measured at net asset value	240,761		240,761		—		—		240,761
Non-marketable securities measured at net asset value	390,658		390,658		—		—		—
Net commercial loans	39,886,296		40,412,490		—		—		40,412,490
Net consumer loans	4,847,427		4,911,451		—		—		4,911,451
FHLB and Federal Reserve Bank stock	61,232		61,232		—		—		61,232
Financial liabilities:


Short-term borrowings	20,553		20,553		—		20,553		—
Non-maturity deposits (1)	101,293,346		101,293,346		101,293,346		—		—
Time deposits	688,461		501,853		—		501,853		—
3.50% Senior Notes	348,348		382,855		—		382,855		—
3.125% Senior Notes	495,280		563,840		—		563,840		—
Off-balance sheet financial assets:
Commitments to extend credit	—		36,672		—		—		36,672
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.

Investments in Entities that Calculate Net Asset Value Per Share

FASB guidance over certain fund investments requires that we disclose the fair value of funds, significant investment strategies of the investees, redemption features of the investees, restrictions on the ability to sell investments, estimate of the period of time over which the underlying assets are expected to be liquidated by the investee, and unfunded commitments related to the investments.

Our investments in debt funds and venture capital and private equity fund investments generally cannot be redeemed. Alternatively, we expect distributions, if any, to be received primarily through IPOs and M&A activity of the

underlying assets of the fund. Subject to applicable requirements under the Volcker Rule, we do not have any plans to sell any of these fund investments. If we decide to sell these investments in the future, the investee fund’s management must approve of the buyer before the sale of the investments can be completed. The fair values of the fund investments have been estimated using the net asset value per share of the investments, adjusted for any differences between our measurement date and the date of the fund investment’s net asset value by using the most recently available financial information from the investee general partner, for example September 30th, for our December 31st consolidated financial statements, adjusted for any contributions paid, distributions received from the investment, and significant fund transactions or market events during the reporting period.

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 December 31, 2020:


(Dollars in thousands)	Carrying Amount		Fair Value		Unfunded Commitments
Non-marketable securities (fair value accounting):
Venture capital and private equity fund investments (1)	$	273,823	$	273,823	$	12,709
Non-marketable securities (equity method accounting):
Venture capital and private equity fund investments (2)	362,192		362,192		10,509
Debt funds (2)	5,444		5,444		211
Other investments (2)	23,023		23,023		886
Total	$	664,482	$	664,482	$	24,315

(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 $66.2 million and $3.1 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.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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