Fair Value of Financial Instruments

3 Months Ended

Mar. 31, 2021

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

Fair Value of Financial Instruments

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 interim consolidated financial statements.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (the “exit price”) in an orderly transaction between market participants at the measurement date. There is a three-level hierarchy for disclosure of assets and liabilities recorded at fair value. The classification of assets and liabilities within the hierarchy is based on whether the inputs to the valuation methodology used for measurement are observable or unobservable and on the significance of those inputs in the fair value measurement. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect our estimates about market data and views of market participants. The three levels for measuring fair value are based on the reliability of inputs and are as follows:

Level 1

Fair value measurements based on quoted prices in active markets for identical assets or liabilities that we have the ability to access. Since valuations are based on quoted prices that are readily and regularly available in an active market, valuation of these instruments does not entail a significant degree of judgment. Assets utilizing Level 1 inputs include U.S. Treasury securities, foreign government debt securities, exchange-traded equity securities and certain marketable securities accounted for under fair value accounting.

Level 2

Fair value measurements based on quoted prices in markets that are not active or for which all significant inputs are observable, directly or indirectly. Valuations for the available-for-sale securities are provided by independent pricing service providers who have experience in valuing these securities and by comparison to and/or average of quoted market prices obtained from independent brokers. We perform a monthly analysis on the values received from third parties to ensure that the prices represent a reasonable estimate of the fair value. The procedures include, but are not limited to, initial and ongoing review of third-party pricing methodologies, review of pricing trends and monitoring of trading volumes. Additional corroboration, such as obtaining a non-binding price from a broker, may be obtained depending on the frequency of trades of the security and the level of liquidity or depth of the market. We ensure prices received from independent brokers represent a reasonable estimate of the fair value through the use of observable market inputs including comparable trades, yield curve, spreads and, when available, market indices. As a result of this analysis, if the Company determines that there is a more appropriate fair value based upon the available market data, the price received from the third party is adjusted accordingly. Below is a summary of the significant inputs used for each class of Level 2 assets and liabilities:

U.S. agency debentures: Fair value measurements of U.S. agency debentures are based on the characteristics specific to bonds held, such as issuer name, issuance date, coupon rate, maturity date and any applicable issuer call option features. Valuations are based on market spreads relative to similar term benchmark market interest rates, generally U.S. Treasury securities.

Agency-issued mortgage-backed securities: Agency-issued mortgage-backed securities are pools of individual conventional mortgage loans underwritten to U.S. agency standards with similar coupon rates, tenor, and other attributes such as geographic location, loan size and origination vintage. Fair value measurements of these securities are based on observable price adjustments relative to benchmark market interest rates taking into consideration estimated loan prepayment speeds.

Agency-issued collateralized mortgage obligations: Agency-issued collateralized mortgage obligations are structured into classes or tranches with defined cash flow characteristics and are collateralized by U.S. agency-issued mortgage pass-through securities. Fair value measurements of these securities incorporate similar characteristics of mortgage pass-through securities such as coupon rate, tenor, geographic location, loan size and origination vintage, in addition to incorporating the effect of estimated prepayment speeds on the cash flow structure of the class or tranche. These measurements incorporate observable market spreads over an estimated average life after considering the inputs listed above.

Agency-issued commercial mortgage-backed securities: Fair value measurements of these securities are based on spreads to benchmark market interest rates (usually U.S. Treasury rates or rates observable in the swaps market), prepayment speeds, loan default rate assumptions and loan loss severity assumptions on underlying loans.

Foreign exchange forward and option contract assets and liabilities: Fair value measurements of these assets and liabilities are priced based on spot and forward foreign currency rates and option volatility assumptions.

Interest rate derivative and interest rate swap assets and liabilities: Fair value measurements of interest rate derivatives and interest rate swaps are priced considering the coupon rate of the fixed leg of the contract and the variable coupon rate on the floating leg of the contract. Valuation is based on both spot and forward rates on the swap yield curve and the credit worthiness of the contract counterparty.

Other equity securities: Fair value measurements of equity securities of public companies are priced based on quoted market prices less a discount if the securities are subject to certain sales restrictions. Certain sales restriction discounts generally range from 10 percent to 20 percent depending on the duration of the sale restrictions which typically range from three to six months.

Equity warrant assets (public portfolio): Fair value measurements of equity warrant assets of publicly-traded portfolio companies are valued based on the Black-Scholes option pricing model. The model uses the price of publicly-traded companies (underlying stock price), stated strike prices, warrant expiration dates, the risk-free interest rate and market-observable option volatility assumptions.

Level 3

The fair value measurement is derived from valuation techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions we believe market participants would use in pricing the asset. The valuation techniques are consistent with the market approach, income approach and/or the cost approach used to measure fair value. Below is a summary of the valuation techniques used for each class of Level 3 assets:

Venture capital and private equity fund investments not measured at net asset value: Fair value measurements are based on consideration of a range of factors including, but not limited to, the price at which the investment was acquired, the term and nature of the investment, local market conditions, values for comparable securities, and as it relates to the private company, the current and projected operating performance, exit strategies and financing transactions subsequent to the acquisition of the investment. The significant unobservable inputs used in the fair value measurement include the information about each portfolio company, including actual and forecasted results, cash position, recent or planned transactions and market comparable companies. Significant changes to any one of these inputs in isolation could result in a significant change in the fair value measurement; however, we generally consider all factors available through ongoing communication with the portfolio companies and venture capital fund managers to determine whether there are changes to the portfolio company or the environment that indicate a change in the fair value measurement.

Equity warrant assets (public portfolio): Fair value measurements of equity warrant assets of publicly-traded portfolio companies are valued based on the Black-Scholes option pricing model. The model uses the price of publicly-traded companies (underlying stock price), stated strike prices, warrant expiration dates, the risk-free interest rate and market-observable option volatility assumptions. Modeled asset values are further adjusted by applying a discount of up to 20 percent for certain warrants that have certain sales restrictions or other features that indicate a discount to fair value is warranted. As sale restrictions are lifted, discounts are adjusted downward to zero once all restrictions expire or are removed.

Equity warrant assets (private portfolio): Fair value measurements of equity warrant assets of private portfolio companies are priced based on a Black-Scholes option pricing model to estimate the asset value by using stated strike prices, option expiration dates, risk-free interest rates and option volatility assumptions. Option volatility assumptions used in the Black-Scholes model are based on public market indices whose members operate in similar industries as companies in our private company portfolio. Option expiration dates are modified to account for estimates to actual life relative to stated expiration. Overall model asset values are further adjusted for a general lack of liquidity due to the private nature of the associated underlying company. There is a direct correlation between changes in the volatility and remaining life assumptions in isolation and the fair value measurement while there is an inverse correlation between changes in the liquidity discount assumption and the fair value measurement.

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 March 31, 2021:

(Dollars in thousands)	Level 1		Level 2		Level 3		Balance at March 31, 2021
Assets:
Available-for-sale securities:
U.S. Treasury securities	$	4,438,396	$	—	$	—	$	4,438,396
U.S. agency debentures	—		226,095		—		226,095
Foreign government debt securities	23,450		—		—		23,450
Residential mortgage-backed securities:
Agency-issued mortgage-backed securities	—		12,514,911		—		12,514,911
Agency-issued collateralized mortgage obligations—fixed rate	—		7,256,626		—		7,256,626
Agency-issued commercial mortgage-backed securities	—		1,526,993		—		1,526,993
Total available-for-sale securities	4,461,846		21,524,625		—		25,986,471
Non-marketable and other equity securities (fair value accounting):
Non-marketable securities:
Venture capital and private equity fund investments measured at net asset value	—		—		—		274,424
Other equity securities in public companies	38,253		122,557		—		160,810
Total non-marketable and other equity securities (fair value accounting)	38,253		122,557		—		435,234
Other assets:
Foreign exchange forward and option contracts	—		240,183		—		240,183
Equity warrant assets	—		10,952		233,382		244,334
Client interest rate derivatives	—		65,123		—		65,123
Total assets	$	4,500,099	$	21,963,440	$	233,382	$	26,971,345
Liabilities:
Foreign exchange forward and option contracts	$	—	$	202,532	$	—	$	202,532
Client interest rate derivatives	—		68,954		—		68,954
Total liabilities	$	—	$	271,486	$	—	$	271,486

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 table presents additional information about Level 3 assets measured at fair value on a recurring basis for the three months ended March 31, 2021 and 2020:

(Dollars in thousands)	Beginning Balance		Total Net Gains Included in Net Income		Purchases		Sales/Exits		Issuances		Other (3)		Transfers Out of Level 3		Ending Balance
Three months ended March 31, 2021
Other assets:
Equity warrant assets (1)	$	192,217	$	219,827	$	—	$	(181,413)	$	6,565	$	(39)	$	(3,775)	$	233,382
Total assets	$	192,217	$	219,827	$	—	$	(181,413)	$	6,565	$	(39)	$	(3,775)	$	233,382
Three months ended March 31, 2020
Non-marketable and other equity securities (fair value accounting):
Venture capital and private equity fund investments not measured at net asset value (2)	$	134	$	5	$	—	$	(5)	$	—	$	—	$	—	$	134
Other assets:
Equity warrant assets (1)	161,038		14,601		—		(30,034)		4,519		—		(266)		149,858
Total assets	$	161,172	$	14,606	$	—	$	(30,039)	$	4,519	$	—	$	(266)	$	149,992

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

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

(3)Foreign currency translation gains (losses) recorded in line item "Foreign currency translation gains (losses)", a component of other comprehensive income.

The following table presents the amount of net unrealized gains and losses included in earnings attributable to Level 3 assets still held at March 31, 2021 and 2020:

	Three months ended March 31,
(Dollars in thousands)	2021		2020
Other assets:
Equity warrant assets (1)	$	60,639	$	(4,145)
Total unrealized gains (losses), net	$	60,639	$	(4,145)

(1)Unrealized gains (losses) 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 March 31, 2021 and December 31, 2020. 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
March 31, 2021:
Equity warrant assets (public portfolio)	28	Black-Scholes option pricing model	Volatility	47.4%	47.4	%
			Risk-Free interest rate	0.9- 1.6	1.1
			Sales restrictions discount (2)	10.0	10.0
Equity warrant assets (private portfolio)	233,354	Black-Scholes option pricing model	Volatility	25.0 - 58.0	45.7
			Risk-Free interest rate	0.01 - 1.17	0.3
			Marketability discount (3)	21.7	21.7
			Remaining life assumption (4)	40.0	40.0
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 - 0.52	0.1
			Marketability discount (3)	20.63	20.6
			Remaining life assumption (4)	40.0	40.0

(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 March 31, 2021, the weighted average contractual remaining term was 6.6 years, compared to our estimated remaining life of 2.6 years. On a quarterly basis, a sensitivity analysis is performed on our remaining life assumption.

For the three months ended March 31, 2021 and 2020, we did not have any transfers between Level 3 and Level 1. All transfers from Level 3 to Level 2 for the three months ended March 31, 2021 and 2020 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 March 31, 2021 and December 31, 2020:

			Estimated Fair Value
(Dollars in thousands)	Carrying Amount		Total		Level 1		Level 2		Level 3
March 31, 2021:
Financial assets:
Cash and cash equivalents	$	21,254,859	$	21,254,859	$	21,254,859	$	—	$	—
Held-to-maturity securities	41,164,620		41,186,735		—		41,186,735		—
Non-marketable securities not measured at net asset value	379,224		379,224		—		—		379,224
Non-marketable securities measured at net asset value	426,306		426,306		—		—		—
Net commercial loans	42,264,653		43,438,142		—		—		43,438,142
Net consumer loans	5,018,762		5,158,216		—		—		5,158,216
FHLB and Federal Reserve Bank stock	83,355		83,355		—		—		83,355
Financial liabilities:
Short-term borrowings	38,434		38,434		—		38,434		—
Non-maturity deposits (1)	123,454,403		123,454,403		123,454,403		—		—
Time deposits	695,703		394,574		—		394,574		—
3.50% Senior Notes	348,441		378,242		—		378,242		—
3.125% Senior Notes	495,387		521,205		—		521,205		—
1.80% Senior Notes	494,355		463,625		—		463,625		—
Off-balance sheet financial assets:
Commitments to extend credit	—		39,003		—		—		39,003
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

(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 IPO 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 December 31st for our March 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 March 31, 2021:

(Dollars in thousands)	Carrying Amount		Fair Value		Unfunded Commitments
Non-marketable securities (fair value accounting):
Venture capital and private equity fund investments (1)	$	274,424	$	274,424	$	19,030
Non-marketable securities (equity method accounting):
Venture capital and private equity fund investments (2)	394,349		394,349		13,303
Debt funds (2)	5,813		5,813		211
Other investments (2)	26,144		26,144		886
Total	$	700,730	$	700,730	$	33,430

(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 $70.8 million and $3.0 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.