Derivative Financial Instruments

9 Months Ended

Sep. 30, 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 September 30, 2020, the total unrealized gains on terminated cash flow hedges remaining in AOCI is $195.0 million, $141.0 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 five 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" under Part II, Item 8 of our 2019 Form 10-K.

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 September 30, 2020 and December 31, 2019 were as follows:


	September 30, 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	462,765		4,083		—		—		—		—
Foreign exchange forwards	59,992		—		278		300,250		—		2,154
Other derivative instruments:
Equity warrant assets	256,774		202,184		—		225,893		165,473		—
Client foreign exchange forwards	6,955,487		138,522		—		4,661,517		114,546		—
Client foreign exchange forwards	5,754,213		—		108,959		4,326,059		—		94,745
Client foreign currency options	111,107		2,986		—		154,985		1,308		—
Client foreign currency options	111,107		—		2,986		154,985		—		1,308
Client interest rate derivatives	916,573		79,270		—		1,275,190		28,811		—
Client interest rate derivatives (2)	1,048,715		—		25,558		1,372,914		—		14,154
Total derivatives not designated as hedging instruments			427,045		137,781				310,138		112,361
Total derivatives			$	427,045	$	137,781			$	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 $59.2 million and $17.4 million of derivative liabilities at September 30, 2020 and December 31, 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 the three and nine months ended September 30, 2020 and 2019 is as follows:


		Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands)	Statement of income location	2020		2019		2020		2019
Derivatives designated as hedging instruments:
Interest rate risks:
Amounts reclassified from accumulated other comprehensive income into income	Interest income - loans	$	16,004	$	(2,713)	$	33,924	$	(3,224)
Derivatives not designated as hedging instruments:
Currency exchange risks:
Gains (losses) on revaluations of internal foreign currency instruments, net	Other noninterest income	$	17,085	$	(8,724)	$	20,138	$	(5,183)
(Losses) gains on internal foreign exchange forward contracts, net	Other noninterest income	(19,344)		8,660		(20,010)		4,917
Net (losses) gains associated with internal currency risk		$	(2,259)	$	(64)	$	128	$	(266)
Other derivative instruments:
Gains (losses) on revaluations of client foreign currency instruments, net	Other noninterest income	$	71	$	(2,181)	$	(3,302)	$	(14,793)
Gains on client foreign exchange forward contracts, net	Other noninterest income	1,641		2,167		2,582		15,232
Net gains (losses) associated with client currency risk		$	1,712	$	(14)	$	(720)	$	439
Net gains on equity warrant assets	Gains on equity warrant assets, net	$	53,766	$	37,561	$	93,667	$	107,213
Net gains (losses) on other derivatives	Other noninterest income	$	31,151	$	(1,123)	$	26,533	$	(2,619)

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 September 30, 2020 and December 31, 2019:


	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
(Dollars in thousands)							Financial Instruments		Cash Collateral Received (1)
September 30, 2020
Derivative assets:
Interest rate swaps	$	—	$	—	$	—	$	—	$	—	$	—
Foreign exchange forwards	142,605		—		142,605		(56,584)		(19,049)		66,972
Foreign currency options	2,986		—		2,986		(2,323)		(19)		644
Client interest rate derivatives	79,270		—		79,270		(79,270)		—		—
Total derivative assets	224,861		—		224,861		(138,177)		(19,068)		67,616
Reverse repurchase, securities borrowing, and similar arrangements	450,164		—		450,164		(450,164)		—		—
Total	$	675,025	$	—	$	675,025	$	(588,341)	$	(19,068)	$	67,616
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 September 30, 2020 and December 31, 2019:


	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
(Dollars in thousands)							Financial Instruments		Cash Collateral Pledged (1)
September 30, 2020
Derivative liabilities:
Interest rate swaps	$	—	$	—	$	—	$	—	$	—	$	—
Foreign exchange forwards	109,237		—		109,237		(49,862)		(12,918)		46,457
Foreign currency options	2,986		—		2,986		(644)		—		2,342
Client interest rate derivatives	25,558		—		25,558		—		(24,898)		660
Total derivative liabilities	137,781		—		137,781		(50,506)		(37,816)		49,459
Repurchase, securities lending, and similar arrangements	—		—		—		—		—		—
Total	$	137,781	$	—	$	137,781	$	(50,506)	$	(37,816)	$	49,459
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.