Fair Value of Financial Instruments

9 Months Ended

Sep. 30, 2022

Fair Value Disclosures [Abstract]

Fair Value of Financial Instruments

Fair Value of Financial Instruments

Fair Value Measurements

Our AFS 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, certain marketable securities accounted for under fair value accounting, and assets and liabilities related to the deferred compensation plan assumed during the merger with Boston Private.    

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 AFS securities are provided by independent pricing service providers who have experience in valuing these securities and are compared to the 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. Prices received from independent brokers represent a reasonable estimate of the fair value and are validated through the use of observable market inputs including comparable trades, yield curve, spreads and, when available, market indices. If we determine 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 MBS: Agency-issued MBS 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 CMO: Agency-issued CMO 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 CMBS: 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.

Derivative assets and liabilities: Fair value measurements of these assets and liabilities are priced based on the following:

•Foreign exchange forward and option contract 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 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.

•Total return swaps are based upon the performance of the reference asset, the variable coupon rate and spread of the floating leg of the contract.

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.

Contingent conversion rights (public portfolio): Fair value measurements of contingent conversion rights 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 conversion rights 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.

Contingent conversion rights (private portfolio): Fair value measurements are based on consideration of a range of factors including, but not limited to, actual and forecasted enterprise values, probability of conversion event occurring and limitations and conversion pricing outlined in the convertible debt agreement. Additionally, we have ongoing communication with the portfolio companies and relationship teams, 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.

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 September 30, 2022:

(Dollars in millions)	Level 1		Level 2		Level 3		Netting Adjustments (1)		Balance at September 30, 2022
Assets:
AFS securities:
U.S. Treasury securities	$	16,845	$	—	$	—	$	—	$	16,845
U.S. agency debentures	—		100		—		—		100
Foreign government debt securities	913		—		—		—		913
Residential MBS:
Agency-issued MBS	—		6,683		—		—		6,683
Agency-issued CMO—fixed rate	—		714		—		—		714
Agency-issued CMBS	—		1,456		—		—		1,456
Total AFS securities	17,758		8,953		—		—		26,711
Non-marketable and other equity securities (fair value accounting):
Non-marketable securities:
Venture capital and private equity fund investments measured at net asset value	—		—		—		—		270
Other equity securities in public companies	27		2		—		—		29
Total non-marketable and other equity securities (fair value accounting)	27		2		—		—		299
Other assets:
Derivative assets	—		804		—		(495)		309
Equity warrant assets	—		6		345		—		351
Contingent conversion rights	—		—		6		—		6
Other assets	4		—		—		—		4
Total assets	$	17,789	$	9,765	$	351	$	(495)	$	27,680
Liabilities:
Derivative liabilities	$	—	$	758	$	—	$	(234)	$	524
Other liabilities	4		—		—		—		4
Total liabilities	$	4	$	758	$	—	$	(234)	$	528

(1)Amounts represent the impact of legally enforceable master netting arrangements and also cash collateral held or placed with the same counterparties

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, 2021:

(Dollars in millions)	Level 1		Level 2		Level 3		Netting Adjustments (1) (2)		Balance at December 31, 2021
Assets:
AFS securities:
U.S. Treasury securities	$	15,850	$	—	$	—	$	—	$	15,850
U.S. agency debentures	—		196		—		—		196
Foreign government debt securities	61		—		—		—		61
Residential MBS:
Agency-issued MBS	—		8,589		—		—		8,589
Agency-issued CMO—fixed rate	—		982		—		—		982
Agency-issued CMBS	—		1,543		—		—		1,543
Total AFS securities	15,911		11,310		—		—		27,221
Non-marketable and other equity securities (fair value accounting):
Non-marketable securities:
Venture capital and private equity fund investments measured at net asset value	—		—		—		—		338
Other equity securities in public companies	43		74		—		—		117
Total non-marketable and other equity securities (fair value accounting)	43		74		—		—		455
Other assets:
Derivative assets (2)	—		288		—		(137)		151
Equity warrant assets	—		8		269		—		277
Other assets	8		—		—		—		8
Total assets	$	15,962	$	11,680	$	269	$	(137)	$	28,112
Liabilities:
Derivative liabilities (2)	$	—	$	238	$	—	$	(120)	$	118
Other liabilities	8		—		—		—		8
Total liabilities	$	8	$	238	$	—	$	(120)	$	126

The following table presents additional information about Level 3 assets measured at fair value on a recurring basis for the three and nine months ended September 30, 2022 and 2021:

(Dollars in millions)	Beginning Balance		Total Net Gains (Losses) Included in Net Income		Sales/Exits		Issuances		Transfers Out of Level 3		Ending Balance
Three months ended September 30, 2022
Equity warrant assets (1)	$	318	$	39	$	(21)	$	9	$	—	$	345
Contingent conversion rights (2)	6		—		—		—		—		6
Three months ended September 30, 2021
Equity warrant assets (1)	257		149		(146)		6		(1)		265
Nine months ended September 30, 2022
Equity warrant assets (1)	269		124		(67)		21		(2)		345
Contingent conversion rights (2)	—		(1)		—		7		—		6
Nine months ended September 30, 2021
Equity warrant assets (1)	192		490		(431)		18		(4)		265

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

(2)Unrealized gains and losses are recorded in the line item "Other noninterest income," a component of noninterest income.

The following table presents the amount of net unrealized gains and losses included in earnings attributable to Level 3 assets still held at September 30, 2022 and 2021:

	Three months ended September 30,				Nine months ended September 30,
(Dollars in millions)	2022		2021		2022		2021
Other assets:
Equity warrant assets (1)	$	26	$	21	$	84	$	113
Contingent conversion rights (2)	—		—		(1)		—
Total unrealized gains, net	$	26	$	21	$	83	$	113

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

(2)Unrealized gains and losses are recorded in the line item "Other noninterest income," 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 September 30, 2022 and December 31, 2021. 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 millions)	Fair value	Valuation Technique	Significant Unobservable Inputs	Input Range	Weighted  Average
September 30, 2022:
Equity warrant assets (private portfolio)	345	Black-Scholes option pricing model	Volatility	23.8 - 51.3	42.3
			Risk-Free interest rate	3.3 - 4.4	4.2
			Marketability discount (2)	17.1	17.1
			Remaining life assumption (3)	40.0	40.0
Contingent conversion rights (private portfolio)	6	Private company equity pricing	(4)	(4)	(4)
December 31, 2021:
Equity warrant assets (public portfolio)	2	Black-Scholes option pricing model	Volatility	27.8% - 55.0%	43.7	%
			Risk-Free interest rate	0.6- 1.5	1.1
			Sales restrictions discount (1)	10.0 - 20.0	10.7
Equity warrant assets (private portfolio)	267	Black-Scholes option pricing model	Volatility	24.7 - 55.0	43.0
			Risk-Free interest rate	0.06 - 1.40	0.8
			Marketability discount (2)	20.1	20.1
			Remaining life assumption (3)	40.0	40.0

    

(1)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.

(2)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.

(3)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 September 30, 2022, the weighted average contractual remaining term was 6.2 years, compared to our estimated remaining life of 2.5 years. On a quarterly basis, a sensitivity analysis is performed on our remaining life assumption.

(4)In determining the fair value of our private contingent conversion rights portfolio (not valued using the Black-Scholes model), we evaluate a variety of factors related to each underlying private portfolio company including, but not limited to, actual and forecasted enterprise values, the probability of a conversion event occurring and limitations and conversion pricing outlined in the convertible debt agreement. Additionally, we have ongoing communication with the portfolio companies and relationship teams, 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.

For the three and nine months ended September 30, 2022 and 2021, we did not have any transfers between Level 3 and Level 1. All transfers from Level 3 to Level 2 for the three and nine months ended September 30, 2022 and 2021 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 September 30, 2022 and December 31, 2021:

			Estimated Fair Value
(Dollars in millions)	Carrying Amount		Total		Level 1		Level 2		Level 3
September 30, 2022:
Financial assets:
Cash and cash equivalents	$	13,968	$	13,968	$	13,968	$	—	$	—
HTM securities	93,286		77,370		—		77,370		—
Non-marketable securities not measured at net asset value	431		431		—		—		431
Non-marketable securities measured at net asset value	660		660		—		—		—
Net loans	71,572		72,489		—		—		72,489
FHLB and Federal Reserve Bank stock	665		665		—		—		665
Financial liabilities:
Short-term borrowings	13,552		13,552		—		13,552		—
Non-maturity deposits (1)	171,545		171,545		171,545		—		—
Time deposits	5,274		4,916		—		4,916		—
3.50% Senior Notes	349		336		—		336		—
3.125% Senior Notes	496		407		—		407		—
1.800% Senior Notes due 2031	495		358		—		358		—
2.100% Senior Notes due 2028	496		408		—		408		—
1.800% Senior Notes due 2026	646		559		—		559		—
4.345% Senior Notes due 2028	348		327		—		327		—
4.570% Senior Notes due 2033	447		396		—		396		—
Junior subordinated debentures	91		91		—		91		—
Off-balance sheet financial assets:
Commitments to extend credit	—		49		—		—		49
December 31, 2021:
Financial assets:
Cash and cash equivalents	$	14,586	$	14,586	$	14,586	$	—	$	—
HTM securities	98,195		97,227		—		97,227		—
Non-marketable securities not measured at net asset value	424		424		—		—		424
Non-marketable securities measured at net asset value	710		710		—		—		—
Net loans	65,854		67,335		—		—		67,335
FHLB and Federal Reserve Bank stock	107		107		—		—		107
Financial liabilities:
Short-term borrowings	71		71		—		71		—
Non-maturity deposits (1)	187,464		187,464		187,464		—		—
Time deposits	1,739		1,728		—		1,728		—
3.50% Senior Notes	349		370		—		370		—
3.125% Senior Notes	496		526		—		526		—
1.800% Senior Notes due 2031	494		474		—		474		—
2.100% Senior Notes due 2028	496		501		—		501		—
1.800% Senior Notes due 2026	645		649		—		649		—
Junior subordinated debentures	90		92		—		92		—
Off-balance sheet financial assets:
Commitments to extend credit	—		47		—		—		47

(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 June 30th for our September 30th 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 September 30, 2022:

(Dollars in millions)	Carrying Amount		Fair Value		Unfunded Commitments
Non-marketable securities (fair value accounting):
Venture capital and private equity fund investments (1)	$	270	$	270	$	13
Non-marketable securities (equity method accounting):
Venture capital and private equity fund investments (2)	639		639		11
Debt funds (2)	4		4		—
Other investments (2)	17		17		1
Total	$	930	$	930	$	25

(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 $42 million and $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.