Derivative Instruments and Hedging Activities

9 Months Ended

Sep. 30, 2019

Summary of Derivative Instruments [Abstract]

Derivative Instruments and Hedging Activities

Note 8 - Derivative Instruments and Hedging Activities

Synovus utilizes derivative instruments to manage its exposure to various types of interest rate risk, exposures related to liquidity and credit risk, and to facilitate customer transactions. The primary types of derivative instruments utilized by Synovus consist of interest rate swaps, interest rate lock commitments made to prospective mortgage loan customers, commitments to sell fixed-rate mortgage loans, and foreign currency exchange forwards. Interest rate lock commitments represent derivative instruments since it is intended that such loans will be sold. Synovus is party to master netting arrangements with its dealer counterparties; however, Synovus does not offset assets and liabilities under these arrangements for financial statement presentation purposes.

Hedging Derivatives

Cash flow hedge relationships mitigate exposure to the variability of future cash flows or other forecasted transactions. Synovus has entered into interest rate swap contracts to manage overall cash flow changes related to interest rate risk exposure on index-based variable rate loans. The contracts effectively modify Synovus' exposure to interest rate risk by utilizing receive fixed/pay index-based variable rate interest rate swaps. At September 30, 2019, Synovus' cash flow hedges are all forward-starting with effective start dates during the second quarter of 2020.

For cash flow hedges, the effective and ineffective portions of the gain or loss related to the derivative instrument is initially reported as a component of other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings or when the hedge is terminated. As of September 30, 2019, the maximum length of time over which Synovus is hedging its exposure to the variability in future cash flows is through the second quarter of 2023. Synovus does not expect to reclassify amounts from accumulated other comprehensive income (loss) into interest income on cash flow hedges over the next twelve months.

For derivative instruments that are not designated as hedging instruments, changes in the fair value of the derivatives are recognized in earnings immediately.

Counterparty Credit Risk and Collateral

Entering into derivative contracts potentially exposes Synovus to the risk of counterparties’ failure to fulfill their legal obligations, including, but not limited to, potential amounts due or payable under each derivative contract. Notional principal amounts are often used to express the volume of these transactions, but the amounts potentially subject to credit risk are much smaller. Synovus assesses the credit risk of its dealer counterparties by regularly monitoring publicly available credit rating

information, evaluating other market indicators, and periodically reviewing detailed financials. Dealer collateral requirements are determined via risk-based policies and procedures and in accordance with existing agreements. Synovus seeks to minimize dealer credit risk by dealing with highly rated counterparties and by obtaining collateral for exposures above certain predetermined limits. Management closely monitors credit conditions within the customer swap portfolio, which management deems to be of higher risk than dealer counterparties. Collateral is secured at origination and credit-related fair value adjustments are recorded against the asset value of the derivative as deemed necessary based upon an analysis, which includes consideration of the current asset value of the swap, customer credit rating, collateral value, and customer standing with regards to its swap contractual obligations and other related matters. Such asset values fluctuate based upon changes in interest rates regardless of changes in notional amounts and changes in customer specific risk.

Collateral Requirements

Pursuant to the Dodd-Frank Act, certain derivative transactions have collateral requirements, both at the inception of the trade and as the value of each derivative position changes. As of September 30, 2019, collateral totaling $105.5 million was pledged to the derivative counterparties to comply with collateral requirements. For derivatives cleared through central clearing houses, the variation margin payments made are legally characterized as settlements of the derivatives. As a result, these variation margin payments are netted against the fair value of the respective derivative contracts in the balance sheet and related disclosures. At September 30, 2019 and December 31, 2018, Synovus had a variation margin of $141.1 million and $3.1 million respectively, each reducing the derivative liability.

The following table reflects the notional amount and fair value of derivative instruments included on the consolidated balance sheets.



	September 30, 2019						December 31, 2018
			Fair Value						Fair Value
(in thousands)	Notional Amount		Derivative Assets ⁽¹⁾		Derivative Liabilities ⁽²⁾		Notional Amount		Derivative Assets ⁽¹⁾		Derivative Liabilities ⁽²⁾
Derivatives in cash flow hedging relationships:
Interest rate contracts	$	1,000,000	$	915	$	2,097	—		$	—	$	—
Total derivatives designated as hedging instruments			$	915	$	2,097			$	—	$	—

Derivatives not designated as hedging instruments:
Interest rate contracts⁽³⁾	$	6,402,871	$	178,976	$	38,702	$	1,840,288	$	18,388	$	15,716
Mortgage derivatives - interest rate lock commitments	125,023		1,914		—		52,420		944		—
Mortgage derivatives - forward commitments to sell fixed-rate mortgage loans	161,500		—		407		65,500		—		819
Other contracts⁽⁴⁾	139,167		—		144		69,902		—		—
Visa derivative	—		—		3,335		—		—		1,673
Total derivatives not designated as hedging instruments			$	180,890	$	42,588			$	19,332	$	18,208

⁽¹⁾Derivative assets are recorded in other assets on the consolidated balance sheets.


⁽²⁾	Derivative liabilities are recorded in other liabilities on the consolidated balance sheets.


⁽³⁾	Includes interest rate contracts for customer swaps and offsetting positions, net of variation margin payments.


⁽⁴⁾	Includes risk participation agreements sold.

Synovus has entered into risk participation agreements with counterparties to transfer or assume credit exposures related to interest rate derivatives. The notional amounts of risk participation agreements sold were $139.2 million and $69.9 million at September 30, 2019 and December 31, 2018, respectively. The notional amount of risk participation agreements purchased was $3.1 million at September 30, 2019. Assuming all underlying third-party customers referenced in the swap contracts defaulted at September 30, 2019 and December 31, 2018, the exposure from these agreements would not be material based on the fair value of the underlying swaps.

Synovus also provides foreign currency exchange services, primarily forward contracts, with counterparties to allow commercial customers to mitigate exchange rate risk. Synovus covers its risk by entering into an offsetting foreign currency exchange forward contract. The notional amounts of foreign currency exchange forwards were $37.4 million and $28.8 million at

September 30, 2019 and December 31, 2018, respectively. The fair value of foreign currency exchange forwards was negligible at September 30, 2019 and December 31, 2018 due to the very short duration of these contracts.

The pre-tax effect of changes in fair value from derivative instruments not designated as hedging instruments on the consolidated statements of income for the three and nine months ended September 30, 2019 and 2018 is presented below.



		Gain (Loss) Recognized in Consolidated Statements of Income
		Three Months Ended September 30,						Nine Months Ended September 30,
(in thousands)	Location in Consolidated Statements of Income	2019			2018			2019			2018
Derivatives not designated as hedging instruments:
Interest rate contracts⁽¹⁾	Capital markets income	$	549		$	1		$	640		$	(8	)
Other contracts⁽²⁾	Capital markets income	(144		)	—			(144		)	—
Mortgage derivatives - interest rate lock commitments	Mortgage banking income	22			(427		)	970			(61		)
Mortgage derivatives - forward commitments to sell fixed-rate mortgage loans	Mortgage banking income	642			495			413			376
Visa derivative	Other non-interest expense	(2,500		)	—			(2,500		)	(2,328		)
Total derivatives not designated as hedging instruments		$	(1,431	)	$	69		$	(621	)	$	(2,021	)


⁽¹⁾	Gain (loss) represents net fair value adjustments (including credit-related adjustments and interest settlements on variation margin payments) for customer swaps and offsetting positions.

⁽²⁾

Includes risk participation agreements sold.