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Fair Value Accounting

9 Months Ended

Sep. 30, 2020

Note 7 - Fair Value Accounting

Fair value accounting guidance defines fair value as the exchange price that would be received to sell an asset or paid to transfer a liability (an "exit price") in the principal or most advantageous market available to the entity in an orderly transaction between market participants, on the measurement date. See "Part II - Item 8. Financial Statements and Supplementary Data - Note 1 - Summary of Significant Accounting Policies" of Synovus' 2019 Form 10-K for a description of how fair value measurements are determined.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present all financial instruments measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019.


	September 30, 2020
(in thousands)	Level 1		Level 2		Level 3		Total Assets and Liabilities at Fair Value
Assets
Trading securities:
Mortgage-backed securities issued by U.S. Government agencies	$	—	$	18	$	—	$	18
Collateralized mortgage obligations issued by U.S. Government sponsored enterprises	—		604		—		604
Other mortgage-backed securities	—		673		—		673
State and municipal securities	—		579		—		579
Asset-backed securities	—		2,497		—		2,497
Total trading securities	$	—	$	4,371	$	—	$	4,371
Investment securities available for sale:
U.S. Treasury securities	$	20,254	$	—	$	—	$	20,254
U.S. Government agency securities	—		156,614		—		156,614
Mortgage-backed securities issued by U.S. Government agencies	—		1,129,392		—		1,129,392
Mortgage-backed securities issued by U.S. Government sponsored enterprises	—		4,540,386		—		4,540,386
Collateralized mortgage obligations issued by U.S. Government agencies or sponsored enterprises	—		1,345,284		—		1,345,284
Commercial mortgage-backed securities issued by U.S. Government agencies or sponsored enterprises	—		354,157		—		354,157
State and municipal securities	—		501		—		501
Corporate debt securities and other debt securities	—		18,137		1,800		19,937
Total investment securities available for sale	$	20,254	$	7,544,471	$	1,800	$	7,566,525
Mortgage loans held for sale	—		285,899		—		285,899
Private equity investments	—		—		958		958
Mutual funds and mutual funds held in rabbi trusts	35,174		—		—		35,174
GGL/SBA loans servicing asset	—		—		3,100		3,100
Derivative assets	—		463,028		—		463,028
Liabilities
Earnout liability	$	—	$	—	$	15,924	$	15,924
Derivative liabilities	—		178,508		1,460		179,968



	December 31, 2019
(in thousands)	Level 1		Level 2		Level 3		Total Assets and Liabilities at Fair Value
Assets
Trading securities:
Collateralized mortgage obligations issued by U.S. Government sponsored enterprises	$	—	$	2,486	$	—	$	2,486
Other mortgage-backed securities	—		1,284		—		1,284
State and municipal securities	—		65		—		65
Asset-backed securities	—		3,227		—		3,227
Other investments	—		150		—		150
Total trading securities	$	—	$	7,212	$	—	$	7,212
Investment securities available for sale:
U.S. Treasury securities	$	19,855	$	—	$	—	$	19,855
U.S. Government agency securities	—		36,541		—		36,541
Mortgage-backed securities issued by U.S. Government agencies	—		56,816		—		56,816
Mortgage-backed securities issued by U.S. Government sponsored enterprises	—		5,180,815		—		5,180,815
Collateralized mortgage obligations issued by U.S. Government agencies or sponsored enterprises	—		636,851		—		636,851
Commercial mortgage-backed securities issued by U.S. Government agencies or sponsored enterprises	—		371,592		—		371,592
State and municipal securities	—		2,075		—		2,075
Asset-backed securities	—		327,400		—		327,400
Corporate debt securities and other debt securities	—		144,620		2,105		146,725
Total investment securities available for sale	$	19,855	$	6,756,710	$	2,105	$	6,778,670
Mortgage loans held for sale	—		115,173		—		115,173
Private equity investments	15,502		—		3,887		19,389
Mutual funds and mutual funds held in rabbi trusts	32,348		—		—		32,348
GGL/SBA loans servicing asset	—		—		3,040		3,040
Derivative assets	—		140,016		—		140,016
Liabilities
Trading liability for short positions	$	1,560	$	—	$	—	$	1,560
Earnout liability	—		—		11,016		11,016
Derivative liabilities	—		34,732		2,339		37,071

Fair Value Option

Synovus has elected the fair value option for mortgage loans held for sale primarily to ease the operational burden required to maintain hedge accounting for these loans. Synovus is still able to achieve effective economic hedges on mortgage loans held for sale without the time and expense needed to manage a hedge accounting program.

The following table summarizes the difference between the fair value and the UPB of mortgage loans held for sale and the changes in fair value of these loans. An immaterial portion of these changes in fair value was attributable to changes in instrument-specific credit risk.


Mortgage Loans Held for Sale
(in thousands)	As of September 30, 2020		As of December 31, 2019
Fair value	$	285,899	$	115,173
Unpaid principal balance	276,709		112,218
Fair value less aggregate unpaid principal balance	$	9,190	$	2,955


Changes in Fair Value Included in Net Income
	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Mortgage loans held for sale	$	251	$	892	$	6,235	$	1,593

Fair Value Measurements Using Significant Unobservable Inputs (Level 3)

During the three and nine months ended September 30, 2020, Synovus did not have any transfers in or out of Level 3 in the fair value hierarchy. During the nine months ended September 30, 2019, Synovus had transfers out of Level 3 into Level 1 in the fair value hierarchy as certain funds within private equity investments became public with traded securities.


	Three Months Ended September 30, 2020
(in thousands)	Investment Securities Available for Sale		Private Equity Investments		GGL / SBA Loans Servicing Asset		Earnout Liability		Visa Derivative
Beginning balance, July 1, 2020	$	1,662	$	698	$	3,019	$	(15,924)	$	(1,755)
Total gains (losses) realized/unrealized:
Included in earnings	—		260		(187)		—		—
Unrealized gains (losses) included in OCI	138		—		—		—		—
Additions	—		—		268		—		—
Settlements	—		—		—		—		295
Ending balance, September 30, 2020	$	1,800	$	958	$	3,100	$	(15,924)	$	(1,460)
Total net gains (losses) for the period included in earnings attributable to the change in unrealized gains/(losses) relating to assets/liabilities still held at September 30, 2020	$	—	$	260	$	—	$	—	$	—

	Three Months Ended September 30, 2019
(in thousands)	Investment Securities Available for Sale		Private Equity Investments		GGL / SBA Loans Servicing Asset		Earnout Liability		Visa Derivative
Beginning balance, July 1, 2019	$	2,017	$	13,341	$	3,326	$	(14,353)	$	(1,049)
Total gains (losses) realized/unrealized:
Included in earnings	—		1,194		(298)		(10,457)		(2,500)
Unrealized gains (losses) included in OCI	(26)		—		—		—		—
Additions	—		—		322		—		—
Settlements	—		(3,246)		—		—		214
Ending balance, September 30, 2019	$	1,991	$	11,289	$	3,350	$	(24,810)	$	(3,335)
Total net gains (losses) for the period included in earnings attributable to the change in unrealized gains/(losses) relating to assets/liabilities still held at September 30, 2019	$	—	$	777	$	—	$	(10,457)	$	(2,500)



	Nine Months Ended September 30, 2020
(in thousands)	Investment Securities Available for Sale		Private Equity Investments		GGL / SBA Loans Servicing Asset		Earnout Liability		Visa Derivative
Beginning balance, January 1, 2020	$	2,105	$	3,887	$	3,040	$	(11,016)	$	(2,339)
Total gains (losses) realized/unrealized:
Included in earnings			(2,929)		(742)		(4,908)		—
Unrealized gains (losses) included in OCI	(305)		—		—		—		—
Additions	—		—		802		—		—
Settlements	—		—		—		—		879
Ending balance, September 30, 2020	$	1,800	$	958	$	3,100	$	(15,924)	$	(1,460)
Total net gains (losses) for the period included in earnings attributable to the change in unrealized gains/(losses) relating to assets/liabilities still held at September 30, 2020	$	—	$	(2,929)	$	—	$	(4,908)	$	—

	Nine Months Ended September 30, 2019
(in thousands)	Investment Securities Available for Sale		Private Equity Investments		GGL / SBA Loans Servicing Asset		Earnout Liability		Visa Derivative
Beginning balance, January 1, 2019	$	1,785	$	11,028	$	3,729	$	(14,353)	$	(1,673)
Total (losses) gains realized/unrealized:
Included in earnings	—		3,507		(1,091)		(10,457)		(2,500)
Unrealized gains (losses) included in OCI	206		—		—		—		—
Additions	—		—		712		—		—
Settlements	—		(3,246)		—		—		838
Ending balance, September 30, 2019	$	1,991	$	11,289	$	3,350	$	(24,810)	$	(3,335)
Total net gains (losses) for the period included in earnings attributable to the change in unrealized losses relating to assets/liabilities still held at September 30, 2019	$	—	$	3,090	$	—	$	(10,457)	$	(2,500)

The table below provides an overview of the valuation techniques and significant unobservable inputs used in those techniques to measure financial instruments that are classified within Level 3 of the valuation hierarchy and are measured at fair value on a recurring basis. The range of sensitivities that management utilized in its fair value calculations is deemed acceptable in the industry with respect to the identified financial instruments.

September 30, 2020

(dollars in thousands)

Valuation Technique

Significant Unobservable Input

Level 3 Fair Value

Rate/Range

Assets measured at fair value on a recurring basis

Investment Securities Available for Sale -
Corporate debt and other debt securities - trust preferred security

Discounted cash flow analysis

Discount rate
Forecasted average Prime reset rate

$1,800

5.83% 3.79%

Private equity investments

Individual analysis of each investee company

Multiple factors, including but not limited to, current operations, financial condition, cash flows, evaluation of business management and financial plans, and recently executed financing transactions related to the investee companies

$958

N/A

GGL/SBA loans servicing asset

Discounted cash flow analysis

Discount rate
Prepayment speeds

$3,100

9.68% 19.20%

Earnout liability

Option pricing methods and Monte Carlo simulation

Financial projections of Global One

$15,924

N/A

Visa derivative liability

Discounted cash flow analysis

Estimated timing of resolution of Covered Litigation and future cumulative deposits to the litigation escrow for settlement of the Covered Litigation

$1,460

0-1.2 years

(4Q 2021)

Assets Measured at Fair Value on a Non-recurring Basis

Certain assets are required to be measured at fair value on a nonrecurring basis subsequent to their initial recognition. These assets and liabilities are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The following table presents assets measured at fair value on a non-recurring basis as of the dates indicated for which there was a fair value adjustment.


	September 30, 2020								December 31, 2019
(in thousands)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Loans(1)	$	—	$	—	$	27,440	$	27,440	$	—	$	—	$	1,461	$	1,461
Other real estate	—		—		1,750		1,750		—		—		8,023		8,023
MPS receivable	—		—		17,915		17,915		—		—		21,437		21,437
Other assets held for sale	—		—		1,634		1,634		—		—		1,238		1,238

(1) Collateral-dependent loans that were written down to fair value of collateral.

ORE properties are included in other assets on the consolidated balance sheets. The carrying value of ORE at September 30, 2020 and December 31, 2019 was $5.4 million and $14.4 million, respectively.

The following table presents fair value adjustments recognized in earnings for the three and nine months ended September 30, 2020 and 2019 for assets measured at fair value on a non-recurring basis still held at period-end.


	Three Months Ended September 30,				Nine Months Ended September 30,
(in thousands)	2020		2019		2020		2019
Loans(1)	$	5,661	$	4,170	$	20,412	$	4,718
Other real estate	107		74		138		569
MPS receivable	—		—		2,663		—
Other assets held for sale	—		—		2,120		91

(1) Collateral-dependent loans that were written down to fair value of collateral.

September 30, 2020

Valuation Technique

Significant Unobservable Input

Range

(Weighted Average)(1)

Assets measured at fair value on a non-recurring basis

Loans

Third-party appraised value of collateral less estimated selling costs

Discount to appraised value
Estimated selling costs

0%-36% (28%) 0%-10% (7%)

Other real estate

Third-party appraised value of real estate less estimated selling costs

Discount to appraised value
Estimated selling costs

0%-20% (10%) 0%-10% (7%)

MPS receivable(2)

Third-party appraised value of business less estimated selling costs

Discount to appraised value
Estimated selling costs

N/A

Other assets held for sale

Third-party appraised value less estimated selling costs or BOV

Discount to appraised value
Estimated selling costs

0%-66% (53%) 0%-10% (7%)

(1) The weighted average is the measure of central tendencies; it is not the value that management is using for the asset or liability.

(2) See "Part I - Item 1. Notes to Unaudited Interim Financial Statements - Note 10 - Commitments and Contingencies" of this Report for more information on this receivable which was classified as a NPA at September 30, 2020 and December 31, 2019.

Fair Value of Financial Instruments

The following tables present the carrying and estimated fair values of financial instruments at September 30, 2020 and December 31, 2019. The fair values represent management’s best estimates based on a range of methodologies and assumptions. See "Part II - Item 8. Financial Statements and Supplementary Data - Note 1 - Summary of Significant Accounting Policies" to the consolidated financial statements of Synovus' 2019 Form 10-K for a description of how fair value measurements are determined.


	September 30, 2020
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial assets
Total cash, cash equivalents, restricted cash, and restricted cash equivalents	$	1,985,363	$	1,985,363	$	1,985,363	$	—	$	—
Trading securities	4,371		4,371		—		4,371		—
Investment securities available for sale	7,566,525		7,566,525		20,254		7,544,471		1,800
Loans held for sale	745,160		744,615		—		285,899		458,716
Private equity investments	958		958		—		—		958
Mutual funds and mutual funds held in rabbi trusts	35,174		35,174		35,174		—		—
Loans, net	38,946,047		38,923,265		—		—		38,923,265
GGL/SBA loans servicing asset	3,100		3,100		—		—		3,100
Derivative assets	463,028		463,028		—		463,028		—
Financial liabilities
Non-interest-bearing deposits	$	13,075,081	$	13,075,081	$	—	$	13,075,081	$	—
Non-time interest-bearing deposits	24,831,480		24,831,480		—		24,831,480		—
Time deposits	6,759,343		6,797,139		—		6,797,139		—
Total deposits	$	44,665,904	$	44,703,700	$	—	$	44,703,700	$	—
Federal funds purchased and securities sold under repurchase agreements	202,344		202,344		202,344		—		—
Other short-term borrowings	400,000		400,000		—		400,000		—
Long-term debt	1,628,385		1,687,448		—		1,687,448		—
Earnout liability	15,924		15,924		—		—		15,924
Derivative liabilities	179,968		179,968		—		178,508		1,460


	December 31, 2019
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial assets
Total cash, cash equivalents, restricted cash, and restricted cash equivalents	$	1,186,918	$	1,186,918	$	1,186,918	$	—	$	—
Trading securities	7,212		7,212		—		7,212		—
Investment securities available for sale	6,778,670		6,778,670		19,855		6,756,710		2,105
Mortgage loans held for sale	115,173		115,173		—		115,173		—
Private equity investments	19,389		19,389		15,502		—		3,887
Mutual funds and mutual funds held in rabbi trusts	32,348		32,348		32,348		—		—
Loans, net	36,881,048		36,931,256		—		—		36,931,256
GGL/SBA loans servicing asset	3,040		3,040		—		—		3,040
Derivative assets	140,016		140,016		—		140,016		—

Financial liabilities
Non-interest-bearing deposits	$	9,439,485	$	9,439,485	$	—	$	9,439,485	$	—
Non-time interest-bearing deposits	19,891,711		19,891,711		—		19,891,711		—
Time deposits	9,074,308		9,112,459		—		9,112,459		—
Total deposits	$	38,405,504	$	38,443,655	$	—	$	38,443,655	$	—
Federal funds purchased and securities sold under repurchase agreements	165,690		165,690		165,690		—		—
Trading liability for short positions	1,560		1,560		1,560		—		—
Other short-term borrowings	1,752,000		1,752,000		—		1,752,000		—
Long-term debt	2,153,897		2,185,717		—		2,185,717		—
Earnout liability	11,016		11,016		—		—		11,016
Derivative liabilities	37,071		37,071		—		34,732		2,339

- 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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