Derivative Instruments

12 Months Ended

Dec. 31, 2012

Summary of Derivative Instruments [Abstract]

Derivative Instruments

Derivative Instruments

As part of its overall interest rate risk management activities, Synovus utilizes derivative instruments to manage its exposure to various types of interest rate risk. These derivative instruments generally consist of interest rate swaps, interest rate lock commitments made to prospective mortgage loan customers, and commitments to sell fixed-rate mortgage loans. Interest rate lock commitments represent derivative instruments since it is intended that such loans will be sold.

From time to time, Synovus utilizes interest rate swaps to manage interest rate risks primarily arising from its core banking activities. These interest rate swap transactions generally involve the exchange of fixed and floating interest rate payment obligations without the exchange of underlying principal amounts. Swaps may be designated as either cash flow hedges or fair value hedges, as discussed below. As of December 31, 2012 and 2011, Synovus had no outstanding interest rate swap contracts utilized to manage interest rate risk.

Cash Flow Hedges

Synovus designates hedges of floating rate loans as cash flow hedges. These swaps hedge against the variability of cash flows from specified pools of floating rate prime based loans. Synovus calculates effectiveness of the hedging relationship quarterly using regression analysis. The effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income and reclassified into earnings in the same period or periods during which the hedged transactions affect earnings. Ineffectiveness from cash flow hedges is recognized in the consolidated statements of operations as a component of other non-interest income. As of December 31, 2012, there were no cash flow hedges outstanding, and therefore, no cumulative ineffectiveness.

Synovus expects to reclassify from accumulated other comprehensive income (loss) $(447) thousand to pre-tax income during the next year as amortization of deferred gains (losses) are recorded.

Synovus did not terminate any cash flow hedges during 2012 or 2011. The remaining unamortized deferred loss balance of all previously terminated cash flow hedges at December 31, 2012 and 2011 was $2.0 million and $630 thousand, respectively.

Fair Value Hedges

Synovus designates hedges of fixed rate liabilities as fair value hedges. These swaps hedge against the change in fair value of various fixed rate liabilities due to changes in the benchmark interest rate, LIBOR. Synovus calculates effectiveness of the fair value hedges quarterly using regression analysis. As of December 31, 2012 and 2011, there were no fair value hedges outstanding, and therefore, no cumulative ineffectiveness. Ineffectiveness from fair value hedges is recognized in the consolidated statements of operations as a component of other non-interest income.

Synovus did not terminate any fair value hedges during 2012 or 2011. The remaining unamortized deferred gain balance on all previously terminated fair value hedges at December 31, 2012 and 2011 was $13.9 million and $21.2 million, respectively.

Customer Related Derivative Positions

Synovus also enters into derivative financial instruments to meet the financing and interest rate risk management needs of its customers. Upon entering into these instruments to meet customer needs, Synovus enters into offsetting positions in order to minimize the interest rate risk. These derivative financial instruments are recorded at fair value with any resulting gain or loss recorded in current period earnings. As of December 31, 2012, the notional amount of customer related interest rate derivative financial instruments, including both the customer position and the offsetting position, was $1.10 billion and $1.50 billion, respectively.

Visa Derivative

In conjunction with the sale of Class B shares of common stock issued by Visa to Synovus as a Visa USA member, Synovus entered into a derivative contract with the purchaser, which provides for settlements between the parties based upon a change in the ratio for conversion of Visa Class B shares to Visa Class A shares. The conversion ratio changes when Visa deposits funds to a litigation escrow established by Visa to pay settlements for certain litigation, which Visa is indemnified by Visa USA members. The litigation escrow is funded by proceeds from Visa’s conversion of Class B shares. The fair value of the derivative liability is based on an estimate of Synovus’ membership proportion of Visa’s aggregate exposure to the Covered Litigation, or in effect,the future cumulative deposits to the litigation escrow for settlement of the Covered Litigation, and estimated future monthly fees payable to the derivative counterparty. See "Part II - Item 8. Financial Statements and Supplementary Data - Note 19 - Visa Shares and Related Agreement" of this Report for further information.

Mortgage Derivatives

Synovus originates first lien residential mortgage loans for sale into the secondary market and generally does not hold the originated loans for investment purposes. Mortgage loans are sold by Synovus for conversion to securities and the servicing of these loans is generally sold to a third-party servicing aggregator, or Synovus sells the mortgage loans as whole loans to investors either individually or in bulk on a servicing released basis.

At December 31, 2012 and 2011, Synovus had agreements to fund at a locked interest rate, primarily fixed-rate mortgage loans to customers in the amount of $158.0 million and $115.5 million, respectively. The fair value of these rate lock commitments at December 31, 2012 and 2011, resulted in an unrealized net gain of $2.8 million and $1.9 million, respectively, which was recorded as a component of mortgage banking income in the consolidated statements of operations.

At December 31, 2012 and 2011, outstanding commitments to sell primarily fixed-rate mortgage loans amounted to $231.5 million and $202.5 million, respectively. Such commitments are entered into to reduce the exposure to market risk arising from potential changes in interest rates, which could affect the fair value of mortgage loans held for sale and outstanding rate lock commitments, which guarantee a certain interest rate if the loan is ultimately funded or granted by the Bank as a mortgage loan held for sale. The commitments to sell mortgage loans are at fixed prices and are scheduled to settle at specified dates that generally do not exceed 90 days. The fair value of outstanding commitments to sell mortgage loans at December 31, 2012 and 2011 resulted in an unrealized loss of $525 thousand and $1.9 million, respectively, which was recorded as a component of mortgage banking income in the consolidated statements of operations.

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 and other market indicators. 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 Contingencies

Certain derivative instruments contain provisions that require Synovus to maintain an investment grade credit rating from each of the major credit rating agencies. When Synovus’ credit rating falls below investment grade, these provisions allow the counterparties of the derivative instrument to demand immediate and ongoing full collateralization on derivative instruments in net liability positions and, for certain counterparties, request immediate termination. As Synovus’ current rating is below investment grade, Synovus is required to post collateral, as required by each agreement, against these positions. As of December 31, 2012, collateral totaling $110.0 million, consisting of cash and short-term investments, has been pledged to the derivative counterparties to comply with collateral requirements.

The impact of derivative instruments on the consolidated balance sheets at December 31, 2012 and 2011 is presented below.

	Fair Value of Derivative Assets				Fair Value of Derivative Liabilities
		December 31,				December 31,
(in thousands)	Location on Consolidated Balance Sheet	2012		2011	Location on Consolidated Balance Sheet	2012	2011
Derivatives Not Designated   as Hedging Instruments
Interest rate contracts	Other assets	$	61,869	83,072	Other liabilities	62,912	85,534
Mortgage derivatives	Other assets	2,793		1,851	Other liabilities	525	1,947
Visa Derivative		—		—	Other liabilities	2,956	9,093
Total derivatives		$	64,662	84,923		66,393	96,574

The effect of the amortization of the termination of cash flow hedges on the consolidated statements of operations for the years ended December 31, 2012, 2011 and 2010 is presented below.

								Location of
	Amount of Gain							Gain (Loss)	Amount of Gain
	(Loss) Recognized in							Reclassified	(Loss) Reclassified				Location of	Amount of Gain (Loss)
	OCI on Derivative							from OCI	from OCI into Income				Gain (Loss)	Recognized in Income
	Effective Portion							into	Effective Portion				Recognized	Ineffective Portion
	Twelve Months Ended							Income	Twelve Months Ended				in Income	Twelve Months Ended
	December 31,							Effective	December 31,				Ineffective	December 31,
(in thousands)	2012			2011		2010		Portion	2012		2011	2010	Portion	2012		2011	2010
Interest rate contracts	$	(204	)	(4,203	)	(6,003	)	Interest Income (Expense)	$	646	7,112	14,446	Other Non-interest Income	$	—	—	(14	)

The effect of fair value hedges on the consolidated statements of operations for the years ended December 31, 2012, 2011 and 2010 is presented below.

	Derivative							Hedged Item
	Location of	Amount of Gain (Loss)							Amount of Gain (Loss)
	Gain (Loss)	Recognized in Income on						Location of	Recognized in Income On
	Recognized	Derivative						Gain (Loss)	Hedged Item
	in Income	Twelve Months Ended						Recognized in	Twelve Months Ended
	on	December 31,						Income on	December 31,
(in thousands)	Derivative	2012		2011		2010		Hedged Item	2012		2011	2010
Derivatives Designated in Fair Value Hedging Relationships
Interest rate contracts(1)	Other Non-  Interest Income	$	—	—		(991	)	Other Non- Interest Income	$	—	—	972
Total		$	—	—		(991	)		$	—	—	972
Derivatives Not Designated as Hedging Instruments
Interest rate contracts(2)	Other Non-  Interest Income (Expense)	$	1,419	(819	)	(6,902	)
Mortgage derivatives(3)	Mortgage Banking Income	$	2,364	393		(2,565	)
Total		$	3,783	(426	)	(9,467	)
Total derivatives		$	3,783	(426	)	(10,458	)		—		—	972

⁽¹⁾ Gain (loss) represents fair value adjustments recorded for fair value hedges designated in hedging relationships and related hedged items.

⁽²⁾ Gain (loss) represents net fair value adjustments (including credit related adjustments) for customer swaps and offsetting positions.

⁽³⁾ Gain (loss) represents net fair value adjustments recorded for interest rate lock commitments and commitments to sell mortgage loans to third party investors.