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Visa Shares and Litigation Expense
12 Months Ended
Dec. 31, 2012
Visa Shares and Litigation Expense [Abstract]  
Visa Shares and Litigation Expense
Visa Shares and Related Agreement
Synovus is a member of the Visa USA network and received shares of Visa Class B common stock in exchange for its membership interest in Visa USA in conjunction with the public offering by the Visa IPO in 2008. Visa members have indemnification obligations with respect to the Covered Litigation. Visa Class B shares are subject to certain restrictions until March 25, 2011 or settlement of the Covered Litigation. As of December 31, 2012, all of the Covered Litigation had not been settled. Visa has established a litigation escrow to fund settlement of the Covered Litigation. The litigation escrow is funded by proceeds from Visa's conversion of Class B shares.
The Visa IPO was completed in March 2008. Immediately following completion of the Visa IPO in March 2008, Visa redeemed a portion of the Class B shares of its common stock held by Visa members. Synovus recognized a pre-tax gain of $38.5 million on redemption of a portion of its Visa Class B shares. During 2008 and 2009, Synovus reduced its contingent liability for its indemnification obligation upon events of Visa's funding of the litigation escrow through conversion of Class B shares as described above.
In November 2009, Synovus sold its remaining Visa Class B shares to another Visa USA member financial institution for $51.9 million and recognized a gain on sale of $51.9 million. In conjunction with the sale, 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 fair value of the derivative liability of $3.0 million and $9.1 million, at December 31, 2012 and 2011, respectively, is based on an estimate of Visa's exposure to liability based upon probability-weighted potential outcomes of the Covered Litigation, and with respect to December 31, 2012 includes the present value of estimated future fees paid to the derivative counterparty, and the estimated impact of a ten bps decrease in credit interchange fees for an eight-month period beginning in mid-2013.
Synovus paid settlements of approximately $9.9 million and $888 thousand to the derivative counterparty in connection with conversion rate changes in February 2012 and August 2012, respectively. The conversion rate changed each of these times in connection with Visa's deposit of funds to the litigation escrow. For the year ended December 31, 2012, the $6.3 million indemnification charges included a $5.8 million increase in the fair value of the derivative liability and $466 thousand of fees payable to the derivative counterparty.
On July 13, 2012, Visa announced that it had signed a memorandum of understanding with the class plaintiffs in the multi-district interchange litigation, which obligated the parties to enter into a settlement agreement, and on October 19, 2012, Visa announced that a settlement agreement had been executed to resolve class plaintiff's claims. Among other things, the settlement agreement provides for settlement payments of approximately $6.6 billion, of which Visa's share will be approximately $4.4 billion, and further provides for distribution to class merchants of an amount equal to ten basis points of default interchange across all credit rate categories for a period of eight consecutive months, which otherwise would have been paid to card issuers and which effectively reduces credit interchange for that period of time. The eight month period would begin sixty days after completion of the court ordered period during which individual class members may opt out of the proposed settlement.
These announcements have been factored into the fair value determination as of December 31, 2012 using the probability model described in Note 16 - Fair Value Accounting. Management believes that the estimate of Synovus' exposure to the Visa indemnification and fees associated with the Visa Derivative is adequate based on current information, including Visa's recent announcements. However, future developments in the litigation could require potentially significant changes to Synovus' estimate.