XML 91 R24.htm IDEA: XBRL DOCUMENT v2.4.0.8
Fair Value Accounting
12 Months Ended
Dec. 31, 2013
Fair Value Disclosures [Abstract]  
Fair Value Accounting
Note 16 - Fair Value Accounting
Synovus carries various assets and liabilities at fair value based on the fair value accounting guidance under ASC 820 and ASC 825. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an “exit price”) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
Synovus has implemented controls and processes for the determination of the fair value of financial instruments. The ultimate responsibility for the determination of fair value rests with Synovus. Synovus has established a process that has been designed to ensure there is an independent review and validation of fair values by a function independent of those entering into the transaction. This includes specific controls to ensure consistent pricing policies and procedures that incorporate verification for both market and derivative transactions. For all financial instruments where fair values are determined by reference to externally quoted prices or observable pricing inputs to models, independent price determination or validation is utilized. Where the market for a financial instrument is not active, fair value is determined using a valuation technique or pricing model. These valuation techniques and models involve a degree of estimation, the extent of which depends on each instrument's complexity and the availability of market-based data.
The most frequently applied pricing model and valuation technique utilized by Synovus is the discounted cash flow model. Discounted cash flows determine the value by estimating the expected future cash flows from assets or liabilities discounted to their present value. Synovus may also use a relative value model to determine the fair value of a financial instrument based on the market prices of similar assets or liabilities or an option pricing model such as binomial pricing that includes probability-based techniques. Assumptions and inputs used in valuation techniques and models include benchmark interest rates, credit spreads and other inputs used in estimating discount rates, bond and equity prices, price volatilities and correlations, prepayment rates, probability of default, and loss severity upon default.
Synovus refines and modifies its valuation techniques as markets develop and as pricing for individual financial instruments become more or less readily available. While Synovus believes its valuation techniques are appropriate and consistent with other market participants, the use of different methodologies or assumptions could result in different estimates of fair value at the balance sheet date. In order to determine the fair value, where appropriate, management applies valuation adjustments to the pricing information. These adjustments reflect management's assessment of factors that market participants would consider in setting a price, to the extent that these factors have not already been included in the pricing information. Furthermore, on an ongoing basis, management assesses the appropriateness of any model used. To the extent that the price provided by internal models does not represent the fair value of the financial instrument, management makes adjustments to the model valuation to calibrate it to other available pricing sources. Where unobservable inputs are used, management may determine a range of possible valuations based upon differing stress scenarios to determine the sensitivity associated with the valuation. As a final step, management considers the need for further adjustments to the modeled price to reflect how market participants would price the financial instrument.
Fair Value Hierarchy
Synovus determines the fair value of its financial instruments based on the fair value hierarchy established under ASC 820-10, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. A financial instrument’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the financial instrument's fair value measurement in its entirety. There are three levels of inputs that may be used to measure fair value. The three levels of inputs of the valuation hierarchy are defined below:
Level 1
Quoted prices (unadjusted) in active markets for identical assets and liabilities for the instrument or security to be valued. Level 1 assets include marketable equity securities as well as U.S. Treasury securities that are highly liquid and are actively traded in over-the-counter markets.
Level 2
Observable inputs other than Level 1 quoted prices, such as quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or model-based valuation techniques for which all significant assumptions are derived principally from or corroborated by observable market data. Level 2 assets and liabilities include debt securities with quoted prices that are traded less frequently than exchange-traded instruments and derivative contracts whose value is determined by using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data. U.S. Government sponsored agency securities, mortgage-backed securities issued by U.S. Government sponsored enterprises and agencies, obligations of states and municipalities, collateralized mortgage obligations issued by U.S. Government sponsored enterprises, and mortgage loans held-for-sale are generally included in this category. Certain private equity investments that invest in publicly traded companies are also considered Level 2 assets.
Level 3
Unobservable inputs that are supported by little, if any, market activity for the asset or liability. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow models and similar techniques, and may also include the use of market prices of assets or liabilities that are not directly comparable to the subject asset or liability. These methods of valuation may result in a significant portion of the fair value being derived from unobservable assumptions that reflect Synovus' own estimates for assumptions that market participants would use in pricing the asset or liability. This category primarily includes collateral-dependent impaired loans, other real estate, certain equity investments, and certain private equity investments.
Fair Value Option
Synovus has elected the fair value option for mortgage loans held for sale primarily to ease the operational burdens 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 operational time and expense needed to manage a hedge accounting program.
Valuation Methodology by Product
Following is a description of the valuation methodologies used for the major categories of financial assets and liabilities measured at fair value.
Trading Account Assets and Investment Securities Available for Sale
The fair values of trading securities and investment securities available for sale are primarily based on actively traded markets where prices are based on either quoted market prices or observed transactions. Management employs independent third-party pricing services to provide fair value estimates for Synovus' investment securities available for sale and trading securities. Fair values for fixed income investment securities are typically determined based upon quoted market prices, broker/dealer quotations for identical or similar securities, and/or inputs that are observable in the market, either directly or indirectly, for substantially similar securities. Level 1 securities are typically exchange quoted prices and include financial instruments such as U.S. Treasury securities, equity securities, and mutual fund investments. Level 2 securities are typically matrix priced by the third-party pricing service to calculate the fair value. Such fair value measurements consider observable data such as relevant broker/dealer quotes, market spreads, cash flows, yield curves, live trading levels, trade execution data, market consensus prepayments speeds, credit information, and the respective terms and conditions for debt instruments. The types of securities classified as Level 2 within the valuation hierarchy primarily consist of collateralized mortgage obligations, mortgage-backed securities, debt securities of U.S. Government-sponsored enterprises and agencies, corporate debt, and state and municipal securities.
When there is limited activity or less transparency around inputs to valuation, Synovus develops valuations based on assumptions that are not readily observable in the marketplace; these securities are classified as Level 3 within the valuation hierarchy. The majority of the balance of Level 3 investment securities available for sale consists primarily of trust preferred securities issued by financial institutions. Synovus also carries non-marketable common equity securities within this category. Synovus accounts for the non-marketable common equity securities in accordance with ASC 325-20, which requires these investments to be carried at cost. To determine the fair value of the trust preferred securities, management uses a measurement technique to reflect one that utilizes credit spreads and/or credit indices available from a third-party pricing service.  In addition, for each trust preferred security, management projects non-credit adjusted cash flows, and discounts those cash flows to net present value incorporating a relevant credit spread in the discount rate.  Other inputs to calculating fair value include potential discounts for lack of marketability.
Management uses various validation procedures to confirm the prices received from pricing services and quotations received from dealers are reasonable. Such validation procedures include reference to relevant broker/dealer quotes or other market quotes and a review of valuations and trade activity of comparable securities. Consideration is given to the nature of the quotes (e.g., indicative or firm) and the relationship of recently evidenced market activity to the prices provided by the third-party pricing service. Further, management also employs the services of an additional independent pricing firm as a means to verify and confirm the fair values of the primary independent pricing firms.
Mortgage Loans Held for Sale
Synovus elected to apply the fair value option for mortgage loans originated with the intent to sell to investors. When quoted market prices are not available, fair value is derived from a hypothetical bulk sale model used to estimate the exit price of the loans in a loan sale. The bid pricing convention is used for loan pricing for similar assets. The valuation model is based upon forward settlements of a pool of loans of identical coupon, maturity, product, and credit attributes. The inputs to the model are continuously updated with available market and historical data. As the loans are sold in the secondary market and predominantly used as collateral for securitizations, the valuation model represents the highest and best use of the loans in Synovus’ principal market. Mortgage loans held for sale are classified within Level 2 of the valuation hierarchy.
Private Equity Investments
Private equity investments consist primarily of equity method investments in venture capital funds, which are primarily classified as Level 3 within the valuation hierarchy. The valuation of these investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. Based on these factors, the ultimate realizable value of these investments could differ significantly from the value reflected in the accompanying audited consolidated financial statements. For ownership in publicly traded companies held in the funds, valuation is based on the closing market price at the balance sheet date, and the valuation of marketable securities that have market restrictions is discounted until the securities can be freely traded. The private equity investments in which Synovus holds a limited partner interest consist of funds that invest in privately held companies. For privately held companies in the funds, the general partner estimates the fair value of the company in accordance with GAAP, as clarified by ASC 820, and guidance specific to investment companies. The estimated fair value of the company is the estimated fair value as an exit price the fund would receive if it were to sell the company in the marketplace. The fair value of the fund's underlying investments is estimated through the use of valuation models such as option pricing or a discounted cash flow model. Valuation factors, such as a company's operational performance against budget or milestones, last price paid by investors, with consideration given on whether financing is provided by insiders or unrelated new investors, public market comparables, liquidity of the market, industry and economic trends, and change of management or key personnel, are used in the determination of fair value.
Also, Synovus holds an interest in an investment fund that invests in publicly traded financial services companies. Although the fund holds investments in publicly traded entities, the fair value of this investment is classified as Level 2 in the valuation hierarchy because there is no actively traded market for the fund itself, and the value of the investment is based on the aggregate fair value of the publicly traded companies that are held in the fund for investment.
Investments Held in Rabbi Trusts
The investments held in Rabbi Trusts primarily include mutual funds that invest in equity and fixed income securities. Shares of mutual funds are valued based on quoted market prices, and are therefore, classified within Level 1 of the fair value hierarchy.
Salary Stock Units
Salary stock units represent fully vested stock awards that have been granted to certain key employees of Synovus. The salary stock units are classified as liabilities and are settled in cash, as determined by the closing Common Stock price on the date of settlement and the number of salary stock units being settled. Accordingly, salary stock units are classified as Level 1 within the fair value hierarchy.
Derivative Assets and Liabilities
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. With the exception of one derivative contract discussed herein, Synovus' derivative financial instruments are all Level 2 financial instruments. The majority of derivatives entered into by Synovus are executed over-the-counter and consist of interest rate swaps. The fair values of these derivative instruments are determined based on an internally developed model that uses readily observable market data, as quoted market prices are not available for these instruments. The valuation models and inputs depend on the type of derivative and the nature of the underlying instrument, and include interest rates, prices and indices to generate continuous yield or pricing curves, volatility factors, and customer credit related adjustments. The principal techniques used to model the value of these instruments are an income approach, discounted cash flows, Black-Scholes or binomial pricing models. The sale of TBA mortgage-backed securities for current month delivery or in the future and the purchase of option contracts of similar duration are derivatives utilized by Synovus’ mortgage banking subsidiary, and are valued by obtaining prices directly from dealers in the form of quotes for identical securities or options using a bid pricing convention with a spread between bid and offer quotations. Interest rate swaps, floors, caps and collars, and TBA mortgage-backed securities are classified as Level 2 within the valuation hierarchy.
Synovus' mortgage banking subsidiary enters into interest rate lock commitments related to expected funding of residential mortgage loans at specified times in the future. Interest rate lock commitments that relate to the origination of mortgage loans that will be held-for-sale are considered derivative instruments under applicable accounting guidance. As such, Synovus records its interest rate lock commitments and forward loan sales commitments at fair value, determined as the amount that would be required to settle each of these derivative financial instruments at the balance sheet date. In the normal course of business, the mortgage subsidiary enters into contractual interest rate lock commitments to extend credit, if approved, at a fixed interest rate and with fixed expiration dates. The commitments become effective when the borrowers "lock-in" a specified interest rate within the time frames established by the mortgage banking subsidiary. Market risk arises if interest rates move adversely between the time of the interest rate lock by the borrower and the sale date of the loan to an investor. To mitigate the effect of the interest rate risk inherent in providing interest rate lock commitments to borrowers, the mortgage banking subsidiary enters into best efforts forward sales contracts with third-party investors. The forward sales contracts lock in a price for the sale of loans similar to the specific interest rate lock commitments. Both the interest rate lock commitments to the borrowers and the forward sales contracts to the investors that extend through to the date the loan may close are derivatives, and accordingly, are marked to fair value through earnings. In estimating the fair value of an interest rate lock commitment, Synovus assigns a probability to the interest rate lock commitment based on an expectation that it will be exercised and the loan will be funded. The fair value of the interest rate lock commitment is derived from the fair value of related mortgage loans, which is based on observable market data and includes the expected net future cash flows related to servicing of the loans. The fair value of the interest rate lock commitment is also derived from inputs that include guarantee fees negotiated with the agencies and private investors, buy-up and buy-down values provided by the agencies and private investors, and interest rate spreads for the difference between retail and wholesale mortgage rates. Management also applies fall-out ratio assumptions for those interest rate lock commitments for which we do not close a mortgage loan. The fall-out ratio assumptions are based on the mortgage subsidiary's historical experience, conversion ratios for similar loan commitments, and market conditions. While fall-out tendencies are not exact predictions of which loans will or will not close, historical performance review of loan-level data provides the basis for determining the appropriate hedge ratios. In addition, on a periodic basis, the mortgage banking subsidiary performs analysis of actual rate lock fall-out experience to determine the sensitivity of the mortgage pipeline to interest rate changes from the date of the commitment through loan origination, and then period end, using applicable published mortgage-backed investment security prices. The expected fall-out ratios (or conversely the "pull-through" percentages) are applied to the determined fair value of the unclosed mortgage pipeline in accordance with GAAP. Changes to the fair value of interest rate lock commitments are recognized based on interest rate changes, changes in the probability that the commitment will be exercised, and the passage of time. The fair value of the forward sales contracts to investors considers the market price movement of the same type of security between the trade date and the balance sheet date. These instruments are classified as Level 2 within the valuation hierarchy.
In November 2009, Synovus sold certain Visa Class B shares to another Visa USA member financial institution. The sales price was based on the Visa stock conversion ratio in effect at the time for conversion of Visa Class B shares to Visa Class A unrestricted shares at a future date. In conjunction with the sale, Synovus entered into a derivative contract with the purchaser (the Visa derivative), 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 Visa derivative is determined based on management's estimate of the timing and amount of the Covered Litigation settlement and the resulting payments due to the counterparty under the terms of the contract. Since this estimation process requires application of judgment in developing significant unobservable inputs used to determine the fair value of the Visa derivative, this derivative has been classified as Level 3 within the valuation hierarchy. See "Part II - Item 8. Financial Statements and Supplementary Data - Note 19 - Visa Shares and Related Agreements" of this Report for additional discussion on the Visa derivative and related litigation.

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table presents all financial instruments measured at fair value on a recurring basis as of December 31, 2013 and 2012, according to the valuation hierarchy included in ASC 820-10. For equity and debt securities, class was determined based on the nature and risks of the investments. Transfers between levels for the years ended December 31, 2013 and 2012 were inconsequential.
 
December 31, 2013
(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    
$

 
2,465

 

 
2,465

State and municipal securities

 
429

 

 
429

  All other residential mortgage-backed
  securities    

 
968

 

 
968

Other investments

 
2,251

 

 
2,251

Total trading securities

 
6,113

 

 
6,113

Mortgage loans held for sale

 
45,384

 

 
45,384

Investment securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
17,791

 

 

 
17,791

U.S. Government agency securities

 
34,641

 

 
34,641

Securities issued by U.S. Government sponsored enterprises

 
113,745

 

 
113,745

Mortgage-backed securities issued by U.S. Government agencies

 
195,117

 

 
195,117

Mortgage-backed securities issued by U.S. Government sponsored enterprises

 
2,421,360

 

 
2,421,360

Collateralized mortgage obligations issued by U.S. Government agencies or sponsored enterprises

 
398,540

 

 
398,540

State and municipal securities

 
6,889

 

 
6,889

Equity securities
6,956

 

 
628

 
7,584

  Other investments(1)    
1,969

 

 
1,722

 
3,691

Total investment securities available for sale
26,716

 
3,170,292

 
2,350

 
3,199,358

Private equity investments

 
1,615

 
27,745

 
29,360

Mutual funds held in Rabbi Trusts
11,246

 

 

 
11,246

Derivative assets:
 
 
 
 
 
 
 
Interest rate contracts

 
38,482

 

 
38,482

Mortgage derivatives(2)

 
1,522

 

 
1,522

Total derivative assets

 
40,004

 

 
40,004

Liabilities
 
 
 
 
 
 
 
Trading account liabilities

 
1,763

 

 
1,763

Salary stock units
1,764

 

 

 
1,764

Derivative liabilities:
 
 
 
 
 
 
 
Interest rate contracts

 
39,436

 

 
39,436

Visa Derivative

 

 
2,706

 
2,706

Total derivative liabilities
$

 
39,436

 
2,706

 
42,142

 
 
 
 
 
 
 
 
 
December 31, 2012
(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
$

 
2,171

 

 
2,171

Collateralized mortgage obligations issued by U.S. Government sponsored enterprises

 
4,875

 

 
4,875

State and municipal securities

 
451

 

 
451

All other residential mortgage-backed securities

 
1,159

 

 
1,159

Other investments

 
2,446

 

 
2,446

Total trading securities

 
11,102

 

 
11,102

Mortgage loans held for sale

 
212,663

 

 
212,663

Investment securities available for sale:
 
 
 
 
 
 
 
U.S. Treasury securities
356

 

 

 
356

U.S. Government agency securities

 
38,046

 

 
38,046

Securities issued by U.S. Government sponsored enterprises

 
293,310

 

 
293,310

Mortgage-backed securities issued by U.S. Government agencies

 
245,593

 

 
245,593

Mortgage-backed securities issued by U.S. Government sponsored enterprises

 
1,867,493

 

 
1,867,493

Collateralized mortgage obligations issued by U.S. Government agencies or sponsored enterprises

 
514,489

 

 
514,489

State and municipal securities

 
15,798

 

 
15,798

Equity securities
2,849

 

 
891

 
3,740

  Other investments(1)    

 

 
2,287

 
2,287

Total investment securities available for sale
3,205

 
2,974,729

 
3,178

 
2,981,112

Private equity investments

 
1,168

 
30,708

 
31,876

Mutual funds held in Rabbi Trusts
10,001

 

 

 
10,001

Derivative assets:
 
 
 
 
 
 
 
Interest rate contracts

 
61,869

 

 
61,869

Mortgage derivatives (2)

 
2,793

 

 
2,793

Total derivative assets

 
64,662

 

 
64,662

Liabilities
 
 
 
 
 
 
 
Trading account liabilities

 
91

 

 
91

Salary stock units
1,888

 

 

 
1,888

Derivative liabilities:
 
 
 
 
 
 
 
Interest rate contracts

 
62,912

 

 
62,912

Mortgage derivatives (2)

 
525

 

 
525

Visa Derivative

 

 
2,956

 
2,956

Total derivative liabilities
$

 
63,437

 
2,956

 
66,393

 
 
 
 
 
 
 
 

(1) Based on an analysis of the nature and risks of these investments, Synovus has determined that presenting these investments as a single asset class is appropriate.
(2) Mortgage derivatives consist of customer interest rate lock commitments that relate to the potential origination of mortgage loans, which would be classified as held for sale and forward loan sales commitments with third-party investors.

Fair Value Option
The following table summarizes the difference between the fair value and the unpaid principal balance of mortgage loans held for sale measured at fair value and the changes in fair value of these loans. Mortgage loans held for sale are initially measured at fair value with subsequent changes in fair value recognized in earnings. Changes in fair value were recorded as a component of mortgage banking income and other non-interest income in the consolidated statements of income, as appropriate. An immaterial portion of these changes in fair value were attributable to changes in instrument-specific credit risk.
 
Twelve Months Ended December 31,
(in thousands)
2013
 
2012
 
2011
Changes in fair value included in net income:
 
 
 
 
 
Mortgage loans held for sale
$
(5,566
)
 
1,813

 
5,185

Mortgage loans held for sale:
 
 
 
 
 
Fair value
45,384

 
212,663

 
161,509

Unpaid principal balance
44,943

 
206,657

 
157,316

Fair value less aggregate unpaid principal balance
$
441

 
6,006

 
4,193

 
 
 
 
 
 

Changes in Level 3 Fair Value Measurements
As noted above, Synovus uses significant unobservable inputs (Level 3) in determining the fair value of assets and liabilities classified as Level 3 in the fair value hierarchy. The table below includes a roll-forward of the amounts on the consolidated balance sheet for the year ended December 31, 2013 and 2012 (including the change in fair value), for financial instruments of a material nature that are classified by Synovus within Level 3 of the fair value hierarchy and are measured at fair value on a recurring basis. Transfers between fair value levels are recognized at the end of the reporting period in which the associated changes in inputs occur. During 2013, Synovus did not have any material transfers between levels in the fair value hierarchy. During the first quarter of 2012, Synovus transferred the mortgage derivative asset, which consists of interest rate lock commitments totaling $1.9 million, from Level 3 to Level 2 within the fair value hierarchy, reflecting increased transparency of the inputs used to value these financial instruments, which are based on the mortgage banking subsidiary's historical experience, conversion ratios for similar loan commitments, market conditions and other observable inputs, instead of previously used external industry data. Additionally, during the first quarter of 2012, Synovus transferred assets totaling $501 thousand that were classified as a Level 3 equity security to other assets to more accurately reflect the financial characteristics of the financial instruments.
 
2013
(in thousands)
Investment Securities Available for Sale
 
 Private Equity Investments
 
Other Derivative
Contracts
Beginning balance, January 1,
$
3,178

 
30,708

 
(2,956
)
Total gains (losses) realized/unrealized:
 
 
 
 
 
Included in earnings(1)    
(264
)
 
(2,963
)
 
(1,600
)
Unrealized gains (losses) included in other comprehensive income
436

 

 

Purchases

 




Sales

 

 

Issuances

 

 

Settlements
(1,000
)
 

 
1,850

Amortization of discount/premium

 

 

Transfers in and/or out of Level 3

 

 

Ending balance, December 31,
$
2,350

 
27,745

 
(2,706
)
The amount of total net gains (losses) for the year included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at December 31,
$
(264
)
 
(2,963
)
 
(1,600
)
 
 
 
 
 
 
 
2012
(in thousands)
Investment Securities Available for Sale
 
 Private Equity Investments
 
Other Derivative
Contracts, Net(3)
Beginning balance, January 1,
$
6,842

 
21,418

 
(7,242
)
Total gains (losses) realized/unrealized:
 
 
 
 
 
Included in earnings(1)    
(450
)
 
8,233

 
(6,304
)
Unrealized gains (losses) included in other comprehensive income
(713
)
 

 

Purchases

 
1,057

(2 
) 

Sales

 

 

Issuances

 

 

Settlements
(2,000
)
 

 
12,441

Amortization of discount/premium

 

 

Transfers in and/or out of Level 3
(501
)
 

 
(1,851
)
Ending balance, December 31,
$
3,178

 
30,708

 
(2,956
)
The amount of total net gains (losses) for the year included in earnings attributable to the change in unrealized gains (losses) relating to assets still held at December 31,
$
(450
)
 
8,233

 
(6,304
)
 
 
 
 
 
 
(1) Included in earnings as a component of other non-interest income(expense).
(2) Represents additional capital contributed to a private equity investment fund for capital calls. There are no such calls outstanding as of December 31, 2013.
(3) Other derivative contracts include the Visa Derivative and the mortgage derivatives for the year ended December 31, 2012.
Assets Measured at Fair Value on a Non-recurring Basis
From time to time, certain assets may be recorded at fair value on a non-recurring basis. These non-recurring fair value adjustments typically are a result of the application of lower of cost or fair value accounting or a write-down occurring during the period. For example, if the fair value of an asset in these categories falls below its cost basis, it is considered to be at fair value at the end of the period of the adjustment. 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 during the period, according to the valuation hierarchy included in ASC 820-10.


As of December 31, 2013
 
Fair Value Adjustments for the Year Ended December 31, 2013
(in thousands)
Level 1
 
Level 2
 
Level 3
 
Impaired loans*
$

 

 
$
170,693

 
29,132

Other loans held for sale

 

 
9,670

 
5,988

Other real estate

 

 
50,070

 
10,431

Other assets held for sale

 

 
4,945

 
2,294

 
 
 
 
 
 
 
 
 
As of December 31, 2012
 
Fair Value Adjustments for the Year Ended December 31, 2012
 
Level 1
 
Level 2
 
Level 3
 
Impaired loans*
$

 

 
$
80,299

 
52,916

Other loans held for sale

 

 
7,420

 
5,144

Other real estate

 

 
79,293

 
22,615

Other assets held for sale

 

 
5,804

 
2,425

 
 
 
 
 
 
 
 
*Impaired loans that are collateral-dependent.
Collateral dependent impaired loans are evaluated for impairment in accordance with the provisions of ASC 310-10-35 using the fair value of the collateral less costs to sell. For loans measured using the estimated fair value of collateral securing these loans less costs to sell, fair value is generally determined based upon appraisals performed by a certified or licensed appraiser using inputs such as absorption rates, capitalization rates, and market comparables, adjusted for estimated selling costs. Management also considers other factors or recent developments, such as changes in absorption rates or market conditions from the time of valuation, and anticipated sales values considering management's plans for disposition, which could result in adjustments to the collateral value estimates indicated in the appraisals. Estimated costs to sell are based on actual amounts for similar assets. These measurements are classified as Level 3 within the valuation hierarchy. Collateral dependent impaired loans are reviewed and evaluated on at least a quarterly basis for additional impairment and adjusted accordingly based on the same factors identified above.
Loans are transferred to other loans held for sale at fair value when Synovus makes the determination to sell specifically identified loans. The fair value of the loans is primarily determined by analyzing the underlying collateral of the loan and the anticipated market prices of similar assets less estimated costs to sell, as well as consideration of the market for loan sales versus the sale of collateral. At the time of transfer, if the fair value is less than the carrying amount, the difference is recorded as a charge-off against the allowance for loan losses. Decreases in the fair value subsequent to the transfer, as well as gains/losses realized from sale of these loans, are recognized as gains/losses on other loans held for sale, net, as a component of non-interest expense on the consolidated statements of income.
ORE consists of properties obtained through a foreclosure proceeding or through an in-substance foreclosure in satisfaction of loans. The fair value of ORE is determined on the basis of current appraisals, comparable sales, and other estimates of fair value obtained principally from independent sources, adjusted for estimated selling costs. At foreclosure, ORE is recorded at the lower of cost or fair value less the estimated cost to sell, which establishes a new cost basis. Subsequent to foreclosure, ORE is evaluated quarterly and reported at fair value less estimated costs to sell, not to exceed the new cost basis, determined on the basis of current appraisals, comparable sales, and other estimates of fair value obtained principally from independent sources, adjusted for estimated selling costs. In the determination of fair value subsequent to foreclosure, management also considers other factors or recent developments, such as changes in absorption rates or market conditions from the time of valuation, and anticipated sales values considering management’s plans for disposition, which could result in an adjustment to lower the fair value estimates indicated in the appraisals. Internally adjusted valuations are considered Level 3 measurements as management uses assumptions that may not be observable in the market.

Other assets held for sale consist of certain premises and equipment held for sale, including those related to the efficiency initiatives discussed in "Note 3 - Restructuring Charges" of this Report. These assets are classified as held for sale and recorded at the lower of their amortized cost or fair value, less costs to sell, consistent with ASC 360-10. The fair value of these assets is determined primarily on the basis of appraisals or BOV, as circumstances warrant, adjusted for estimated selling costs. Both techniques engage licensed or certified professionals that use inputs such as absorption rates, capitalization rates, and market comparables; these valuations are considered Level 3 measurements since assumptions or inputs may not be observable in the market.
Quantitative Information about Level 3 Fair Value Measurements
The tables below provide 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. 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. The tables below present both the total balance as of the dates indicated for assets measured at fair value on a recurring basis and the assets measured at fair value on a non-recurring basis for which there was a fair value adjustment during the period, according to the valuation hierarchy included in ASC 820-10.
December 31, 2013
(dollars in thousands)
 
Level 3 Fair Value
 
Valuation Technique
Significant Unobservable Input
Range (Weighted Average)(1)
Assets measured at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
Investment Securities Available for Sale
 
 
 
 
Equity securities
 
$
628

 
Individual analysis of each investment
Multiple data points, including, but not limited to evaluation of past and projected business performance
N/A(4)
 
 
 
 
 
 
 
Other investments:
 
 
 
 
 
 
 
 
 
 
 
Trust preferred securities
 
1,722

 
Discounted cash flow analysis
Credit spread embedded in discount rate
400-480 bps (441 bps)
 
 
 
 
 
Discount for lack of marketability(2)
0%-10% (0%)
 
 
 
 
 
 
 
Private equity investments
 
27,745

 
Individual analysis of each investee company
Multiple factors, including but not limited to, current operations, financial conditions, cash flows, evaluation of business management and financial plans, and recently executed financing transactions related to the investee companies (2)  
N/A
 
 
 
 
 
 
 
Visa derivative liability
 
$
2,706

 
Internal valuation
Estimated future cumulative deposits to the litigation escrow for settlement of the Covered Litigation, and estimated future monthly fees payable to the derivative counterparty
$400 thousand to $2.7 million ($2.7 million)
 
 
 
 
 
 
 



December 31, 2013
(dollars in thousands)
 
Level 3 Fair Value
 
Valuation Technique
Significant Unobservable Input
Range
(Weighted Average)(1)
Assets measured at fair value on a non-recurring basis
 
 
Collateral dependent impaired loans
 
$
170,693

 
Third-party appraised value of collateral less estimated selling costs
Discount to appraised value (3)
Estimated selling costs
0%-65% (25%) 0%-10% (7%)
 
 
 
 
 
 
 
Other loans held for sale
 
9,670

 
Third-party appraised value of collateral less estimated selling costs
Discount to appraised value (3)
Estimated selling costs
18%-93% (70%) 0%-10% (7%)
 
 
 
 
 
 
 
Other real estate
 
50,070

 
Third-party appraised value of collateral less estimated selling costs
Discount to appraised value (3)
Estimated selling costs
0%-85% (25%) 0%-10% (7%)
 
 
 
 
 
 
 
Other assets held for sale
 
$
4,945

 
Third-party appraised value of collateral less estimated selling costs or BOV
Discount to appraised value (3)
Estimated selling costs
5%-36% (20%) 0%-10% (7%)
(1) The range represents management's best estimate of the high and low of the value that would be assigned to a particular input. The weighted average is the measure of central tendencies; it is the value that management is using for the asset or liability.
(2) Represents management's estimate of discount that market participants would require based on the instrument's lack of liquidity.
(3) Synovus also makes adjustments to the values of the assets listed above for various reasons, including age of the appraisal, information known by management about the property, such as occupancy rates, changes to the physical conditions of the property, and other factors.
(4) The range has not been disclosed due to the wide range of possible values given the methodology used.
December 31, 2012
(dollars in thousands)
 
Level 3 Fair Value
 
Valuation Technique
Significant Unobservable Input
Range (Weighted Average)(1)
Assets measured at fair value on a recurring basis
 
 
 
 
 
 
 
 
 
Investment Securities Available for Sale
 
 
 
 
Equity securities
 
$
891

 
Individual analysis of each investment
Multiple data points, including, but not limited to evaluation of past and projected business performance
N/A(4)
 
 
 
 
 
 
 
Other investments:
 
 
 
 
 
 
 
 
 
 
 
Trust preferred securities
 
2,287

 
Discounted cash flow analysis
Credit spread embedded in discount rate
425-650 bps (571 bps)
 
 
 
 
 
Discount for lack of marketability(2)
0%-10% (0%)
 
 
 
 
 
 
 
Private equity investments
 
30,708

 
Individual analysis of each investee company
Multiple factors, including but not limited to, current operations, financial conditions, cash flows, evaluation of business management and financial plans, and recently executed financing transactions related to the investee companies (2)  
N/A
 
 
 
 
 
 
 
Visa derivative liability
 
$
2,956

 
Internal valuation
Estimated future cumulative deposits to the litigation escrow for settlement of the Covered Litigation, and estimated future monthly fees payable to the derivative counterparty
$400 thousand to $3.0 million ($3.0 million)
 
 
 
 
 
 
 
December 31, 2012
(dollars in thousands)
 
Level 3 Fair Value
 
Valuation Technique
Significant Unobservable Input
Range
(Weighted Average)(1)
Assets measured at fair value on a non-recurring basis
 
 
Collateral dependent impaired loans
 
$
80,299

 
Third-party appraised value of collateral less estimated selling costs
Discount to appraised value (3)
Estimated selling costs
0%-12% (4%) 0%-10% (7%)
 
 
 
 
 
 
 
Other loans held for sale
 
7,420

 
Third-party appraised value of collateral less estimated selling costs
Discount to appraised value (3)
Estimated selling costs
0%-12% (4%) 0%-10% (7%)
 
 
 
 
 
 
 
Other real estate
 
79,293

 
Third-party appraised value of collateral less estimated selling costs
Discount to appraised value (3)
Estimated selling costs
0%-7% (2%) 0%-10% (7%)
 
 
 
 
 
 
 
Other assets held for sale
 
$
5,804

 
Third-party appraised value of collateral less estimated selling costs or BOV
Discount to appraised value (3)
Estimated selling costs
13%-51% (29%) 0%-10% (7%)
(1) The range represents management's best estimate of the high and low of the value that would be assigned to a particular input. The weighted average is the measure of central tendencies; it is the value that management is using for the asset or liability.
(2) Represents management's estimate of discount that market participants would require based on the instrument's lack of liquidity.
(3) Synovus also makes adjustments to the values of the assets listed above for various reasons, including age of the appraisal, information known by management about the property, such as occupancy rates, changes to the physical conditions of the property, and other factors.
(4) The range has not been disclosed due to the wide range of possible values given the methodology used.

Sensitivity Analysis of Level 3 Unobservable Inputs Measured on a Recurring Basis
Included in the fair value estimates of financial instruments carried at fair value on the consolidated balance sheet are those estimated in full or in part using valuation techniques based on assumptions that are not supported by observable market prices, rates, or other inputs. Unobservable inputs are assessed carefully, considering the current economic environment and market conditions. However, by their very nature, unobservable inputs imply a degree of uncertainty in their determination, because they are supported by little, if any, market activity for the related asset or liability.
Investment Securities Available for Sale
The significant unobservable inputs used in the fair value measurement of the corporate obligations in Level 3 assets are the credit spread embedded in the discount rate and the discount for lack of liquidity. Generally, a change in one or more assumptions, and the degree or sensitivity of the change used, can have a meaningful impact on fair value. With regard to the trust preferred securities in Level 3 assets, raising the credit spread, and raising the discount for lack of liquidity assumptions will result in a lower fair value measurement.
Private Equity Investments
In the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of private equity investments, significant judgment is required to value these investments. The significant unobservable inputs used in the fair value measurement of private equity investments include current operations, financial condition and cash flows, comparables and private sales, when available, and recently executed financing transactions related to investee companies. Significant increases or decreases in any of these inputs in isolation would result in a significantly lower or higher fair value measurement.
Visa Derivative Liability
The fair value of the Visa derivative is determined based on management's estimate of the timing and amount of the Covered Litigation settlement and the resulting payments due to the counterparty under the terms of the contract. Significant increases (decreases) in any of these inputs in isolation would result in a significantly higher (lower) valuation of the Visa derivative liability. Generally, a change in the amount funded by Visa into its escrow for the Covered Litigation would have a directionally similar change in the assumptions used for the discounted cash flow technique used to compute fair value.
Fair Value of Financial Instruments
The following table presents the carrying and fair values of financial instruments at December 31, 2013 and 2012. The fair value represents management’s best estimates based on a range of methodologies and assumptions. For financial instruments that are not recorded at fair value on the balance sheet, such as loans, interest bearing deposits (including brokered deposits), and long-term debt, the figures given in the notes should not be taken as an estimate of the amount that would be realized if all such financial instruments were to be settled immediately.
Cash and cash equivalents, interest bearing funds with the Federal Reserve Bank, interest earning deposits with banks, and federal funds sold and securities purchased under resale agreements are repriced on a short-term basis; as such, the carrying value closely approximates fair value. Since these amounts generally relate to highly liquid assets, these are considered a Level 1 measurement.
Loans, net of deferred fees and costs, are recorded at the amount of funds advanced, less charge-offs, and an estimation of credit risk represented by the allowance for loan losses. The fair value estimates for disclosure purposes differentiate loans based on their financial characteristics, such as product classification, loan category, pricing features, and remaining maturity. The fair value of loans is estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type, such as commercial, mortgage, home equity, credit card, and other retail loans. Commercial loans are further segmented into certain collateral code groupings. The fair value of the loan portfolio is calculated, in accordance with ASC 825-10, by discounting contractual cash flows using estimated market discount rates, which reflect the credit and interest rate risk inherent in the loan. This method of estimating fair value does not incorporate the exit-price concept of fair value prescribed by ASC 820-10 and generally produces a higher value than a pure exit price approach. For loans measured using the estimated fair value of collateral less costs to sell, fair value is generally estimated using appraisals of the collateral. Collateral values are monitored and additional write-downs are recognized if it is determined that the estimated collateral values have declined further. Estimated costs to sell are based on current amounts of disposal costs for similar assets. Carrying value is considered to reflect fair value for these loans. Loans are considered a Level 3 fair value measurement.
The fair value of deposits with no stated maturity, such as non-interest bearing demand accounts, interest bearing demand deposits, money market accounts, and savings accounts, is estimated to be equal to the amount payable on demand as of that respective date. The fair value of time deposits is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The value of long-term relationships with depositors is not taken into account in estimating fair values. Synovus has developed long-term relationships with its customers through its deposit base and, in the opinion of management, these customer relationships add significant value to Synovus. Synovus has determined that the appropriate classification for deposits is Level 2 due to the ability to reasonably measure all inputs to valuation based on observable market variables. Short-term and long-term debt is also considered a Level 2 valuation, as management relies on market prices for bonds or debt that is similar, but not necessarily identical, to the debt being valued. Short-term debt that matures within ten days is assumed to be at fair value, and is considered a Level 1 measurement. The fair value of other short-term and long-term debt with fixed interest rates is calculated by discounting contractual cash flows using market discount rates for bonds or debt that is similar but not identical.
The carrying and estimated fair values of financial instruments, as well as the level within the fair value hierarchy, as of December 31, 2013 and 2012 are as follows:
 
December 31, 2013

(in thousands)
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial Assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
469,630

 
469,630

 
469,630

 

 

Interest bearing funds with Federal Reserve Bank
644,528

 
644,528

 
644,528

 

 

Interest earning deposits with banks
24,325

 
24,325

 
24,325

 

 

Federal funds sold and securities purchased under resale agreements
80,975

 
80,975

 
80,975

 

 

Trading account assets
6,113

 
6,113

 

 
6,113

 

Mortgage loans held for sale
45,384

 
45,384

 

 
45,384

 

Other loans held for sale
10,685

 
10,685

 

 

 
10,685

Investment securities available for sale
3,199,358

 
3,199,358

 
26,716

 
3,170,292

 
2,350

Private equity investments
29,360

 
29,360

 

 
1,615

 
27,745

Mutual funds held in Rabbi Trusts
11,246

 
11,246

 
11,246

 

 

Loans, net of deferred fees and costs
20,057,798

 
19,763,708

 

 

 
19,763,708

Derivative assets
40,004

 
40,004

 

 
40,004

 

Financial Liabilities
 
 
 
 
 
 
 
 
 
Trading account liabilities
$
1,763

 
1,763

 

 
1,763

 

Non-interest bearing deposits
5,642,751

 
5,642,751

 

 
5,642,751

 

Interest bearing deposits
15,234,039

 
15,244,020

 

 
15,244,020

 

Federal funds purchased, other short-term borrowings and other short-term liabilities
148,132

 
148,132

 

 
148,132

 

Salary stock units
1,764

 
1,764

 
1,764

 

 

Long-term debt
2,033,141

 
2,095,720

 

 
2,095,720

 

Derivative liabilities
42,142

 
42,142

 

 
39,436

 
2,706

 
 
 
 
 
 
 
 
 
 
 
December 31, 2012

(in thousands)
Carrying Value
 
Fair Value
 
Level 1
 
Level 2
 
Level 3
Financial assets
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
614,630

 
614,630

 
614,630

 

 

Interest bearing funds with Federal Reserve Bank
1,498,390

 
1,498,390

 
1,498,390

 

 

Interest earning deposits with banks
23,442

 
23,442

 
23,442

 

 

Federal funds sold and securities purchased under resale agreements
113,517

 
113,517

 
113,517

 

 

Trading account assets
11,102

 
11,102

 

 
11,102

 

Mortgage loans held for sale
212,663

 
212,663

 

 
212,663

 

Other loans held for sale
10,690

 
10,690

 

 

 
10,690

Investment securities available for sale
2,981,112

 
2,981,112

 
3,205

 
2,974,729

 
3,178

Private equity investments
31,876

 
31,876

 

 
1,168

 
30,708

Mutual funds held in Rabbi Trusts
10,001

 
10,001

 
10,001

 

 

Loans, net of deferred fees and costs
19,541,690

 
19,254,199

 

 

 
19,254,199

Derivative assets
64,662

 
64,662

 

 
64,662

 

Financial liabilities
 
 
 
 
 
 
 
 
 
Trading account liabilities
$
91

 
91

 

 
91

 

Non-interest bearing deposits
5,665,527

 
5,665,527

 

 
5,665,527

 

Interest bearing deposits
15,391,517

 
15,415,160

 

 
15,415,160

 

Federal funds purchased, other short-term borrowings, and other short-term liabilities
201,243

 
201,243

 

 
201,243

 

Salary stock units
1,888

 
1,888

 
1,888

 

 

Long-term debt
1,726,455

 
1,784,223

 

 
1,784,223

 

Derivative liabilities
66,393

 
66,393

 

 
63,437

 
2,956