Derivative Instruments and Hedging Activities

3 Months Ended

Mar. 31, 2023

Summary of Derivative Instruments [Abstract]

Derivative Instruments and Hedging Activities

Note 7 - 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 client transactions. The primary types of derivative instruments utilized by Synovus consist of interest rate swaps, interest rate lock commitments made to prospective mortgage loan clients, 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 also provides foreign currency exchange services, primarily forward contracts, with counterparties to allow commercial clients to mitigate exchange rate risk. Synovus covers its risk by entering into an offsetting foreign currency exchange forward contract. Synovus enters into risk participation agreements with financial institution counterparties where we are either a participant or a lead bank so that the risk of default on the interest rate swaps is shared. Synovus either pays or receives a fee depending on the participation type. 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. See "Part II - Item 8. Financial Statements and Supplementary Data - Note 1 - Summary of Significant Accounting Policies" to the consolidated financial statements of Synovus' 2022 Form 10-K for additional information regarding accounting policies for derivatives.

Hedging Derivatives

Cash flow hedging 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 commercial loans. The contracts effectively modify Synovus' exposure to interest rate risk by utilizing receive fixed/pay index-based variable rate interest rate swaps.

For cash flow hedges, the effective portion of the gain or loss on the derivative instrument is reported initially as a component of accumulated other comprehensive income (loss), net of the tax impact, and subsequently reclassified into earnings when the hedged transaction affects earnings with the impacts recorded in the same income statement line item used to

present the earnings effect of the hedged item. When a cash flow hedge relationship is discontinued but the hedged cash flows, or forecasted transactions, are still expected to occur, gains or losses that were accumulated in OCI are amortized into earnings over the same periods in which the hedged transactions are still expected to affect earnings. If, however, it is probable the forecasted transactions will no longer occur, the remaining accumulated amounts in OCI for the impacted cash flow hedges are immediately recognized in earnings.

Synovus recorded no unrealized gains (losses) during the three months ended March 31, 2023 and 2022 related to terminated cash flow hedges. Synovus recognized a pre-tax loss of $5.4 million during the three months ended March 31, 2023 and pre-tax income of $2.2 million for the three months ended March 31, 2022 related to the amortization of terminated cash flow hedges. Amounts related to the amortization of terminated cash flow hedges are being recognized into earnings in conjunction with the effective terms of the original swaps through the third quarter of 2026.

As of March 31, 2023, Synovus expects to reclassify into earnings approximately $149 million in pre-tax loss due to the receipt or payment of interest payments on all cash flow hedges within the next twelve months. Included in this amount is approximately $24 million in pre-tax loss related to the amortization of terminated cash flow hedges. As of March 31, 2023, the maximum length of time over which Synovus is hedging its exposure to the variability in future cash flows is through the fourth quarter of 2027.

Fair value hedging relationships mitigate exposure to the change in fair value of an asset or liability. Synovus has entered into receive-fixed, pay-variable interest rate swap contracts to hedge the change in the fair value due to fluctuations in market interest rates for outstanding fixed-rate long-term debt and interest-bearing deposits. The changes in fair value of the fair value hedges are recorded through earnings with an offset against changes in the fair value of the hedged item within interest expense in the consolidated statements of income. All components of each derivative instrument’s gain/(loss) are included in the assessment of hedge effectiveness.

Derivatives Not Designated as Hedges

Derivatives not designated as hedges include those that are entered into as either economic hedges to facilitate client needs or as part of Synovus' overall risk management strategy. Economic hedges are those that do not qualify to be treated as a fair value hedge or cash flow hedge for accounting purposes but are necessary to economically manage the risk exposure associated with the assets and liabilities of Synovus. 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 client 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, client risk rating, collateral value, and client 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 client specific risk.

Collateral Requirements

Certain derivative transactions have collateral requirements, both at the inception of the trade and as the value of each derivative position changes. As of March 31, 2023 and December 31, 2022, Synovus had recorded the right to reclaim cash collateral of $86.5 million and $66.8 million, respectively. As of both March 31, 2023 and December 31, 2022, Synovus had recorded the obligation to return cash collateral of $7.7 million.

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 consolidated balance sheets and related disclosures.

The following table reflects the estimated fair value of derivative instruments included in other assets and other liabilities on the consolidated balance sheets along with their respective notional amounts on a gross basis.


	March 31, 2023						December 31, 2022
			Estimated Fair Value						Estimated Fair Value
(in thousands)	Notional Amount		Derivative Assets		Derivative Liabilities		Notional Amount		Derivative Assets		Derivative Liabilities
Derivatives in cash flow hedging relationships:
Interest rate contracts	$	6,000,000	$	995	$	30,044	$	5,250,000	$	—	$	8,286
Total cash flow hedges			$	995	$	30,044			$	—	$	8,286

Derivatives in fair value hedging relationships:
Interest rate contracts	$	3,338,229	$	—	$	16,017	$	2,230,232	$	—	$	8,093
Total fair value hedges			$	—	$	16,017			$	—	$	8,093
Total derivatives designated as hedging instruments			$	995	$	46,061			$	—	$	16,379

Derivatives not designated as hedging instruments:
Interest rate contracts	$	11,037,624	$	85,790	$	272,765	$	10,276,754	$	89,310	$	322,329
Mortgage derivatives - interest rate lock commitments	82,380		1,459		—		50,218		350		—
Mortgage derivatives - forward commitments to sell fixed-rate mortgage loans	89,000		—		173		76,500		155		—
Risk participation agreements	679,924		—		—		635,891		—		3
Foreign exchange contracts	21,177		13		—		20,439		—		516
Visa derivative	—		—		1,111		—		—		3,453
Total derivatives not designated as hedging instruments			$	87,262	$	274,049			$	89,815	$	326,301

The following table presents the effect of hedging derivative instruments in the consolidated statements of income and the total amounts for the respective line item affected for the three months ended March 31, 2023 and 2022.


	Three Months Ended March 31, 2023
	Interest Income		Interest Expense
(in thousands)	Loans, including fees		Deposits		Long-term debt
Total interest income/expense amounts presented in the consolidated statements of income	$	629,557	$	173,935	$	42,529

Gain/(loss) on cash flow hedging relationships: (1)
Interest rate contracts:
Realized gains (losses) reclassified from AOCI, pre-tax, to interest income on loans	$	(39,892)	$	—	$	—
Pre-tax income (loss) recognized on cash flow hedges	$	(39,892)	$	—	$	—

Gain/(loss) on fair value hedging relationships:
Amounts related to interest settlements and amortization on derivatives	$	—	$	(3,371)	$	(2,721)
Recognized on derivatives	—		(12,057)		(3,952)
Recognized on hedged items	—		12,057		3,952
Pre-tax income (loss) recognized on fair value hedges	$	—	$	(3,371)	$	(2,721)


	Three Months Ended March 31, 2022
	Interest Income
(in thousands)	Loans, including fees
Total interest income/expense amounts presented in the consolidated statements of income	$	361,091

Gain/(loss) on cash flow hedging relationships: (1)
Interest rate contracts:
Realized gains (losses) reclassified from AOCI, pre-tax, to interest income on loans	$	2,189
Pre-tax income (loss) recognized on cash flow hedges	$	2,189

(1) See "Part I - Item 1. Financial Statements and Supplementary Data - Note 5 - Accumulated Other Comprehensive Income (Loss)" for gain (loss) recognized on cash flow hedging relationships in AOCI.

The following table presents the carrying amount and associated cumulative basis adjustment related to the application of hedge accounting that is included in the carrying amount of the hedged assets/(liabilities) in fair value hedging relationships.


	March 31, 2023				December 31, 2022
	Hedged Items Currently Designated				Hedged Items Currently Designated
(in thousands)	Carrying Amount of Assets/(Liabilities)		Hedge Accounting Basis Adjustment		Carrying Amount of Assets/(Liabilities)		Hedge Accounting Basis Adjustment
Interest-bearing deposits	$	(2,288,000)	$	(12,170)	$	(1,680,000)	$	24,227
Long-term debt	(1,041,971)		(15,396)		(545,787)		19,348

The pre-tax effect of changes in fair value from derivative instruments not designated as hedging instruments in the consolidated statements of income for the three months ended March 31, 2023 and 2022 is presented below.


		Gain (Loss) Recognized in Consolidated Statements of Income
		Three Months Ended March 31,
(in thousands)	Location in Consolidated Statements of Income	2023		2022
Derivatives not designated as hedging instruments:
Interest rate contracts(1)	Capital markets income	$	18	$	673
Mortgage derivatives - interest rate lock commitments	Mortgage banking income	1,109		(1,318)
Mortgage derivatives - forward commitments to sell fixed-rate mortgage loans	Mortgage banking income	(328)		3,565
Risk participation agreements	Capital markets income	3		25
Foreign exchange contracts	Capital markets income	529		65

Total derivatives not designated as hedging instruments		$	1,331	$	3,010

(1) Gain (loss) represents net fair value adjustments (including credit related adjustments) for client swaps.