SYNOVUS FINANCIAL CORP

Note 23 - Income Taxes

The components of income tax expense (benefit) included in the consolidated statements of income for the years ended December 31, 2017, 2016, and 2015 are presented below:



(in thousands)	2017			2016		2015
Current
Federal	$	(32,341	)	$	7,329	$	6,163
State	5,949			5,501		4,424
Total current income tax expense (benefit)	(26,392		)	12,830		10,587
Deferred
Federal	229,917			117,463		108,877
State	1,139			11,374		13,027
Total deferred income tax expense	231,056			128,837		121,904
Total income tax expense	$	204,664		$	141,667	$	132,491

Note: The table above does not reflect a net charge of $790 thousand and a credit of $1.7 million for the years ended December 31, 2016 and 2015, respectively, relating to share-based compensation transactions that were charged or credited directly to shareholders' equity.

Income tax expense does not reflect the tax effects of net unrealized gains (losses) on investment securities available for sale and post-retirement unfunded health benefits. These effects are presented in the Consolidated Statements of Comprehensive Income.

The 2017 financial results reflect the income tax expense effects from Federal Tax Reform in accordance with ASC Topic 740, Income Taxes. Additionally, Staff Accounting Bulletin No. 118 provides guidance for the application of ASC Topic 740, Income Taxes, in the reporting period in which the Federal Tax Reform was signed into law. Synovus remeasured its deferred tax assets and liabilities based upon the newly enacted U.S. statutory federal rate of 21 percent which is the tax rate at which these deferred tax assets and liabilities are expected to reverse. This resulted in an additional provisional federal income tax expense of $47.2 million in 2017. Based on the information available and our current interpretation of the Federal Tax Reform, Synovus has made reasonable estimates of the impact from the reduction in the corporate tax rate on the remeasurement of applicable deferred tax assets and liabilities. However, certain deferred tax assets and liabilities will continue to be evaluated in the context of Federal Tax Reform through the date of the filing of our 2017 federal income tax return, and may change as a result of evolving management interpretations, elections, and assumptions, as well as new guidance that may be issued by the Internal Revenue Service. Accordingly, the federal income tax expense of $47.2 million relating to the effects from Federal Tax Reform is considered provisional, as defined by SAB 118. Management expects to complete its analysis within the measurement period in accordance with SAB 118.

Income tax expense as shown in the consolidated statements of income differed from the amounts computed by applying the U.S. federal income tax rate of 35 percent to income before income taxes. A reconciliation of the differences for the years ended December 31, 2017, 2016 and 2015 is presented below:



	Years Ended December 31,
(dollars in thousands)	2017			2016			2015
Income tax expense at statutory federal income tax rate	$	168,048		$	135,957		$	125,501
Increase (decrease) resulting from:
State income tax expense, net of federal income tax benefit	11,961			13,256			12,870
Provisional tax adjustment related to reduction in U.S. federal statutory income tax rate (1)(2)	46,573			—			—
LIHTC amortization, net of tax benefits	268			—			—
Tax-exempt income	(719		)	(825		)	(835		)
Tax benefit from share-based compensation	(4,318		)	—			—
Bank-owned life insurance	(4,702		)	(3,402		)	(2,885		)
Change in valuation allowance (3)	(6,227		)	(2,055		)	(589		)
General business tax credits⁽⁴⁾	(6,546		)	(1,213		)	(1,173		)
Other, net	326			(51		)	(398		)
Total income tax expense	$	204,664		$	141,667		$	132,491
Effective tax rate	42.6		%	36.5		%	36.9		%

⁽¹⁾ Does not include a provisional tax expense adjustment of $608 thousand which is included as a component of the change in the valuation allowance. The income tax effect of the provisional federal income tax expense of $47.2 million relating to Federal Tax Reform represents 9.8% of income before taxes.

⁽²⁾ Includes $7.8 million expense from remeasurement of deferred tax assets relating to unrealized losses on available for sale securities which were initially recorded through accumulated other comprehensive income (AOCI). As further described in Note 1, ASU 2018-02, issued in February 2018, provides for the reclassification of the tax effects stranded in AOCI resulting from Federal Tax Reform to retained earnings. As a result, Synovus will elect to apply the ASU 2018-02 guidance during the reporting period ending on March 31, 2018 and reclassify $7.8 million from AOCI to retained earnings.

⁽³⁾Includes a provisional federal income tax expense of $608 thousand related to Federal Tax Reform.

⁽⁴⁾ 2017 includes research and development tax credits for the tax years 2013-2017 totaling $4.6 million.

Significant portions of the deferred tax assets and liabilities at December 31, 2017 and 2016 are presented below:



(in thousands)	2017			2016
Deferred tax assets
Allowance for loan losses	$	66,034		$	100,419
Net operating loss carryforwards	41,059			167,072
Tax credit carryforwards	19,175			67,031
Employee benefits and deferred compensation	18,333			26,183
Net unrealized losses on investment securities available for sale	13,253			19,413
Deferred revenue	12,311			18,639
Non-performing loan interest	10,388			19,137
Other	8,892			14,600
Total gross deferred tax assets	189,445			432,494
Less valuation allowance	(3,431		)	(9,658		)
Total deferred tax assets	186,014			422,836
Deferred tax liabilities
Other properties held for sale	(5,447		)	(8,179		)
Excess tax over financial statement depreciation	(6,628		)	(5,343		)
Other	(8,151		)	(13,958		)
Total gross deferred tax liabilities	(20,226		)	(27,480		)
Net deferred tax asset	$	165,788		$	395,356

The net decrease in the valuation allowance for the years ended December 31, 2017 and 2016 was $6.2 million and $2.1 million, respectively, due to the expiration of unused state tax credits, the reversal of valuation allowance on state tax credits that now have been determined to be utilized before they expire, and a provisional tax adjustment of $608 thousand related to the effects from Federal Tax Reform.

Management assesses the realizability of deferred tax assets at each reporting period. The determination of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires an evaluation of all the positive and negative evidence. At December 31, 2017, the Company is not in a three-year cumulative loss position; accordingly, it does not have significant negative evidence to consider when evaluating the realization of its deferred tax assets. Positive evidence supporting the realization of the Company’s deferred tax assets at December 31, 2017 includes generation of taxable income in 2017, 2016, and 2015, continued improvement in credit quality, record of long-term positive earnings prior to the most recent economic downturn, strong capital position, as well as sufficient amounts of projected future taxable income, of the appropriate character, to support the realization of the $165.8 million net deferred tax asset at December 31, 2017. Synovus expects to realize its net deferred tax asset of $165.8 million through the reversal of existing taxable temporary differences and projected future taxable income. The valuation allowance of $3.4 million at December 31, 2017 relates to specific state income tax credits that will expire in 2018, and before they can be realized. Based on the assessment of all the positive and negative evidence at December 31, 2017 and 2016, management has concluded that it is more likely than not that the results of future operations will generate sufficient taxable income to realize the deferred tax assets.

Synovus expects to realize substantially all of the $165.8 million in net deferred tax assets well in advance of the statutory carryforward period. At December 31, 2017, $108.9 million of existing deferred tax assets are not related to net operating losses or credits and therefore, have no expiration dates. $41.1 million of the deferred tax assets relate to state net operating losses which will expire in installments annually through the tax year 2035. State tax credits at December 31, 2017 total $19.2 million and have expiration dates through the tax year 2027.

State NOL and tax credit carryforwards as of December 31, 2017 are summarized in the following table.



Tax Carryforwards	As of December 31, 2017
(in thousands)	Expiration Dates	Deferred Tax Asset Balance (2)		Valuation Allowance			Net Deferred Tax Asset Balance		Pre-Tax Earnings Necessary to Realize⁽¹⁾
Net operating losses - states	2023-2027	$	1,688	$	—		$	1,688	$	1,018,310
Net operating losses - states	2028-2032	48,430		—			48,430		1,093,946
Net operating losses - states	2033-2035	360		—			360		7,584
Other credits - states	2018-2022	18,381		(3,431		)	14,950		N/A
Other credits - states	2023-2027	207		—			207		N/A
Other credits - states	None	587		—			587		N/A

⁽¹⁾N/A indicates credits are not measured on a pre-tax earnings basis.

⁽²⁾Effective December 31, 2017, alternative minimum tax credits of $42.1 million were reclassified from deferred tax assets to current taxes receivable reflecting their refundability pursuant to Federal Tax Reform.

Synovus believes that a portion of its state tax credit carryforwards will not be realized due to the length of certain state carryforward periods. Accordingly, a valuation allowance in the amount of $3.4 million has been established against deferred tax assets at December 31, 2017 compared to a valuation allowance of $9.7 million at December 31, 2016. The decrease of $6.2 million in 2017 reflects the expiration of unused state tax credits, the reversal of a valuation allowance on state tax credits that now have been determined to be utilized before they expire, and a provisional tax adjustment related to the effects from the Federal Tax Reform. A decrease of $2.1 million occurred in 2016.

Synovus is subject to income taxation in the United States and various state jurisdictions. Synovus' federal income tax return is filed on a consolidated basis, while state income tax returns are filed on both a consolidated and separate entity basis. Currently, there are no years for which Synovus filed a federal income tax return that are under examination by the IRS. Additionally, Synovus is no longer subject to income tax examinations by the IRS for years before 2013, and excluding certain limited exceptions, Synovus is no longer subject to income tax examinations by state and local income tax authorities for years before 2013. However, amounts reported as net operating losses and tax credit carryovers from closed tax periods remain subject to review by most tax authorities. Although Synovus is unable to determine the ultimate outcome of current and future examinations, Synovus believes that the liability recorded for uncertain tax positions is adequate.

A reconciliation of the beginning and ending amount of unrecognized income tax benefits is as follows (unrecognized state income tax benefits are not adjusted for the federal income tax impact).



	Years Ended December 31,
(in thousands)	2017			2016			2015
Balance at January 1,	$	14,745		$	12,745		$	13,023
Additions based on income tax positions related to current year	152			—			—
Additions for income tax positions of prior years *	934			1,811			8
Additions from acquisition	—			608			—
Reductions for income tax positions of prior years	(706		)	—			—
Statute of limitation expirations	(8		)	(419		)	(286		)
Settlements	—			—			—
Balance at December 31,	$	15,117		$	14,745		$	12,745

*Includes deferred tax benefits that could reduce future tax liabilities.

Accrued interest and penalties related to unrecognized income tax benefits are included as a component of income tax expense. Accrued interest and penalties on unrecognized income tax benefits totaled $105 thousand, $38 thousand, and $96 thousand as of December 31, 2017, 2016 and 2015, respectively. Unrecognized income tax benefits as of December 31, 2017, 2016 and 2015 that, if recognized, would affect the effective income tax rate totaled $12.3 million, $9.9 million and $8.3 million (net of the federal benefit on state income tax issues). Accrued interest and penalties were approximately $76 thousand and $25 thousand at December 31, 2017 and 2016, respectively. Synovus expects that $17 thousand of uncertain income tax positions will be either settled or resolved during the next twelve months.