Note 24 - Income Taxes

The components of income tax expense included in the consolidated statements of income for the years ended December 31, 2016, 2015, and 2014 as presented:



(in thousands)	2016		2015	2014
Current
Federal	$	7,329	6,163	5,140
State	5,501		4,424	150
Total current income tax expense	12,830		10,587	5,290
Deferred
Federal	117,463		108,877	92,360
State	11,374		13,027	9,660
Total deferred income tax expense	128,837		121,904	102,020
Total income tax expense	$	141,667	132,491	107,310

Note: The table above does not reflect amounts relating to share-based compensation transactions that were charged or credited directly to shareholders' equity. The amounts charged or credited to shareholder's equity for the years ended December 31, 2016, 2015, and 2014 were a decrease of $790 thousand, an increase of $1.7 million, and a decrease of $3.2 million, respectively.

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. This information is presented in the Consolidated Statements of Comprehensive Income.

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, 2016, 2015 and 2014 as presented:



	Years Ended December 31,
(in thousands)	2016			2015		2014
Income tax expense at statutory federal income tax rate	$	135,957		125,501		105,896
Increase (decrease) resulting from:
State income tax expense, net of federal income tax benefit	13,256			12,870		8,014
Bank-owned life insurance	(3,402		)	(2,885	)	(2,928	)
Change in valuation allowance	(2,055		)	(589	)	(2,273	)
General business tax credits	(1,213		)	(1,173	)	(1,123	)
Tax-exempt income	(825		)	(835	)	(1,076	)
Other, net	(51		)	(398	)	800
Total income tax expense	$	141,667		132,491		107,310
Effective tax rate	36.5		%	36.9	%	35.5	%

Significant portions of the deferred tax assets and liabilities at December 31, 2016 and 2015 are presented:



(in thousands)	2016			2015
Deferred tax assets
Net operating loss carryforwards	$	167,072		308,617
Allowance for loan losses	100,419			103,884
Tax credit carryforwards	67,031			59,434
Employee benefits and deferred compensation	21,024			21,177
Net unrealized losses on investment securities available for sale	19,413			3,072
Non-performing loan interest	19,137			16,604
Deferred revenue	18,639			16,529
Other	19,759			18,573
Total gross deferred tax assets	432,494			547,890
Less valuation allowance	(9,658		)	(11,713	)
Total deferred tax assets	422,836			536,177
Deferred tax liabilities
Fixed assets held for sale	(8,179		)	(5,985	)
Purchase accounting adjustments	(5,765		)	(811	)
Excess tax over financial statement depreciation	(5,343		)	(8,564	)
Ownership interest in partnerships	(5,242		)	(4,537	)
Other	(2,951		)	(4,332	)
Total gross deferred tax liabilities	(27,480		)	(24,229	)
Net deferred tax asset	$	395,356		511,948

Note: The table above includes $3.1 million in net deferred tax liabilities from the acquisition of Global One on October 1, 2016. Please refer to Note 2 - "Acquisition" of this Report for more information on the acquisition of Global One.

The net decrease in the valuation allowance for the years ended December 31, 2016 and 2015 was $2.1 million and $589 thousand, respectively, and it was due to the expiration of unused state tax credits.

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, 2016, 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, 2016 includes generation of taxable income in 2016, 2015, and 2014, continued improvement in credit quality, record of long-term positive earnings prior to the most recent economic downturn, the Company’s strong capital position, as well as sufficient amounts of projected future taxable income, of the appropriate character, to support the realization of $395.4 million of the Company’s net deferred tax asset at December 31, 2016. The Company expects to realize its net deferred tax asset of $395.4 million at December 31, 2016 through the reversal of existing taxable temporary differences and projected future taxable income. The valuation allowance of $9.7 million at December 31, 2016 relates to specific state income tax credits that have various expiration dates through the tax year 2019, and are expected to expire before they can be realized. Based on the assessment of all the positive and negative evidence at December 2016 and 2015, 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 $395.4 million in net deferred tax assets well in advance of the statutory carryforward period. At December 31, 2016, $213.9 million of existing deferred tax assets are not related to net operating losses or credits and therefore, have no expiration dates. $126.4 million of the remaining deferred tax assets relate to federal net operating losses which expire in years beginning in 2031 through 2036. Additionally, $40.7 million of the deferred tax assets relate to state net operating losses which will expire in installments annually through the tax year 2036. Tax credit carryforwards at December 31, 2016 include federal alternative minimum tax credits totaling $43.0 million which have an unlimited carryforward period. Other federal and state tax credits at December 31, 2016 total $24.0 million and have expiration dates through the tax year 2036.

Federal and state NOL and tax credit carryforwards as of December 31, 2016 are summarized in the following table.



Tax Carryforwards	As of December 31, 2016
(in thousands)	Expiration Dates	Deferred Tax Asset Balance		Valuation Allowance		Net Deferred Tax Asset Balance	Pre-Tax Earnings Necessary to Realize
Net operating losses - federal(3)	2031-2036	$	126,351	—		126,351	361,004
General business credits - federal	2028-2036	8,383		—		8,383	NA(1)
Net operating losses - states	2025-2029	13,244		—		13,244	1,370,624
Net operating losses - states(3)	2030-2036	36,148		—		36,148	1,165,627
Other credits - states	2017-2020	12,422		(9,658	)	2,764	NA(1)
Other credits - states	2021-2026	2,239		—		2,239	NA(1)
Alternative minimum tax credits - federal	None	43,037		—		43,037	NA(2)
Other credits - states	None	950		—		950	NA(1)

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

⁽²⁾Alternative minimum tax credits can be carried forward indefinitely.

(3) $3.0 million of acquired NOLs from Global One acquisition have a utilization limitation.

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. Synovus is no longer subject to income tax examinations by the IRS for years before 2012, and excluding certain limited exceptions, Synovus is no longer subject to income tax examinations by state and local income tax authorities for years before 2012. However, amounts reported as net operating losses and tax credit carryovers from closed tax periods remain subject to review by most taxing 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)	2016			2015		2014
Balance at January 1,	$	12,745		13,023		912
Additions based on income tax positions related to current year	—			—		—
Additions for income tax positions of prior years *	1,811			8		12,318
Additions from acquisition	608			—		—
Deductions for income tax positions of prior years	—			—		(52	)
Statute of limitation expirations	(419		)	(286	)	(155	)
Settlements	—			—		—
Balance at December 31,	$	14,745		12,745		13,023

*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 $38 thousand, $96 thousand, and $109 thousand as of December 31, 2016, 2015 and 2014, respectively. Unrecognized income tax benefits as of December 31, 2016, 2015 and 2014 that, if recognized, would affect the effective income tax rate totaled $9.9 million, $8.3 million and $8.5 million (net of the federal benefit on state income tax issues). Synovus had approximately $25 thousand and $63 thousand accrued interest and penalties at December 31, 2016 and 2015, respectively. Synovus expects that $80 thousand of uncertain income tax positions will be either settled or resolved during the next twelve months.