Income Taxes

For the six and three months ended June 30, 2012, Synovus calculated an income tax benefit by applying the estimated annual effective tax rate. For the six and three months ended June 30, 2011, Synovus determined that a reliable annual effective tax rate estimate could not be made; accordingly, Synovus calculated income tax expense based on an actual effective tax rate applied to the year-to-date results.

Deferred income tax assets are analyzed on a quarterly basis, based on standards in ASC 740, to determine the likelihood that they will be realized. All available evidence about the realization of DTA's, both positive and negative, which can be objectively verified, is considered. At June 30, 2012, Synovus' positive evidence in support of its use of forecasted future earnings as a source of realizing DTAs was deemed insufficient to overcome the negative evidence associated with its pre-tax cumulative loss position. Management concluded that it is more likely than not that $2 million of the June 30, 2012 net DTAs will be realized as compared to $2.1 million at December 31, 2011. This determination is based on the separate entity state income tax liabilities.

A reconciliation of the beginning and ending amounts of the valuation allowance recorded against DTAs is as follows:



(in thousands)	2012			2011
Balance at January 1,	$	821,429		774,961
Increase (decrease) for the three months ended March 31,	(4,181		)	43,906
Increase (decrease) for the three months ended June 30,	(16,859		)	9,723
Balance at June 30,	$	800,389		828,590

Synovus expects to reverse substantially all (or approximately $779 million) of the DTA valuation allowance once it has demonstrated a sustainable return to profitability, perhaps at the point it has significantly improved credit quality, and experienced consecutive profitable quarters coupled with a forecast of sufficient taxable income during the carryforward period. The reversal could occur as a single event or over a period of time depending upon the level of forecasted taxable income, the probability related to realizing the forecasted taxable income, and the estimated risk related to credit quality.

Synovus' income tax returns are subject to review and examination by federal, state, and local taxing jurisdictions. Currently, no years for which Synovus filed a federal income tax return are under examination by the IRS; however, there are certain state tax examinations currently in progress. Although Synovus is unable to determine the ultimate outcome of these examinations, Synovus believes that current income tax accruals are adequate for any uncertain income tax positions relating to these examinations. Adjustments to income tax accruals are made when necessary to reflect a change in the probability outcome.

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).



(in thousands)	2012			2011
Balance at January 1,	$	5,985		6,315
First quarter activity:
Additions based on income tax positions related to current year	57			70
Additions for income tax positions of prior years	—			—
Reductions for income tax positions of prior years	(343		)	(415	)
Settlements	—			—
Net, first quarter activity	(286		)	(345	)
Balance at March 31,	5,699			5,970
Second quarter activity:
Additions based on income tax positions related to current year	58			70
Additions for income tax positions of prior years	175			—
Reductions for income tax positions of prior years	(2,431		)	—
Settlements	(1,250		)	—
Net, second quarter activity	(3,448		)	70
Balance at June 30,	$	2,251		6,040

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 $1.5 million and $503 thousand as of January 1 and June 30, 2012, respectively. Total unrecognized income tax benefits as of January 1 and June 30, 2012 that, if recognized, would affect the effective income tax rate is $4.8 million and $1.8 million (net of the federal benefit on state income tax issues) respectively, which includes interest and penalties of $943 thousand and $327 thousand, respectively. During the three months ended June 30, 2012, Synovus reached a settlement with a state taxing authority which resulted in a reduction of its reserve under ASC 740-10-25 in the amount of $2.8 million, and was recorded as a reduction of income tax expense reported in both the six and three months ended June 30, 2012. Synovus expects an approximate range of $210 thousand to $1.3 million of uncertain income tax positions will be either settled or resolved during the next twelve months.