Income Taxes

The components of income tax (benefit) expense from continuing operations for the years ended December 31, 2012, 2011, and 2010 are presented below:



(in thousands)	2012			2011		2010
Current
Federal	$	2,831		(99	)	(20,185	)
State	(6,885		)	1,768		(4,181	)
Total current income tax (benefit) expense	(4,054		)	1,669		(24,366	)
Deferred
Federal	(666,242		)	535		(4,834	)
State	(128,436		)	(892	)	14,049
Total deferred income tax (benefit) expense	(794,678		)	(357	)	9,215
Total income tax (benefit) expense	$	(798,732	)	1,312		(15,151	)

Income tax expense from discontinued operations for the year ended December 31, 2010 was $27.5 million.

Income tax expense (benefit) from continuing operations does not reflect the tax effects of unrealized gains (losses) on investment securities available for sale, unrealized gains (losses) on cash flow hedges, and amortization of post-retirement unfunded health benefits. This information is presented in the Consolidated Statements of Comprehensive Income (Loss).

Income tax effects for items that were charged or credited directly to shareholders' equity consisted of a decrease to shareholders' equity totaling $715 thousand and an increase to shareholders' equity of $16 thousand for the years ended December 31, 2012 and 2011, respectively, relating to share-based compensation transactions. There were no such items during 2010.

Income tax expense (benefit) as shown in the consolidated statements of operations differed from the amounts computed by applying the U.S. federal income tax rate of 35% to income (loss) from continuing operations before income taxes. A reconciliation of the differences for the years ended December 31, 2012, 2011 and 2010 is shown below:



	Years Ended December 31,
(in thousands)	2012			2011		2010
Income tax expense (benefit) at statutory federal income tax rate	$	11,017		(20,836	)	(297,210	)
Increase (decrease) in taxes resulting from:
State income tax benefit, net of federal income tax effect	(3,935		)	(3,084	)	(30,598	)
Tax-exempt income	(2,026		)	(2,316	)	(2,678	)
Tax credits	(1,558		)	(1,461	)	(1,576	)
Cash surrender value of life insurance	(2,907		)	(2,911	)	(2,888	)
Change in valuation allowance, federal and state	(802,771		)	31,844		320,377
Other, net	3,448			76		(578	)
Total income tax (benefit) expense	$	(798,732	)	1,312		(15,151	)

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities at December 31, 2012 and 2011 are presented below.



(in thousands)	2012			2011
Deferred tax assets
Net operating loss carryforwards	$	590,938		514,275
Allowance for loan losses	179,916			268,406
Tax credit carryforwards	44,563			44,170
Finance lease transactions	6,236			4,901
Net unrealized loss on cash flow hedges	774			243
Other	46,536			46,779
Total gross deferred tax assets	868,963			878,774
Less valuation allowance	(18,658		)	(821,429	)
Total deferred tax assets	850,305			57,345
Deferred tax liabilities
Excess tax over financial statement depreciation	(13,945		)	(16,371	)
Net unrealized gains on investment securities available for sale	(19,051		)	(29,390	)
Other	(10,903		)	(9,446	)
Total gross deferred tax liabilities	(43,899		)	(55,207	)
Net deferred tax asset	$	806,406		2,138

The net reduction to the valuation allowance for the year ended December 31, 2012 was $802.8 million. Net additions to the valuation allowance during the years ended December 31, 2011, and 2010, were $31.8 million and $320.4 million, respectively.

Management assesses the valuation allowance recorded against 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. During 2009, the Company established a valuation allowance for substantially all of its deferred tax assets, primarily due to the realization of significant losses, significant credit deterioration, and negative trending in asset quality and uncertainty regarding the amount of future taxable income that the Company could forecast. At December 31, 2011, based on the assessment of all the positive and negative evidence, management concluded that there was not sufficient evidence to conclude that it was more likely than not that Synovus would realize the benefits associated with its deferred tax assets; accordingly, the Company continued to maintain a valuation allowance for substantially all of the deferred tax assets.

At December 31, 2012, the Company continues to be in a three-year cumulative loss position, which represents significant negative evidence. However, based on the assessment of all the positive and negative evidence, management concluded that it was more likely than not that $806.4 million of the net deferred tax assets will be realized based upon future taxable income, and therefore reversed $802.8 million of the valuation allowance. The valuation allowance of $18.7 million at December 31, 2012 is related to specific state income tax credits and specific state NOL carryforwards that have various expiration dates through the tax year 2018 and 2027, respectively, and are expected to expire before they can be utilized.

The deferred tax asset valuation allowance was reversed in the fourth quarter of 2012 after the achievement of operating results for the fourth quarter and full year of 2012 demonstrated the continuation of profitable operating results, excluding the impact of the pre-tax charge of approximately $157 million from the discretionary sales of distressed assets completed during the fourth quarter of 2012, marking the sixth consecutive quarter of profitable operating results. The fourth quarter of 2012 results also provided further validation of the positive credit quality trending improvements marking the twelfth consecutive quarter of such improvements. The pace of credit quality improvement accelerated during the fourth quarter of 2012 after the completion of the bulk sale of distressed assets. At December 31, 2012, Synovus Bank's classified asset ratio as a percentage of Tier 1 Capital and the allowance for loan losses improved to 38.07% from 50.65% at September 30, 2012 and 62.51% at December 31, 2011. The consolidated classified asset ratio improved to 44.83% at December 31, 2012 from 58.65% and 70.27% at September 30, 2012 and December 31, 2011, respectively.

In addition, the achievement of operating results for the fourth quarter and full year of 2012 consistent with management's forecast for these periods, excluding the impact of the pre-tax charge of approximately $157 million from the discretionary sales of distressed assets completed in the fourth quarter of 2012, provided further evidence of the Company's ability to produce reliable forecasts, and strengthened the weight of the positive evidence provided by forecasted future taxable income. The Company's forecast of taxable income at December 31, 2012 demonstrates that there will be sufficient future taxable income to realize the $806.4 million net deferred tax asset at December 31, 2012. The positive evidence related to the forecasted future taxable income assists in overcoming the weight of the negative evidence related to the significant operating losses recognized as a result of the recent financial crisis and adds to the overall weight of positive evidence that the December 31, 2012 deferred tax asset is more likely than not realizable. Prior to the fourth quarter of 2012, the Company was unable to conclude that there was sufficient evidence to support that the deferred tax asset was more likely than not realizable and to support the reversal of the deferred tax asset valuation allowance.

The positive evidence at December 31, 2012 included the Company's significantly improved credit risk profile, the continued improving trends in credit quality, continued profitability in recent quarters, credit risk policy enhancements which reduce exposure to credit risk through concentration limits by loan type, exposure limits to single borrowers, among others, record of long-term positive earnings prior to the recent economic downturn, the Company's strong capital position, as well as sufficient amounts of estimated future taxable income, of the appropriate character, to support the realization of $806.4 million of the Company's net deferred tax asset at December 31, 2012. Management's confidence in the realization of projected future taxable income is based on an analysis of the Company's risk profile and recent trends in financial performance, including credit quality trends. In determining whether management's projections of future taxable income are reliable, management considered objective evidence supporting the forecast assumptions as well as recent experience which demonstrates the Company's ability to reasonably project future results of operations. The analysis showed that credit losses will continue to be at elevated levels but will continue to trend downward, and that credit quality indicators will continue to improve. Further, while the banking environment is expected to remain challenging due to economic and other uncertainties, the Company believes that it can confidently forecast future taxable income at sufficient levels over the future period of time that the Company has available to realize its December 31, 2012 net deferred tax asset, which is discussed further below.

Synovus expects to realize the $806.4 million in net deferred tax assets well in advance of the statutory carryforward period. At December 31, 2012, approximately $189.6 million of existing deferred tax assets are not related to net operating losses or credits and therefore, have no expiration date. Approximately $519.8 million of the remaining deferred tax assets relate to federal net operating losses which will expire in annual installments beginning in 2028 through 2032. Additionally, approximately $71.2 million of the deferred tax assets relate to state net operating losses which will expire in annual installments beginning in 2013 through 2032. Tax credit carryforwards at December 31, 2012 include federal alternative minimum tax credits totaling $19.1 million which have an unlimited carryforward period. Other federal and state tax credits at December 31, 2012 total $25.5 million and will expire in annual installments beginning in 2013 through 2032.

Federal and state NOL and tax credit carryforwards as of December 31, 2012 are summarized in the following table.



Tax Carryforwards	As of December 31, 2012
(in thousands)	Expiration Dates	Deferred Tax Asset Balance		Valuation Allowance		Net Deferred Tax Asset Balance
Net operating losses - federal	2028-2032	$	519,755	—		519,755
General business credits - federal	2028-2032	7,799		—		7,799
Net operating losses - states	2013-2017	47		—		47
Net operating losses - states	2018-2022	1,828		—		1,828
Net operating losses - states	2023-2027	5,296		(3,785	)	1,511
Net operating losses - states	2028-2032	64,012		—		64,012
Other credits - states	2013-2017	17,565		(14,782	)	2,783
Other credits - states	2018-2022	136		(91	)	45
Alternative minimum tax credits - federal	None	$	19,063	—		19,063

The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence. Management's conclusion at December 31, 2012 that it is more likely than not that the net deferred tax assets of $806.4 million will be realized is based upon management's estimate of future taxable income. Management's estimate of future taxable income is based on internal projections which consider historical performance, various internal estimates and assumptions, as well as certain external data all of which management believes to be reasonable although inherently subject to significant judgment. If actual results differ significantly from the current estimates of future taxable income, even if caused by adverse macro-economic conditions, the valuation allowance may need to be increased for some or all of the Company's deferred tax asset. Such an increase to the deferred tax asset valuation allowance could have a material adverse effect on Synovus' financial condition and results of operations.

Synovus is subject to income taxation in the United States and by 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, no years for which Synovus filed a federal income tax return are under examination by the IRS; also, there are no state tax examinations currently in progress. Synovus is no longer subject to income tax examinations from state and local income tax authorities for years before 2008. Although Synovus is unable to determine the ultimate outcome of 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)	2012			2011
Balance at January 1,	$	5,985		6,315
Additions based on income tax positions related to current year	227			275
Additions for income tax positions of prior years	175			—
Deductions for income tax positions of prior years	(2,774		)	(605	)
Statute of limitation expirations	(1,068		)	—
Settlements	(1,425		)	—
Balance at December 31,	$	1,120		5,985

Accrued interest and penalties related to unrecognized income tax benefits are included as a component of income tax expense (benefit). Accrued interest and penalties on unrecognized income tax benefits totaled $1.5 million and $163 thousand as of January 1 and December 31, 2012, respectively. Unrecognized income tax benefits as of January 1 and December 31, 2012 that, if recognized, would affect the effective income tax rate totaled $4.8 million and $834 thousand (net of the federal benefit on state income tax issues), respectively, which includes interest and penalties of $943 thousand and $106 thousand, respectively. Synovus expects that approximately $358 thousand of uncertain income tax positions will be either settled or resolved during the next twelve months.