Note 17 - Income Taxes

The components of income tax expense (benefit) included in the consolidated statements of income for the years ended December 31, 2018, 2017, and 2016 are presented below:



(in thousands)	2018		2017			2016
Current
Federal	$	75,582	$	(32,341	)	$	7,329
State	7,081		5,949			5,501
Total current income tax expense (benefit)	82,663		(26,392		)	12,830
Deferred
Federal	24,894		229,917			117,463
State	11,321		1,139			11,374
Total deferred income tax expense	36,215		231,056			128,837
Total income tax expense	$	118,878	$	204,664		$	141,667

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 2018 financial results reflect a $9.8 million tax benefit resulting from the completion of the remeasurement of the deferred tax assets and liabilities from Federal Tax Reform in accordance with ASC Topic 740, Income Taxes. This included a $3.9 million tax benefit for the refinement of provisional amounts previously reported under SEC Staff Accounting Bulletin No. 118, Income Tax Accounting Implications of the Tax Cuts and Jobs Act (SAB 118) and a $5.9 million return to provision benefit associated with the 2017 tax return. In 2017, Synovus made a reasonable estimate, based on the information available, of the impact from the reduction in the corporate tax rate on the remeasurement of applicable deferred tax assets and liabilities, which resulted in an additional provisional federal income tax expense of $47.2 million.

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 21 percent to income before income taxes for the year ended December 31, 2018, and 35 percent for the years ended 2017 and 2016. A reconciliation of the differences is presented below:



	Years Ended December 31,
(dollars in thousands)	2018			2017			2016
Income tax expense at statutory federal income tax rate	$	114,944		$	168,048		$	135,957
Increase (decrease) resulting from:
State income tax expense, net of federal income tax benefit	17,270			11,961			13,256
Adjustment related to reduction in U.S. federal statutory income tax rate⁽¹⁾⁽²⁾	(9,865		)	46,573			—
Non-deductible expenses	7,556			2,435			813
Low income housing tax credits and other tax benefits	(6,421		)	(2,759		)	—
Low income housing tax credit amortization	5,316			268			—
Change in valuation allowance⁽³⁾	(3,431		)	(6,227		)	(2,055		)
Bank-owned life insurance	(3,055		)	(4,702		)	(3,402		)
Excess tax benefit from share-based compensation	(2,801		)	(4,318		)	—
General business tax credits⁽⁴⁾	(1,163		)	(4,615		)	(1,213		)
Other, net	528			(2,000		)	(1,689		)
Total income tax expense	$	118,878		$	204,664		$	141,667
Effective tax rate	21.7		%	42.6		%	36.5		%

⁽¹⁾ Does not include a 2017 provisional tax expense adjustment of $608 thousand which is included as a component of the change in the valuation allowance. The 2017 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⁾ 2017 includes a $7.6 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 elected to apply the ASU 2018-02 guidance during the reporting period ending on March 31, 2018 and reclassified $7.6 million from AOCI to retained earnings.

⁽³⁾ 2017 includes 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.

Details for significant portions of the deferred tax assets and liabilities at December 31, 2018 and 2017 are presented below:



(in thousands)	2018			2017
Deferred tax assets
Allowance for loan losses	$	63,952		$	66,034
Net operating loss carryforwards	33,008			41,059
Net unrealized losses on investment securities available for sale	24,419			13,253
Employee benefits and deferred compensation	20,363			18,333
Tax credit carryforwards	20,088			19,175
Deferred revenue	10,189			12,311
Lease rental	2,526			2,549
Non-performing loan interest	2,442			10,388
Other	9,415			6,343
Total gross deferred tax assets	186,402			189,445
Less valuation allowance	—			(3,431		)
Total deferred tax assets	186,402			186,014
Deferred tax liabilities
Excess tax over financial statement depreciation	(31,260		)	(8,080		)
Other properties held for sale	(5,469		)	(5,447		)
Other	(8,539		)	(6,699		)
Total gross deferred income tax liabilities	(45,268		)	(20,226		)
Net deferred tax assets	$	141,134		$	165,788

The net decrease in the valuation allowance for the years ended December 31, 2018 and 2017 was $3.4 million and $6.2 million, respectively. The decrease in 2018 related to the expiration of unused state tax credits which had a valuation allowance recorded. The decrease in 2017 was related to the expiration of unused state tax credits which had a valuation allowance and the reversal of valuation allowance on state tax credits that now have been determined to be utilized before they expire.

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, 2018, 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, 2018 includes generation of taxable income in 2018, 2017, and 2016, continued improvement in credit quality, strong capital position, as well as sufficient amounts of projected future taxable income, of the appropriate character, to support the realization of the $141.1 million net deferred tax asset at December 31, 2018. Synovus expects to realize its net deferred tax asset of $141.1 million through the reversal of existing taxable temporary differences and projected future taxable income. Based on the assessment of all the positive and negative evidence at December 31, 2018, 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 $141.1 million in net deferred tax assets well in advance of the statutory carryforward period. At December 31, 2018, $88.0 million of existing net deferred tax assets are not related to net operating losses or credits and therefore, have no expiration dates. $33.0 million of the deferred tax assets relate to state net operating losses which will expire in installments annually through the tax year 2036. State tax credits at December 31, 2018 total $20.1 million and have expiration dates through the tax year 2028.

State NOL and tax credit carryforwards as of December 31, 2018 are summarized in the following table.



Tax Carryforwards	As of December 31, 2018
(in thousands)	Expiration Dates	Deferred Tax Asset Balance		Valuation Allowance		Net Deferred Tax Asset Balance		Pre-Tax Earnings Necessary to Realize⁽¹⁾
Net operating losses - states	2023-2027	$	1,431	$	—	$	1,431	$	1,429,499
Net operating losses - states	2028-2032	39,483		—		39,483		914,384
Net operating losses - states	2033-2036	356		—		356		7,356
Other credits - states	2019-2023	20,164		—		20,164		N/A
Other credits - states	2024-2028	2,388		—		2,388		N/A


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

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 2015, and excluding certain limited exceptions, Synovus is no longer subject to income tax examinations by state and local income tax authorities for years before 2015. 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)	2018			2017			2016
Balance at January 1,	$	15,117		$	14,745		$	12,745
Additions based on income tax positions related to current year	1,165			152			—
Additions for income tax positions of prior years⁽¹⁾	2,321			934			1,811
Additions from acquisition	—			—			608
Reductions for income tax positions of prior years	—			(706		)	—
Statute of limitation expirations	(17		)	(8		)	(419		)
Balance at December 31,	$	18,586		$	15,117		$	14,745


⁽¹⁾	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 $227 thousand, $105 thousand, and $38 thousand as of December 31, 2018, 2017 and 2016, respectively. Unrecognized income tax benefits as of December 31, 2018, 2017 and 2016 that, if recognized, would affect the effective income tax rate totaled $15.2 million, $12.3 million and $9.9 million (net of the federal benefit on state income tax issues). Accrued interest and penalties during 2018 and 2017 totaled $193 thousand and $76 thousand, respectively. Synovus expects that $316 thousand of uncertain income tax positions will be either settled or resolved during the next twelve months.