Note 24 - Income Taxes

The components of income tax (benefit) expense from continuing operations for the years ended December 31, 2013, 2012, and 2011 are presented below:



(in thousands)	2013			2012		2011
Current
Federal	$	5,460		2,831		(99	)
State	(2,630		)	(6,885	)	1,768
Total current income tax expense (benefit)	2,830			(4,054	)	1,669
Deferred
Federal	78,870			(666,242	)	535
State	11,545			(128,436	)	(892	)
Total deferred income tax expense (benefit)	90,415			(794,678	)	(357	)
Total income tax expense (benefit)	$	93,245		(798,732	)	1,312

Income tax expense (benefit) 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 an increase of $317 thousand and a decrease of $715 thousand for the years ended December 31, 2013 and 2012, respectively, relating to share-based compensation transactions. There were no such items for 2011.

Income tax expense (benefit) as shown in the Consolidated Statements of Income differed from the amounts computed by applying the U.S. federal income tax rate of 35% to income (loss) before income taxes. A reconciliation of the differences for the years ended December 31, 2013, 2012 and 2011 is shown below:



	Years Ended December 31,
(in thousands)	2013			2012		2011
Income tax expense (benefit) at statutory federal income tax rate	$	88,420		11,017		(20,836	)
Increase (decrease) resulting from:
State income tax expense (benefit), net of federal income tax effect	9,877			(3,935	)	(3,084	)
Tax-exempt income	(1,407		)	(2,026	)	(2,316	)
Tax credits	(1,473		)	(1,558	)	(1,461	)
Cash surrender value of life insurance	(2,932		)	(2,907	)	(2,911	)
Change in valuation allowance, federal and state	(4,083		)	(802,771	)	31,844
Other, net	4,842			3,448		76
Total income tax expense (benefit)	$	93,245		(798,732	)	1,312

The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and liabilities at December 31, 2013 and 2012 are presented below.



(in thousands)	2013			2012
Deferred tax assets
Net operating loss carryforwards	$	510,350		590,938
Allowance for loan losses	136,510			179,916
Tax credit carryforwards	45,767			44,563
Deferred revenue	15,474			12,253
Share-based compensation	12,414			13,303
Net unrealized losses on investment securities available for sale	9,776			—
Other	48,852			27,990
Total gross deferred tax assets	779,143			868,963
Less valuation allowance	(14,575		)	(18,658	)
Total deferred tax assets	764,568			850,305
Deferred tax liabilities
Excess tax over financial statement depreciation	(8,210		)	(13,945	)
Ownership interest in partnership	(5,961		)	(2,721	)
Net unrealized gains on investment securities available for sale	—			(19,051	)
Other	(5,751		)	(8,182	)
Total gross deferred tax liabilities	(19,922		)	(43,899	)
Net deferred tax asset	$	744,646		806,406

The net decrease in the valuation allowance for the years ended December 31, 2013 and 2012 was $4.1 million and $802.8 million, respectively. The net decrease in the valuation allowance for the year ended December 31, 2013 is due to the Company's election to file, in one of its states of operation, a consolidated state income tax return. The net addition to the valuation allowance for the year ended December 31, 2011 was $31.8 million.

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, 2012, the Company remained in a three-year cumulative loss position, which represented 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 would 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 was 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 were expected to expire before they could be utilized.

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 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 $806.4 million of the Company's net deferred tax asset at December 31, 2012.

At December 31, 2013, the Company is no longer in a three-year cumulative loss position; accordingly, it no longer has this 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, 2013 includes an increase in taxable income in 2013 vs. 2012, continued improvement in credit quality, an additional year under the enhanced credit risk policy which reduces 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 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 $744.6 million of the Company’s net deferred tax asset at December 31, 2013. The Company expects to realize its net deferred tax asset of $744.6 million at December 31, 2013 through the reversal of existing taxable temporary differences and projected future taxable income. The valuation allowance of $14.6 million at December 31, 2013 relates to specific state income tax credits that have various expiration dates through the tax year 2023, and are expected to expire before they can be realized.

Synovus expects to realize substantially all of the $744.6 million in net deferred tax assets well in advance of the statutory carryforward period. At December 31, 2013, $203.0 million of existing deferred tax assets are not related to net operating losses or credits and therefore, have no expiration dates. $445.7 million of the remaining deferred tax assets relate to federal net operating losses which expire in years beginning in 2028 through 2032. Additionally, $64.7 million of the deferred tax assets relate to state net operating losses which will expire in installments annually through the tax year 2033. Tax credit carryforwards at December 31, 2013 include federal alternative minimum tax credits totaling $21.3 million which have an unlimited carryforward period. Other federal and state tax credits at December 31, 2013 total $24.5 million and have expiration dates through the tax year 2033.

Federal and state NOL and tax credit carryforwards as of December 31, 2013 are summarized in the following table.



Tax Carryforwards	As of December 31, 2013
(in thousands)	Expiration Dates	Deferred Tax Asset Balance		Valuation Allowance		Net Deferred Tax Asset Balance
Net operating losses - federal	2028-2032	$	445,675	—		445,675
General business credits - federal	2028-2033	9,297		—		9,297
Net operating losses - states	2013-2017	37		—		37
Net operating losses - states	2018-2022	—		—		—
Net operating losses - states	2023-2027	4,074		—		4,074
Net operating losses - states	2028-2033	60,563		—		60,563
Other credits - states	2014-2017	12,307		(11,752	)	555
Other credits - states	2018-2023	2,899		(2,823	)	76
Alternative minimum tax credits - federal	None	$	21,264	—		21,264

The valuation allowance could fluctuate in future periods based on the assessment of the positive and negative evidence. Management's conclusion at December 31, 2013 that it is more likely than not that the net deferred tax assets of $744.6 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. 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 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; likewise, the Company is not currently subject to any state income tax examinations. Synovus is no longer subject to income tax examinations by the IRS for years before 2009, and excluding certain limited exceptions, Synovus is no longer subject to income tax examinations by state and local income tax authorities for years before 2009. 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)	2013			2012
Balance at January 1,	$	1,120		5,985
Additions based on income tax positions related to current year	—			227
Additions for income tax positions of prior years	224			175
Deductions for income tax positions of prior years	(238		)	(2,774	)
Statute of limitation expirations	(194		)	(1,068	)
Settlements	—			(1,425	)
Balance at December 31,	$	912		1,120

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 $163 thousand and $109 thousand as of January 1 and December 31, 2013, respectively. Unrecognized income tax benefits as of January 1 and December 31, 2013 that, if recognized, would affect the effective income tax rate totaled $834 thousand and $663 thousand (net of the federal benefit on state income tax issues), respectively, which includes interest and penalties of $106 thousand and $71 thousand, respectively. Synovus expects that $162 thousand of uncertain income tax positions will be either settled or resolved during the next twelve months.