Huntington Bancshares Incorporated Annual report pursuant to Section 13 and 15(d)

Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

INCOME TAXES

12 Months Ended

Dec. 31, 2016

The Company and its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state, city, and foreign jurisdictions. Federal income tax audits have been completed through 2009. The IRS is currently examining our 2010 and 2011 consolidated federal income tax returns. Various state and other jurisdictions remain open to examination, including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, Wisconsin, and Illinois.

Huntington accounts for uncertainties in income taxes in accordance with ASC 740, Income Taxes. At December 31, 2016, Huntington had gross unrecognized tax benefits of $24 million in income tax liability related to uncertain tax positions. Due to the complexities of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities. Huntington does not anticipate the total amount of gross unrecognized tax benefits to significantly change within the next 12 months.

The following table provides a reconciliation of the beginning and ending amounts of gross unrecognized tax benefits:



(dollar amounts in thousands)	2016		2015
Unrecognized tax benefits at beginning of year	$	23,104	$	1,172
Gross increases for tax positions taken during current period	657		23,104
Gross increases for tax positions taken during prior years	—		—
Gross decreases for tax positions taken during prior years	—		(1,172		)
Unrecognized tax benefits at end of year	$	23,761	$	23,104

Any interest and penalties on income tax assessments or income tax refunds are recognized in the Consolidated Statements of Income as a component of provision for income taxes. Huntington recognized, no interest expense, $0.1 million of interest benefit, and $0.1 million of interest expense for the years ended December 31, 2016, 2015 and 2014, respectively. Total interest accrued was $0.1 million and $0.1 million at December 31, 2016 and 2015, respectively. All of the gross unrecognized tax benefits would impact the Company’s effective tax rate if recognized.

The following is a summary of the provision (benefit) for income taxes:



	Year Ended December 31,
(dollar amounts in thousands)	2016		2015		2014
Current tax provision (benefit)
Federal	$	39,738	$	146,195	$	186,436
State	3,456		5,677		(1,017		)
Total current tax provision (benefit)	43,194		151,872		185,419
Deferred tax provision (benefit)
Federal	160,610		66,823		41,167
State	4,137		1,953		(5,993		)
Total deferred tax provision (benefit)	164,747		68,776		35,174
Provision for income taxes	$	207,941	$	220,648	$	220,593

The following is a reconciliation for provision for income taxes:



	Year Ended December 31,
(dollar amounts in thousands)	2016			2015			2014
Provision for income taxes computed at the statutory rate	$	321,925		$	319,762		$	298,545
Increases (decreases):
Tax-exempt income	(27,453		)	(20,839		)	(17,971		)
Tax-exempt bank owned life insurance income	(20,149		)	(18,340		)	(19,967		)
General business credits	(64,151		)	(47,894		)	(46,047		)
State deferred tax asset valuation allowance adjustment, net	—			—			(7,430		)
Capital loss	(45,500		)	(46,288		)	(26,948		)
Affordable housing investment amortization, net of tax benefits	36,848			31,741			33,752
State income taxes, net	4,936			4,960			2,873
Other	1,485			(2,454		)	3,786
Provision for income taxes	$	207,941		$	220,648		$	220,593

The significant components of deferred tax assets and liabilities at December 31, were as follows:



	At December 31,
(dollar amounts in thousands)	2016			2015
Deferred tax assets:
Allowances for credit losses	$	254,977		$	238,415
Fair value adjustments	216,768			121,642
Net operating and other loss carryforward	140,842			61,492
Tax credit carryforward	76,328			1,823
Accrued expense/prepaid	64,380			44,733
Pension and other employee benefits	34,921			2,405
Partnership investments	22,514			21,614
Market discount	8,295			11,781
Purchase accounting adjustments	—			41,917
Other	10,506			11,645
Total deferred tax assets	829,531			557,467
Deferred tax liabilities:
Lease financing	325,091			261,078
Loan origination costs	137,577			114,488
Purchase accounting adjustments	74,371			6,944
Securities adjustments	55,786			19,952
Operating assets	54,372			46,685
Mortgage servicing rights	51,440			48,514
Pension and other employee benefits	—			—
Other	8,796			5,463
Total deferred tax liabilities	707,433			503,124
Net deferred tax asset before valuation allowance	122,098			54,343
Valuation allowance	(5,003		)	(3,620		)
Net deferred tax asset	$	117,095		$	50,723

At December 31, 2016, Huntington’s net deferred tax asset related to loss and other carryforwards was $217 million. This was comprised of federal net operating loss carryforwards of $97 million, which will begin expiring in 2023, $44 million of state net operating loss carryforwards, which will begin expiring in 2017, an alternative minimum tax credit carryforward of $73 million, which may be carried forward indefinitely, and a general business credit carryforward of $3 million, which will begin expiring in 2030.

In prior periods, Huntington established a valuation allowance against deferred tax assets for state deferred tax assets, and state net operating loss carryforwards. The state valuation allowance was based on the uncertainty of forecasted state taxable income expected in applicable jurisdictions in order to utilize the state deferred tax assets and state net operating loss carryforwards. Based on current analysis of both positive and negative evidence and projected forecasted taxable income within applicable jurisdictions, the Company believes that it is more likely than not, portions of the state deferred tax assets and state net operating loss carryforwards will be realized. As a result of this analysis, the state valuation allowance was $5 million at December 31, 2016 compared to $4 million at December 31, 2015.

At December 31, 2016 retained earnings included approximately $12 million of base year reserves of acquired thrift institutions, for which no deferred federal income tax liability has been recognized. Under current law, if these bad debt reserves are used for purposes other than to absorb bad debt losses, they will be subject to federal income tax at the current corporate rate. The amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction was approximately $4 million at December 31, 2016.