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, 2018

The Company’s deferred federal and state income tax and related valuation accounts represents the estimated impact of temporary differences between how we recognize our assets and liabilities under GAAP and how such assets and liabilities are recognized under federal and state tax law. Deferred tax assets and liabilities are determined based on the difference between the financial statement and tax bases of assets and liabilities as measured by the enacted tax rates which will be in effect when these differences reverse. As a result of the reduction in the U.S. corporate income tax rate from 35% to 21% under the TCJA, the Company revalued its ending net deferred tax liabilities at December 31, 2017. The Company recognized a $123 million tax benefit in the Company’s Consolidated Statement of Income for the year ended December 31, 2017, as a result of the TCJA, of which the benefit recognized is primarily attributable to the revaluation of net deferred tax liabilities. The Company completed its provisional estimate related to tax reform during 2018, recognizing an additional immaterial benefit during the 2018 third quarter.

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 for tax years through 2009. Certain proposed adjustments resulting from the IRS examination of our 2010 through 2011 tax returns have been settled, subject to final approval by the Joint Committee on Taxation of the U.S. Congress. While the statute of limitations remains open for tax years 2012 through 2017, the IRS has advised that tax years 2012 through 2014 will not be audited, and began the examination of the 2015 federal income tax return in second quarter 2018. Various state and other jurisdictions remain open to examination, including Ohio, Kentucky, Indiana, Michigan, Pennsylvania, West Virginia, Wisconsin, and Illinois.

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



(dollar amounts in millions)	2018			2017
Unrecognized tax benefits at beginning of year	$	50		$	24
Gross increases for tax positions taken during prior years	—			26
Gross decreases for tax positions taken during prior years	(12		)	—
Settlements with taxing authorities	(38		)	—
Unrecognized tax benefits at end of year	$	—		$	50

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. Total interest accrued was less than $1 million at December 31, 2018 and 2017. 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 millions)	2018			2017			2016
Current tax provision (benefit)
Federal	$	152		$	41		$	40
State	20			(1		)	3
Total current tax provision	172			40			43
Deferred tax provision (benefit)
Federal	71			151			161
State	(8		)	17			4
Total deferred tax provision	63			168			165
Provision for income taxes	$	235		$	208		$	208

The following is a reconciliation for provision for income taxes:



	Year Ended December 31,
(dollar amounts in millions)	2018			2017			2016
Provision for income taxes computed at the statutory rate	$	342		$	488		$	322
Increases (decreases):
Tax-exempt income	(23		)	(31		)	(27		)
Tax-exempt bank owned life insurance income	(14		)	(23		)	(20		)
General business credits	(80		)	(71		)	(64		)
Capital loss	(60		)	(67		)	(46		)
Impact from TCJA	(3		)	(123		)	—
Affordable housing investment amortization, net of tax benefits	64			46			37
State income taxes, net	10			11			5
Stock based compensation	(14		)	(13		)	(4		)
Other	13			(9		)	5
Provision for income taxes	$	235		$	208		$	208

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



	At December 31,
(dollar amounts in millions)	2018			2017
Deferred tax assets:
Allowances for credit losses	$	184		$	162
Fair value adjustments	173			142
Net operating and other loss carryforward	95			108
Accrued expense/prepaid	16			17
Pension and other employee benefits	14			—
Market discount	6			10
Partnership investments	5			7
Tax credit carryforward	—			153
Other assets	6			6
Total deferred tax assets	499			605
Deferred tax liabilities:
Lease financing	262			249
Loan origination costs	148			116
Operating assets	69			53
Mortgage servicing rights	45			39
Purchase accounting adjustments	25			68
Securities adjustments	6			6
Deferred dividend income	—			77
Pension and other employee benefits	—			5
Other liabilities	2			18
Total deferred tax liabilities	557			631
Net deferred tax (liability) asset before valuation allowance	(58		)	(26		)
Valuation allowance	(6		)	(6		)
Net deferred tax (liability) asset	$	(64	)	$	(32	)

At December 31, 2018, Huntington’s net deferred tax asset related to loss and other carryforwards was $95 million. This was comprised of federal net operating loss carryforwards of $51 million, which will begin expiring in 2030, $44 million of state net operating loss carryforwards, which will begin expiring in 2019, and an alternative minimum tax credit carryforward of less than $1 million, which will be fully utilized or refunded by 2022.

The state valuation allowance was $6 million at both December 31, 2018 and December 31, 2017, as the Company believes that it is more likely than not, portions of the state deferred tax assets and state net operating loss carryforwards will not be realized.

At December 31, 2018, 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 corporate tax rate enacted at the time. The amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction was approximately $3 million at December 31, 2018.