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, 2015

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, and Illinois.

Huntington accounts for uncertainties in income taxes in accordance with ASC 740, Income Taxes. At December 31, 2015, Huntington had gross unrecognized tax benefits of $23 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)	2015			2014
Unrecognized tax benefits at beginning of year	$	1,172		$	704
Gross increases for tax positions taken during current period	23,104			—
Gross increases for tax positions taken during prior years	—			468
Gross decreases for tax positions taken during prior years	(1,172		)	—
Unrecognized tax benefits at end of year	$	23,104		$	1,172

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, $0.1 million of interest benefit, $0.1 million of interest expense, and $0.2 million of interest benefit for the years ended December 31, 2015, 2014 and 2013, respectively. Total interest accrued was $0.1 million and $0.2 million at December 31, 2015 and 2014, 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)	2015		2014			2013
Current tax provision (benefit)
Federal	$	146,195	$	186,436		$	117,174
State	5,677		(1,017		)	4,278
Total current tax provision (benefit)	151,872		185,419			121,452
Deferred tax provision (benefit)
Federal	66,823		41,167			112,681
State	1,953		(5,993		)	(6,659		)
Total deferred tax provision (benefit)	68,776		35,174			106,022
Provision for income taxes	$	220,648	$	220,593		$	227,474

The following is a reconcilement of provision for income taxes:



	Year Ended December 31,
(dollar amounts in thousands)	2015			2014			2013
Provision for income taxes computed at the statutory rate	$	319,762		$	298,545		$	304,065
Increases (decreases):
Tax-exempt income	(20,839		)	(17,971		)	(34,378		)
Tax-exempt bank owned life insurance income	(18,340		)	(19,967		)	(19,747		)
General business credits	(47,894		)	(46,047		)	(39,868		)
State deferred tax asset valuation allowance adjustment, net	—			(7,430		)	(6,020		)
Capital loss	(46,288		)	(26,948		)	(961		)
Affordable housing investment amortization, net of tax benefits	31,741			33,752			16,851
State income taxes, net	4,960			2,873			4,472
Other	(2,454		)	3,786			3,060
Provision for income taxes	$	220,648		$	220,593		$	227,474

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



	At December 31,
(dollar amounts in thousands)	2015			2014
Deferred tax assets:
Allowances for credit losses	$	238,415		$	233,656
Fair value adjustments	121,642			119,512
Net operating and other loss carryforward	61,492			161,548
Accrued expense/prepaid	44,733			48,656
Purchase accounting adjustments	41,917			13,839
Partnership investments	21,614			24,123
Market discount	11,781			12,215
Pension and other employee benefits	2,405			—
Tax credit carryforward	1,823			30,825
Other	11,645			9,477
Total deferred tax assets	557,467			653,851
Deferred tax liabilities:
Lease financing	261,078			202,298
Loan origination costs	114,488			103,025
Mortgage servicing rights	48,514			47,748
Operating assets	46,685			50,266
Securities adjustments	19,952			27,856
Purchase accounting adjustments	6,944			17,299
Pension and other employee benefits	—			9,677
Other	5,463			5,178
Total deferred tax liabilities	503,124			463,347
Net deferred tax asset before valuation allowance	54,343			190,504
Valuation allowance	(3,620		)	(73,057		)
Net deferred tax asset	$	50,723		$	117,447

At December 31, 2015, Huntington’s net deferred tax asset related to loss and other carryforwards was $63 million. This was comprised of federal net operating loss carryforwards of $3 million, which will begin expiring in 2023, $45 million of state net operating loss carryforwards, which will begin expiring in 2016, an alternative minimum tax credit carryforward of $1 million, which may be carried forward indefinitely, a general business credit carryforward of $1 million, which will begin expiring in 2031, and a capital loss carryforward of $13 million, which expires in 2018.

In prior periods, Huntington established a valuation allowance against deferred tax assets for federal capital loss carryforwards, state deferred tax assets, and state net operating loss carryforwards. The federal valuation allowance was based on the uncertainty of forecasted federal taxable income expected of the required character in order to utilize the capital loss carryforward. 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 of the appropriate character and/or within applicable jurisdictions, the Company believes that it is more likely than not the federal capital loss carryforward, and portions of the state deferred tax assets and state net operating loss carryforwards will be realized. As a result of this analysis, there is no federal capital loss carryforward valuation allowance remaining at December 31, 2015 compared to $69 million at December 31, 2014, and the state valuation allowance of $4 million at December 31, 2015 was essentially unchanged compared to $4 million at December 31, 2014.

At December 31, 2015 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, 2015.