INCOME TAXES

9 Months Ended

Sep. 30, 2023

Income Tax Disclosure [Abstract]

INCOME TAXES

INCOME TAXES

Income tax expense for the three and nine months ended September 30, 2023 and 2022 was computed using an estimated annual effective tax rate (“ETR”), with discrete items recognized in the period in which they occur. The estimated ETR is revised, as necessary, at the end of successive interim reporting periods.

During the fourth quarter of 2022, the Company established a valuation allowance of $1.5 billion against its deferred tax asset related to unrealized capital losses in the AFS securities portfolio. Adjustments to the valuation allowance due to changes in the portfolio’s unrealized capital loss are recorded in other comprehensive income. For the nine months ended September 30, 2023, the Company recorded a decrease to the valuation allowance of $137 million in other comprehensive income.

As of each reporting date, management considers new evidence, both positive and negative, that could affect its view of the future realization of deferred tax assets. Adjustments to the valuation allowance due to new facts or evidence are recorded in net income. During the nine months ended September 30, 2023, the Company increased its borrowing capacity and available liquidity so that the Company now has the ability and intent to hold the underlying securities in its available for sale portfolio to recovery to the extent that additional deferred tax asset would be realized. Based on all available evidence, as of September 30, 2023, the Company concluded that approximately three quarters of the deferred tax asset related to unrealized tax capital losses is more-likely-than-not to be realized and a full valuation allowance is not necessary. For the three and nine months ended September 30, 2023, the Company recorded an increase to the valuation allowance of $20 million and a decrease of $920 million, respectively, in net income. A valuation allowance of $433 million remains against the portion of the deferred tax asset that is still not more-likely-than-not to be realized.

The Company uses the aggregate portfolio approach related to the stranded or disproportionate income tax effects in accumulated other comprehensive income related to available for sale securities. Under this approach, the disproportionate tax effect remains intact as long as the investment portfolio remains.