INCOME TAXES

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 23 - INCOME TAXES

Citizens uses an asset and liability (balance sheet) approach for financial accounting and reporting of income taxes, resulting in two components of income tax expense: current and deferred. Current income tax expense approximates taxes to be paid or refunded for the current period. Deferred income tax expense results from changes in gross deferred tax assets and liabilities between periods. These gross deferred tax assets and liabilities represent changes in taxes expected to be paid in the future due to reversals of temporary differences between the bases of the assets and liabilities as measured under tax laws and their bases reported in the Consolidated Financial Statements as measured under GAAP.

Citizens also assesses the probability that the positions taken, or expected to be taken, in its income tax returns will be sustained by taxing authorities. A “more likely than not” (more than 50 percent) recognition threshold must be met before a tax benefit can be recognized. Tax positions that are more likely than not to be sustained are reflected in the Company’s Consolidated Financial Statements.

The following table presents total income tax expense:

	Year Ended December 31,
(in millions)	2022	2021	2020
Income tax expense	$582	$658	$241
Tax effect of changes in OCI	(1,319)	(199)	112
Total comprehensive income tax expense (benefit)	($737)	$459	$353

The following table presents the components of income tax expense:

(in millions)	Current	Deferred	Total
Year Ended December 31, 2022
U.S. federal	$355	$88	$443
State and local	170	(31)	139
Total	$525	$57	$582
Year Ended December 31, 2021
U.S. federal	$871	($345)	$526
State and local	216	(84)	132
Total	$1,087	($429)	$658
Year Ended December 31, 2020
U.S. federal	$377	($181)	$196
State and local	102	(57)	45
Total	$479	($238)	$241

The following table presents a reconciliation between the U.S. federal income tax rate and the Company’s effective income tax rate:

	Year Ended December 31,
	2022			2021			2020
(in millions, except ratio data)	Amount	Rate		Amount	Rate		Amount	Rate
U.S. federal income tax expense and tax rate	$558	21.0	%	$625	21.0	%	$273	21.0	%
Increase (decrease) resulting from:
State and local income taxes (net of federal benefit)	133	5.0		126	4.2		54	4.2
Bank-owned life insurance	(19)	(0.7)		(14)	(0.5)		(12)	(0.9)
Tax-exempt interest	(8)	(0.3)		(7)	(0.2)		(10)	(0.7)
Tax advantaged investments (including related credits)	(102)	(3.8)		(95)	(3.2)		(68)	(5.3)
Other tax credits	(9)	(0.3)		(7)	(0.2)		(6)	(0.5)
Adjustments for uncertain tax positions	1	—		3	0.1		(1)	(0.1)
Non-deductible FDIC premiums	20	0.7		14	0.5		14	1.1
Legacy tax matters	3	0.1		—	—		(4)	(0.3)
Other	5	0.2		13	0.4		1	—
Total income tax expense and tax rate	$582	21.9	%	$658	22.1	%	$241	18.5	%

The following table presents the tax effects of temporary differences that give rise to significant portions of the Company’s deferred tax assets and liabilities:

	December 31,
(in millions)	2022	2021
Deferred tax assets:
Other comprehensive income	$1,546	$227
Allowance for credit losses	511	448
Federal and state net operating and capital loss carryforwards	77	50
Accrued expenses not currently deductible	863	676
Investment and other tax credit carryforwards	131	110
Other	19	—
Total deferred tax assets	3,147	1,511
Valuation allowance	(133)	(103)
Deferred tax assets, net of valuation allowance	3,014	1,408
Deferred tax liabilities:
Leasing transactions	287	331
Amortization of intangibles	413	379
Depreciation	470	256
Pension and other employee compensation plans	128	132
Partnerships	87	95
Deferred Income	12	85
MSRs	203	130
Total deferred tax liabilities	1,600	1,408
Net deferred tax asset (liability)	$1,414	$—

Deferred tax assets are recognized for net operating loss carryforwards, capital loss carryforwards and tax credit carryforwards. Valuation allowances are recorded, as necessary, to reduce deferred tax assets to the amounts that management concludes are more likely than not to be realized.

At December 31, 2022, the Company had federal and state tax net operating loss carryforwards of $719 million and capital loss carryforwards of $133 million. The majority of the federal and state tax net operating loss carryforwards, if not utilized, will expire in varying amounts through 2040, while the capital loss and tax credit carryforwards expire in varying amounts through 2027 and 2029, respectively. Limitations on the ability to realize these carryforwards are reflected in the associated valuation allowance. At December 31, 2022, the Company had a valuation allowance of $133 million against various deferred tax assets related to federal and state net operating losses, capital losses and state tax credits, as the Company’s current assessment is that it is more likely than not that the Company will not recognize a portion of the deferred tax assets related to these items.

Effective with the fiscal year ended September 30, 1997, the reserve method for bad debts was no longer permitted for tax purposes. The repeal of the reserve method required the recapture of the reserve balance in excess of certain base year reserve amounts attributable to years ended prior to 1988. At December 31, 2022, the Company’s base year loan loss reserves attributable to years ended prior to 1988, for which no deferred income taxes have been provided, was $557 million. This base year reserve may become taxable if certain distributions are made with respect to the stock of the Company or if CBNA ceases to qualify as a bank for tax purposes. No actions are planned that would cause this reserve to become wholly or partially taxable.

Citizens files income tax returns in the U.S. federal jurisdiction and in various state and local jurisdictions. With few exceptions, the Company is no longer subject to U.S. federal or state and local income tax examinations by major tax authorities for years before 2018.

The following table presents a reconciliation of the beginning and ending amount of unrecognized tax benefits:

	December 31,
(in millions)	2022	2021	2020
Balance at the beginning of the year	$7	$4	$5
Gross increase for tax positions related to current year	—	1	—
Gross increase for tax positions related to prior years	—	3	—
Decrease for tax positions as a result of the lapse of the statutes of limitations	—	(1)	(1)
Decrease for tax positions related to settlements with taxing authorities	(1)	—	—
Balance at end of year	$6	$7	$4

Tax positions are measured as the largest amount of tax benefit that is greater than 50 percent likely of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The difference between the benefit recognized for a position and the tax benefit claimed on a tax return is referred to as an unrecognized tax benefit. Any adjustment to unrecognized tax benefits is recorded in income tax expense in the Consolidated Statements of Operations. The Company does not expect the balance of unrecognized tax benefits to significantly change in the next twelve months.