INCOME TAXES

12 Months Ended

Dec. 31, 2023

Income Tax Disclosure [Abstract]

INCOME TAXES

NOTE 23 - INCOME TAXES

Income taxes are accounted for under the asset and liability method, 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 while deferred income tax expense results from changes in gross deferred tax assets and liabilities between periods. Gross deferred tax assets and liabilities represent changes in taxes expected to be paid in the future due to the reversal of temporary differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases.

Citizens assesses the probability that positions taken, or expected to be taken, in its income tax returns will be sustained by taxing authorities. A “more likely than not” (i.e., 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,
(dollars in millions)	2023	2022	2021
Income tax expense	$422	$582	$658
Tax effect of changes in OCI	289	(1,319)	(199)
Total comprehensive income tax expense (benefit)	$711	($737)	$459

The following table presents the components of income tax expense:

(dollars in millions)	Current	Deferred	Total
Year Ended December 31, 2023
U.S. federal	$497	($135)	$362
State and local	167	(107)	60
Total	$664	($242)	$422
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

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,
	2023			2022			2021
(dollars in millions)	Amount	Rate		Amount	Rate		Amount	Rate
U.S. federal income tax expense and tax rate	$426	21.0	%	$558	21.0	%	$625	21.0	%
Increase (decrease) resulting from:
State and local income taxes (net of federal benefit)	58	2.9		133	5.0		126	4.2
Bank-owned life insurance	(20)	(1.0)		(19)	(0.7)		(14)	(0.5)
Tax-exempt interest	(12)	(0.6)		(8)	(0.3)		(7)	(0.2)
Tax advantaged investments (including related credits)	(77)	(3.8)		(102)	(3.8)		(95)	(3.2)
Other tax credits	(3)	(0.1)		(9)	(0.3)		(7)	(0.2)
Adjustments for uncertain tax positions	5	0.2		1	—		3	0.1
Non-deductible FDIC insurance premiums	35	1.7		20	0.7		14	0.5
Legacy tax matters	—	—		3	0.1		—	—
Other	10	0.5		5	0.2		13	0.4
Total income tax expense and effective tax rate	$422	20.8	%	$582	21.9	%	$658	22.1	%

The following table presents the significant components of the Company’s deferred tax assets and liabilities:

	December 31,
(dollars in millions)	2023	2022
Deferred tax assets:
Other comprehensive income	$1,291	$1,546
Allowance for credit losses	555	511
Federal and state net operating and capital loss carryforwards	79	77
Accrued expenses	1,152	863
Investment and other tax credit carryforwards	130	131
Other	9	19
Total deferred tax assets	3,216	3,147
Valuation allowance	(137)	(133)
Deferred tax assets, net of valuation allowance	3,079	3,014
Deferred tax liabilities:
Leasing transactions	297	287
Amortization of intangibles	421	413
Depreciation	532	470
Pension and other employee compensation plans	130	128
Partnerships	12	87
Deferred Income	3	12
MSRs	252	203
Total deferred tax liabilities	1,647	1,600
Net deferred tax asset (liability)	$1,432	$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 amount that management concludes is more likely than not to be realized.

At December 31, 2023, the Company had federal and state tax net operating loss carryforwards of $651 million and capital loss carryforwards of $152 million. The majority of the federal and state tax net operating loss carryforwards, if not utilized, will expire in varying amounts through 2042, while the capital loss and tax credit carryforwards expire in varying amounts through 2027 and 2030, respectively. Limitations on the ability to realize these carryforwards are reflected in the associated valuation allowance. At December 31, 2023, the Company had a valuation allowance of $137 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 a portion of the deferred tax assets related to these items will not be realized.

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, 2023, 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 any portion of this reserve to become taxable.

The Company 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 2016.

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

	December 31,
(dollars in millions)	2023	2022	2021
Balance at the beginning of the year	$6	$7	$4
Gross increase for tax positions related to current year	1	—	1
Gross increase for tax positions related to prior years	1	—	3
Decrease for tax positions as a result of the lapse of the statutes of limitations	—	—	(1)
Decrease for tax positions related to settlements with taxing authorities	(1)	(1)	—
Balance at end of year	$7	$6	$7

Tax positions are measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority. The difference between the benefit recognized 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.

Interest and penalties related to unrecognized tax benefits are reported in income tax expense in the Consolidated Statements of Operations. The Company’s liability for accrued interest related to unrecognized tax benefits was $4 million as of December 31, 2023 and immaterial as of December 31, 2022. In addition, the income tax expense recognized for interest related to unrecognized tax benefits was $3 million for the year ended December 31, 2023 and immaterial for the years ended December 31, 2022 and 2021. No amounts were accrued for penalties as of December 31, 2023 and 2022, and no penalties were recognized in income tax expense during the years ended December 31, 2023, 2022 and 2021.