Income Taxes

12 Months Ended

Dec. 31, 2022

Income Tax Disclosure [Abstract]

Income Taxes

INCOME TAXES

The provision (benefit) for income taxes for the year ended December 31, 2022, 2021 and 2020 is comprised of the following:

Provision (Benefit) for Income Taxes

dollars in millions	Year ended December 31
	2022		2021		2020
Current U.S. federal income tax provision	$	58	$	140	$	137
Deferred U.S. federal income tax provision / (benefit)	170		(6)		(29)
Total federal income tax provision	228		134		108
Current state and local income tax provision	4		21		15
Deferred state and local income tax provision / (benefit)	23		(1)		3
Total state and local income tax provision	27		20		18
Total non-U.S. income tax provision	9		—		—
Total provision for income taxes	$	264	$	154	$	126

A reconciliation from the U.S. Federal statutory rate to BancShares’ actual effective income tax rate for the year ended December 31, 2022, 2021 and 2020 is the following:

Percentage of Pretax Income

dollars in millions	Effective Tax Rate
	2022						2021						2020
	Pretax Income		Income Tax Expense (Benefit)		Percentage of Pretax Income		Pretax Income		Income Tax Expense (Benefit)		Percentage of Pretax Income		Pretax Income		Income Tax Expense (Benefit)		Percentage of Pretax Income
Federal income taxes and rate	$	1,362	$	286	21.0	%	$	701	$	147	21.0	%	$	618	$	130	21.0	%
Increase (decrease) due to:
State and local income taxes, net of federal income tax benefit			53		3.9	%			16		2.2	%			14		2.2	%
Non-taxable bargain purchase gain (1)			(105)		(7.7)	%			—		—	%			—		—	%
Domestic tax credits			(20)		(1.5)	%			(5)		(0.7)	%			(5)		(0.9)	%
Effect of BOLI surrender (1)			48		3.5	%			—		—	%			—		—	%
Deferred tax liability adjustment			(8)		(0.6)	%			—		—	%			—		—	%
Difference in tax rates applicable to non-U.S. earnings			1		0.1	%			—		—	%			—		—	%
Repayment of claim of right income			—		—	%			(2)		(0.3)	%			(14)		(2.2)	%
Valuation allowances			(5)		(0.4)	%			—		—	%			—		—	%
Other			14		1.1	%			(2)		(0.2)	%			1		0.3	%
Provision for income taxes and effective tax rate			$	264	19.4	%			$	154	22.0	%			$	126	20.4	%

(1) Income tax expense (benefit) includes, if applicable, federal, state, foreign and penalty taxes.

Income tax expense for 2021 and 2020 was favorably impacted by $2 million and $14 million respectively, due to BancShares’ decision in the second quarter of 2020 to utilize an allowable alternative for computing its 2021 and 2020 federal income tax liability. The allowable alternative provides BancShares the ability to use the federal income tax rate for certain current year deductible amounts related to prior year FDIC-assisted acquisitions that was applicable when these amounts were originally subjected to tax.

As a result of the CIT Merger, BancShares permanently reinvested eligible earnings of certain foreign subsidiaries and accordingly, does not accrue any U.S. or foreign taxes that would be due if those earnings were repatriated. As of December 31, 2022, this assertion resulted in an unrecognized net deferred tax liability of $18 million on reinvested earnings of $665 million.

The tax effects of temporary differences that give rise to deferred income tax assets and liabilities at December 31, 2022 and 2021 are presented below:

Components of Deferred Income Tax Assets and Liabilities

dollars in millions	2022		2021
Deferred Tax Assets:
Net operating loss (NOL) carry forwards	$	358	$	8
Basis difference in loans	57		—
Allowance for credit losses	252		40
Accrued liabilities and reserves	37		6
Deferred compensation	51		19
Right of use - lease liability	92		14
Domestic tax credits	176		—
Mark to market adjustments	28		—
Capitalized costs	15		—
Unrealized net loss on securities AFS	275		5
Other	48		17
Total gross deferred tax assets	1,389		109
Deferred Tax Liabilities:
Operating leases	(1,311)		—
Right of use - lease asset	(86)		(14)
Loans and direct financing leases	(43)		(8)
Deferred BOLI Gain	(15)		—
Pension	(54)		(64)
Prepaid expenses	(14)		—
Market discount accretion	(35)		—
Other	(47)		(56)
Total deferred tax liabilities	(1,605)		(142)
Total net deferred tax liability before valuation allowances	(216)		(33)
Less: valuation allowances	(70)		—
Net deferred tax liability after valuation allowances	$	(286)	$	(33)

Net Operating Loss Carryforwards and Valuation Adjustments

As a result of the CIT Merger, BancShares’ net deferred tax liabilities increased by approximately $300 million. That amount included an increase to deferred tax assets (“DTAs”) primarily from net operating losses, capitalized costs and tax credits net of deferred tax liabilities, primarily from operating leases.

As of December 31, 2022, BancShares has DTAs totaling $358 million on its global NOLs. This includes: (1) a DTA of $192 million relating to its cumulative U.S. federal NOLs of $913 million; (2) DTAs of $150 million relating to cumulative state NOLs of $2.8 billion, including amounts of reporting entities that file in multiple jurisdictions, and (3) DTAs of $16 million relating to cumulative non-U.S. NOLs of $68 million. The U.S. federal NOLs will begin to expire in 2030 and state NOLs will begin to expire in 2024.

As of December 31, 2022, BancShares has deferred tax assets of $176 million from its domestic tax credits. This includes: (1) DTAs of $167 million from federal tax credits and (2) DTAs of $9 million from state tax credits. The federal tax credits begin to expire in 2032 and the state tax credits have an indefinite carryforward.

During 2022, Management updated BancShares’ long-term forecast of future U.S. federal taxable income. The updated forecast continues to support the realization of the U.S. federal DTAs on NOLs and therefore no valuation allowance is necessary. However, a valuation allowance of $67 million was retained on U.S. state DTAs relating to certain state NOLs as of December 31, 2022.

BancShares maintained a valuation allowance of $3 million against certain non-U.S. reporting entities' net DTAs at December 31, 2022. There was no valuation allowance at December 31, 2021. The increase is mainly related to the CIT Merger. BancShares’ ability to recognize DTAs is evaluated on a quarterly basis to determine if there are any significant events that would affect our ability to utilize existing DTAs. If events are identified that affect our ability to utilize our DTAs, the respective valuation allowance may be adjusted accordingly.

Liabilities for Unrecognized Tax Benefits

A reconciliation of the beginning and ending amount of unrecognized tax benefits ("UTBs") is as follows:

Unrecognized Tax Benefits (1)

dollars in millions	Liabilities for Unrecognized Tax Benefits		Interest / Penalties		Total
Balance at December 31, 2021	$	30	$	1	$	31
Effect of CIT Merger	4		2		6
Additions for tax positions related to prior years	1		—		1
Reductions for tax positions of prior years	(2)		—		(2)
Expiration of statutes of limitations	(1)		—		(1)
Settlements	(5)		—		(5)
Balance at December 31, 2022	$	27	$	3	$	30

(1) Tabular rollforward does not present the comparable data for the prior years, as activity in the prior years was not material.

BancShares recognizes tax benefits when it is more likely than not that the position will prevail, based solely on the technical merits under the tax law of the relevant jurisdiction. BancShares will recognize the tax benefit if the position meets this recognition threshold determined based on the largest amount of the benefit that is more than likely to be recognized.

As a result of the CIT Merger, BancShares’ liabilities for unrecognized tax benefits, including interest and penalties, increased by $6 million. During the year ended December 31, 2022, BancShares recorded a net decrease in UTBs, including interest and penalties. The net decrease primarily related to settlements, partially offset by the increase resulting from the CIT Merger.

As of December 31, 2022, the accrued liability for interest and penalties is $3 million. BancShares recognizes accrued interest and penalties on UTBs in income tax expense.

BancShares has UTBs relating to uncertain state tax positions in North Carolina and other state jurisdictions resulting from tax filings submitted to the states. No tax benefit has been recorded for these uncertain tax positions in the consolidated financial statements. It is reasonably possible that these uncertain tax positions may be settled or resolved in the next twelve months. No reasonable estimate of the settlement or resolution can be made.

The entire $30 million of UTBs including interest and penalties at December 31, 2022, would lower BancShares’ effective tax rate, if realized. Management believes that it is reasonably possible the total potential liability before interest and penalties may be increased or decreased by $10 million within the next twelve months of the reporting date because of anticipated settlement with taxing authorities, resolution of open tax matters, and the expiration of various statutes of limitations.

Income Tax Audits

BancShares is subject to examinations by the U.S. Internal Revenue Service (“IRS”) and other taxing authorities in jurisdictions where BancShares has significant business operations. The tax years under examination vary by jurisdiction. BancShares does not expect completion of those audits to have a material impact on the firm’s financial condition, but it may be material to operating results for a particular period, depending, in part, on the operating results for that period.

The table below presents the earliest tax years that remain subject to examination by major jurisdiction.

Jurisdiction	December 31, 2022
U.S. Federal	2019
New York State and City	2015
North Carolina	2019
California	2017
Canada	2015

BancShares and its subsidiaries are subject to examinations by the IRS and other taxing authorities in jurisdictions where BancShares has business operations for years ranging from 2012 through 2022. Management does not anticipate that the completion of these examinations will have a material impact on the firm’s financial condition, but it may be material to operating results for a particular period, depending, in part, on the operating results for that period.