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INCOME TAXES

12 Months Ended

Dec. 31, 2020

NOTE 22 - 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)	2020	2019	2018
Income tax expense	$241	$460	$462
Tax effect of changes in OCI	112	225	(96)
Total comprehensive income tax expense	$353	$685	$366

The following table presents the components of income tax expense:


(in millions)	Current	Deferred	Total
Year Ended December 31, 2020
U.S. federal	$377	($181)	$196
State and local	102	(57)	45
Total	$479	($238)	$241
Year Ended December 31, 2019
U.S. federal	$323	$64	$387
State and local	73	—	73
Total	$396	$64	$460
Year Ended December 31, 2018
U.S. federal	$271	$90	$361
State and local	94	7	101
Total	$365	$97	$462

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,
	2020			2019			2018
(in millions, except ratio data)	Amount	Rate		Amount	Rate		Amount	Rate
U.S. federal income tax expense and tax rate	$273	21.0	%	$473	21.0	%	$459	21.0	%
Increase (decrease) resulting from:
Federal rate change	—	—		—	—		(34)	(1.6)
State and local income taxes (net of federal benefit)	54	4.2		73	3.2		89	4.1
Bank-owned life insurance	(12)	(0.9)		(12)	(0.5)		(12)	(0.5)
Tax-exempt interest	(10)	(0.7)		(15)	(0.7)		(15)	(0.7)
Tax advantaged investments (including related credits)	(68)	(5.3)		(50)	(2.3)		(44)	(2.0)
Other tax credits	(6)	(0.5)		(10)	(0.4)		(8)	(0.4)
Adjustments for uncertain tax positions	(1)	(0.1)		—	—		1	0.1
Non-deductible FDIC premiums	14	1.1		13	0.6		21	1.0
Legacy tax matters	(4)	(0.3)		(19)	(0.8)		—	—
Other	1	—		7	0.3		5	0.2
Total income tax expense and tax rate	$241	18.5	%	$460	20.4	%	$462	21.2	%

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)	2020	2019
Deferred tax assets:
Other comprehensive income	$29	$141
Allowance for credit losses	622	315
State net operating loss carryforwards	71	62
Accrued expenses not currently deductible	77	24
Investment and other tax credit carryforwards	99	89
Fair value adjustments	—	—
Total deferred tax assets	898	631
Valuation allowance	(98)	(79)
Deferred tax assets, net of valuation allowance	800	552
Deferred tax liabilities:
Leasing transactions	459	513
Amortization of intangibles	376	370
Depreciation	262	186
Pension and other employee compensation plans	107	124
Partnerships	76	71
Deferred Income	62	79
MSRs	87	75
Total deferred tax liabilities	1,429	1,418
Net deferred tax liability	$629	$866

Deferred tax assets are recognized for net operating 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, 2020, the Company had state tax net operating loss carryforwards of $1.2 billion. Limitations on the ability to realize these carryforwards are reflected in the associated valuation allowance. At December 31, 2020, the Company had a valuation allowance of $98 million against various deferred tax assets related to state net operating losses and state tax credits, as it is management’s current assessment that it is more likely than not that the Company will not recognize a portion of the deferred tax assets related to these items. The valuation allowance increased $19 million during the year ended December 31, 2020.

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, 2020, 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 the Company 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 2017.

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


	December 31,
(in millions)	2020	2019	2018
Balance at the beginning of the year	$5	$8	$5
Gross increase for tax positions related to current year	—	—	3
Gross decrease for tax positions related to prior years	—	(2)	—

Decrease for tax positions as a result of the lapse of the statutes of limitations	(1)	(1)	—


Balance at end of year	$4	$5	$8

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.

Included in the total amount of unrecognized tax benefits at December 31, 2020, are potential benefits of $4 million that, if recognized, would impact the effective tax rate.

Citizens classifies interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company released $1 million of accrued interest through income tax expense during the year ended December 31, 2020. There was no interest accrued through income tax expense during the years ended December 31, 2019 and 2018. Citizens had approximately $0 million, $1 million, and $2 million accrued for the payment of interest at December 31, 2020, 2019, and 2018, respectively. There were no amounts accrued for penalties as of December 31, 2020, 2019, and 2018, and there were no penalties recognized during the years ended December 31, 2020, 2019, and 2018.

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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