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Income Taxes
 12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
Income Taxes INCOME TAXES
Oriental is subject to the dispositions of the PR Code. For 2021, the PR Code imposed a maximum statutory corporate tax rate of 37.5%. OFG has operations in the U.S. through its wholly owned subsidiary OPC, a retirement plan administration based in Florida. In October 2017, OFG expanded its operations in the United States through the Bank’s wholly owned subsidiary, OFG USA. In March 2019, OFG incorporated in Delaware OFG Ventures, a limited liability company, which will hold new investments; and, on December 31, 2019, OFG established a new branch in USVI acquired as a result of the Scotiabank Acquisition. The United States subsidiaries are subject to federal income taxes at the corporate level, while the USVI branch is subject to the federal income taxes under a mirror system and a 10% surtax included in the maximum tax rate. OPC is subject to Florida state taxes, OFG USA is subject to North Carolina state taxes, and current investments in OFG Ventures are subject to state taxes in Missouri. In addition, during 2021, OFG incorporated in Grand Cayman, as a foreign wholly owned subsidiary, OFG Reinsurance. OFG Reinsurance is tax exempt in Grand Cayman.
Under the PR Code, all companies are treated as separate taxable entities and are not entitled to file consolidated tax returns. OFG and its subsidiaries organized under the laws of Puerto Rico are subject to Puerto Rico regular income tax or the alternative minimum tax (“AMT”) on income earned from all sources. OFG’s subsidiaries organized outside of Puerto Rico are taxed in Puerto Rico only with respect to income from Puerto Rico sources or effectively connected to a Puerto Rico trade or business. The AMT is payable if it exceeds regular income tax. The excess of AMT over regular income tax paid in any one year may be used to offset regular income tax in future years, subject to certain limitations.
The components of income tax expense for the years ended December 31, 2021, 2020, and 2019 are as follows:
Year Ended December 31,
202120202019
(In thousands)
Current income tax expense (benefit)$4,836 $(7,347)$25,477 
Deferred income tax expense (benefit)63,616 27,846 (4,068)
Total income tax expense$68,452 $20,499 $21,409 
In relation to the exempt income level, the Bank’s investment securities portfolio and loans portfolio generated net tax-exempt interest income of $14.4 million at 2021, $15.2 million at 2020 and $11.8 million at 2019. OIB generated exempt income of $9.5 million, $4.1 million and $10.3 million for 2021, 2020, and 2019, respectively.
OFG maintained an effective tax rate lower than statutory rate for the year ended December 31, 2021, mainly by investing in tax-exempt obligations, doing business through its international banking entities and by expanding its subsidiary operations in the U.S., which are taxed at a lower rate.
OFG’s income tax expense differs from amounts computed by applying the applicable statutory rate to income before income taxes as follows:
Year Ended December 31,
202120202019
AmountRateAmountRateAmountRate
(Dollars in thousands)
Income tax expense at statutory rates$80,476 37.50 %$35,567 37.50 %$28,219 37.50 %
Tax of exempt income, net(9,489)-4.42 %(7,272)-7.67 %(8,728)-11.60 %
Disallowed net operating loss carryover(179)-0.08 %202 0.21 %384 0.51 %
Change in valuation allowance803 0.37 %2,267 2.39 %1,217 1.62 %
Unrecognized tax benefits, net70 0.03 %(1,941)-2.05 %1,794 2.38 %
Capital gain at preferential rate(3)— %(450)-0.47 %(265)-0.35 %
Tax rate difference (ordinary vs capital)(480)-0.22 %(4,218)-4.45 %— — %
Bargain purchase gain— — %(2,751)-2.90 %(118)-0.16 %
Return to provision adjustments(933)-0.43 %(1,099)-1.16 %(898)-1.19 %
Foreign tax credit187 0.09 %361 0.38 %— — %
Other items, net(2,000)-0.94 %(167)-0.16 %(196)-0.25 %
Income tax expense$68,452 31.90 %$20,499 21.62 %$21,409 28.46 %
OFG’s effective tax rate for the year ended December 31, 2021 was 31.90%. For the year ended December 31, 2020, the effective tax rate was 21.62%, and it was mainly affected by several items pertaining to the year 2020 that were not expected to reoccur on future years, such as the bargain purchase gain and tax rate differentials. For the year ended December 31, 2019, the effective tax rate was 28.46%.
OFG classifies unrecognized tax benefits in other liabilities. These gross unrecognized tax benefits would affect the effective tax rate if realized. At December 31, 2021, the amount of unrecognized tax benefits was $798 thousand (December 31, 2020 - $728 thousand). OFG had accrued $70 thousand at December 31, 2021 (December 31, 2020 - $50 thousand) for the payment of interest and penalties related to unrecognized tax benefits.
The following table presents a reconciliation of unrecognized tax benefits:
Year Ended December 31,
202120202019
(In thousands)
Balance at beginning of year$728 $2,668 $875 
Additions for tax positions of prior years70 50 51 
Additions due to new tax positions— — 2,181 
Reduction for tax positions as a result of lapse of statute of limitations or new information resulting in a change in assessment— (1,990)(439)
Balance at end of year$798 $728 $2,668 
OFG follows a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals of litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The amount of unrecognized tax benefits may increase or decrease in the future due to new or current tax year positions, expiration of open income tax returns, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity. For 2021, there was a net increase in unrecognized tax benefit of $70 thousand.
The statute of limitations under the PR Code is four years and the statute of limitations for federal tax purposes is three years, after a tax return is due or filed, whichever is later. OFG is potentially subject to income tax audits in the Commonwealth of Puerto Rico for taxable years 2017 to 2020, until the applicable statute of limitations expires. In addition, OFG’s US subsidiaries are potentially subject to income tax audits by the IRS for taxable years 2018 to 2020. Tax audits by their nature are often complex and can require several years to complete.
The determination of the deferred tax expense or benefit is generally based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of OFG’s net deferred tax assets assumes that OFG will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the future, OFG may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense in the consolidated statements of operations. Significant components of OFG’s deferred tax assets and liabilities as of December 31, 2021, and 2020 were as follows:
December 31,
20212020
(In thousands)
Deferred tax asset:
Allowance for loan and lease losses and other reserves$61,009 $83,578 
Scotiabank PR discount2,053 $5,461 
Loans and other real estate valuation adjustment3,660 5,769 
Deferred loan charge-offs115,661 140,445 
Net operating loss carry forwards8,460 7,947 
Alternative minimum tax15,385 15,513 
Unrealized net loss included in other comprehensive income301 642 
Deferred loan origination income, net— 5,147 
Goodwill16,961 23,927 
Acquired portfolio53,687 52,301 
Other assets allowances929 525 
Other deferred tax assets20,292 24,767 
Total gross deferred tax asset298,397 366,022 
Less: valuation allowance(9,645)(8,842)
Net gross deferred tax assets288,752 357,180 
Deferred tax liability:
Acquired loans tax basis(137,402)(135,816)
FDIC-assisted Eurobank acquisition, net(6,636)(9,171)
Customer deposit and customer relationship intangibles(10,324)(13,823)
Building valuation adjustment(6,976)(7,412)
Unrealized net gain on available-for-sale securities(1,572)(2,106)
Servicing asset(15,311)(14,682)
Other deferred tax liabilities(11,468)(11,692)
Total gross deferred tax liabilities(189,689)(194,702)
Net deferred tax asset$99,063 $162,478 
As of December 31, 2021 and 2020, OFG’s net deferred tax asset, net of a valuation allowance of $9.6 million and $8.8 million, respectively, amounted to $99.1 million and $162.5 million, respectively. The deferred tax assets as of December 31, 2020, included SBPR Acquisition related deferred tax assets amounting of $59.9 million. The acquisition of SBPR was a nontaxable transaction where the historical tax bases of the acquired business carries over to the acquirer; the historical tax bases include a tax-deductible goodwill from prior acquisitions of SBPR with a deferred tax asset of $30.4 million.
The increase in valuation allowance of $803 thousand was mainly related to OFG’s operations at the USVI branch. In assessing the realizability of the deferred tax asset, management considers whether it is more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future income, and tax planning strategies in making this assessment. Based upon the assessment of positive and negative evidence, the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax asset are deductible, and provisions of certain closing agreements, management believes it is more likely than not that OFG will realize the benefits of these deductible differences, net of the existing valuation allowances, at December 31, 2021. The amount of the deferred tax asset that is considered realizable could be reduced in the near term if there are changes in estimates of future taxable income.