Income taxes

3 Months Ended

Mar. 31, 2012

Notes to Financial Statements [Abstract]

Income Tax Disclosure Text Block

Note 28 – Income taxes

The reasons for the difference between the income tax expense applicable to income before taxes and the amount computed by applying the statutory tax rate in Puerto Rico are included in the following tables.

		Quarters ended
		March 31, 2012				March 31, 2011
(In thousands)		Amount	% of pre-tax income			Amount	% of pre-tax income
Computed income tax at statutory rates	$	19,380	30	%	$	47,207	30	%
Net benefit of net tax exempt interest income		(7,014)	(11)			(2,407)	(2)
Effect of income subject to preferential tax rate		(971)	(2)			(232)	-
Deferred tax asset valuation allowance		1,167	2			(5,305)	(3)
Non-deductible expenses		5,639	9			5,326	3
Difference in tax rates due to multiple jurisdictions		(3,207)	(5)			(2,464)	(2)
Initial adjustment in deferred tax due to change in tax rate		-	-			103,287	66
State taxes and others		1,198	2			1,815	1
Income tax expense	$	16,192	25	%	$	147,227	93	%

On January 31, 2011, the Governor of Puerto Rico signed into law a new Internal Revenue Code for Puerto Rico (the “2011 Tax Code”) which resulted in a reduction in the Corporation's net deferred tax asset with a corresponding charge to income tax expense of $ 103.3 million due to a reduction in the marginal corporate income tax rate. Under the provisions of the 2011 Tax Code, the maximum marginal corporate income tax rate is 30% for years commenced after December 31, 2010. Prior to the 2011 Tax Code, the maximum marginal corporate income tax rate in Puerto Rico was 39%, which had increased to 40.95% due to a temporary 5% surtax approved in March 2009 for years beginning on January 1, 2009 through December 31, 2011. The 2011 Tax Code, however, eliminated the special 5% surtax on corporations for tax year 2011. The effective tax rate for the Corporation's Puerto Rico banking operations for 2012 is estimated at 20%.

The following table presents the components of the Corporation's deferred tax assets and liabilities.

(In thousands)			March 31, 2012		December 31, 2011
Deferred tax assets:
Tax credits available for carryforward		$	3,139	$	3,459
Net operating loss and other carryforward available			1,186,297		1,174,488
Postretirement and pension benefits			103,118		104,663
Deferred loan origination fees			7,035		6,788
Allowance for loan losses			595,494		605,105
Deferred gains			11,454		11,763
Accelerated depreciation			5,627		5,527
Intercompany deferred gains			4,054		4,344
Other temporary differences			28,470		27,341
	Total gross deferred tax assets		1,944,688		1,943,478
Deferred tax liabilities:
Differences between the assigned values and the tax bases of assets and liabilities
	recognized in purchase business combinations		33,524		32,293
Difference in outside basis between financial and tax reporting on sale of a business			20,721		20,721
FDIC-assisted transaction			145,628		142,000
Unrealized net gain on trading and available-for-sale securities			72,223		73,991
Deferred loan origination costs			4,224		4,277
Other temporary differences			8,262		6,187
	Total gross deferred tax liabilities		284,582		279,469
Valuation allowance			1,260,099		1,259,358
Net deferred tax asset		$	400,007	$	404,651

The net deferred tax asset shown in the table above at March 31,2012 is reflected in the consolidated statements of financial condition as $424 million in net deferred tax assets (in the “Other assets” caption) (December 31, 2011 - $430 million) and $24million in deferred tax liabilities in the “Other liabilities” caption (December 31, 2011 - $25million), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corporation.

A deferred tax asset should be reduced by a valuation allowance if based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. The realization of deferred tax assets, including carryforwards and deductible temporary differences, depends upon the existence of sufficient taxable income of the same character during the carryback or carryforward period. The analysis considers all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years and tax-planning strategies.

The Corporation's U.S. mainland operations are in a cumulative loss position for the three-year period ended March 31, 2012. For purposes of assessing the realization of the deferred tax assets in the U.S. mainland, this cumulative taxable loss position is considered significant negative evidence and has caused management to conclude that it is more likely than not that the Corporation will not be able to realize the associated deferred tax assets in the future. At March 31,2012, the Corporation recorded a valuation allowance of approximately $ 1.3 billion on the deferred tax assets of its U.S. operations (December 31, 2011 - $ 1.3billion).

At March 31, 2012,the Corporation's net deferred tax assets related to its Puerto Rico operations amounted to $425 million. The Corporation's Puerto Rico banking operation is in a cumulative loss position for the three-year period ended March 31, 2012 taking into account taxable income exclusive of temporary differences. This cumulative loss position was mainly due to the performance of the construction and commercial real estate loan portfolios in prior years, including the losses related to the reclassification and sale of certain loans pertaining to those portfolios. The Corporation weights all available positive and negative evidence to assess the realization of the deferred tax asset. Positive evidence assessed included (i) the Corporation's Puerto Rico banking operations very strong earnings history; (ii) consideration that the event causing the cumulative loss position is not a continuing condition of the operations; (iii) new legislation extending the period of carryover of net operating losses to ten years; (iii) unrealized gain on appreciated assets that could be realized to increase taxable income; and (iv) the financial results of the operations showed an improvement in the profitability of the business during 2011 and first quarter of 2012. Accordingly, there is enough positive evidence to outweigh the negative evidence of the cumulative loss. Based on this evidence, the Corporation has concluded that it is more-likely-than-not that such net deferred tax asset will be realized.

The reconciliation of unrecognized tax benefits for the quarters ended March 31, 2012 and 2011 was as follows:

(In millions)		2012		2011
Balance at January 1	$	19.5	$	26.3
Additions for tax positions -January through March		0.7		2.2
Reduction as a result of settlements - January through March		-		(4.4)
Balance at March 31	$	20.2	$	24.1

The accrued interest related to uncertain tax positions approximated $6.0 million at March 31,2012 (March 31,2011 - $6.6million). Management determined that at March 31,2012 and 2011, there was no need to accrue for the payment of penalties.

After consideration of the effect on U.S. federal tax of unrecognized U.S. state tax benefits, the total amount of unrecognized tax benefits, including U.S. and Puerto Rico, that if recognized, would affect the Corporation's effective tax rate, was approximately $25.3million at March 31,2012 (March 31,2011- $30.0million).

The amount of unrecognized tax benefits may increase or decrease in the future for various reasons including adding amounts for current tax year positions, expiration of open income tax returns due to the statutes of limitation, changes in management's judgment about the level of uncertainty, status of examinations, litigation and legislative activity and the addition or elimination of uncertain tax positions.

The Corporation and its subsidiaries file income tax returns in Puerto Rico, the U.S. federal jurisdiction, various U.S. states and political subdivisions, and foreign jurisdictions. At March 31,2012, the following years remain subject to examination in the U.S. Federal jurisdiction: 2008 and thereafter; and in the Puerto Rico jurisdiction, 2007 and thereafter. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $11million.

		Quarters ended
		March 31, 2012				March 31, 2011
(In thousands)		Amount	% of pre-tax income			Amount	% of pre-tax income
Computed income tax at statutory rates	$	19,380	30	%	$	47,207	30	%
Net benefit of net tax exempt interest income		(7,014)	(11)			(2,407)	(2)
Effect of income subject to preferential tax rate		(971)	(2)			(232)	-
Deferred tax asset valuation allowance		1,167	2			(5,305)	(3)
Non-deductible expenses		5,639	9			5,326	3
Difference in tax rates due to multiple jurisdictions		(3,207)	(5)			(2,464)	(2)
Initial adjustment in deferred tax due to change in tax rate		-	-			103,287	66
State taxes and others		1,198	2			1,815	1
Income tax expense	$	16,192	25	%	$	147,227	93	%