Income taxes

3 Months Ended

Mar. 31, 2023

Income Tax Disclosure

Income Taxes

Note 31 – Income taxes

The reason for the difference between the income tax expense applicable to income before provision for income taxes and the

amount computed by applying the statutory tax rate in Puerto Rico, were as follows:

Quarters ended

March 31, 2023

March 31, 2022

(In thousands)

Amount 

% of pre-tax

income 

Amount

% of pre-tax

income

Computed income tax expense at statutory rates 

$

76,985

38

%

$

98,312

38

%

Net benefit of tax exempt interest income

(21,902)

(11)

(42,869)

(16)

Effect of income subject to preferential tax rate

(855)

-

(3,945)

(2)

Deferred tax asset valuation allowance

(4,565)

(2)

3,891

1

Difference in tax rates due to multiple jurisdictions

(5,169)

(3)

(6,493)

(2)

State and local taxes

3,355

2

3,665

1

Others

(1,535)

(1)

(2,082)

(1)

Income tax expense

$

46,314

23

%

$

50,479

19

%

For the quarter ended March 31, 2023, the Corporation recorded an income tax expense of $

46.3

 million compared to $

50.5

 million

for the quarter ended March 31,2022. The decrease in income tax expense was due to a lower pre-tax income and reversal of a

valuation allowance on a tax credit expected to be realized on the U. S. operations as a result of the implementation of the

Corporate Alternative Minimum Tax. This positive variance was partially offset by lower benefits on the exempt income, mainly

associated with the allocation of higher interest expense disallowance.

The following table presents a breakdown of the significant components of the Corporation’s deferred tax assets and liabilities.

March 31, 2023

 (In thousands)

PR

US

Total

Deferred tax assets:

Tax credits available for carryforward

$

261

$

4,726

$

4,987

Net operating loss and other carryforward available 

121,758

655,505

777,263

Postretirement and pension benefits

47,039

-

47,039

Allowance for credit losses

238,695

30,628

269,323

Depreciation

6,033

6,257

12,290

FDIC-assisted transaction

152,665

-

152,665

Lease liability

27,995

22,427

50,422

Unrealized net loss on investment securities 

235,932

20,832

256,764

Difference in outside basis from pass-through entities

32,800

-

32,800

Mortgage Servicing Rights

13,012

-

13,012

Other temporary differences

29,835

8,589

38,424

Total gross deferred tax assets

906,025

748,964

1,654,989

Deferred tax liabilities:

Intangibles

82,103

55,415

137,518

Right of use assets

25,631

19,322

44,953

Deferred loan origination fees/cost

1,804

2,995

4,799

Loans acquired

22,134

-

22,134

Other temporary differences

6,159

422

6,581

Total gross deferred tax liabilities

137,831

78,154

215,985

Valuation allowance

138,016

396,472

534,488

Net deferred tax asset

$

630,178

$

274,338

$

904,516

 December 31, 2022

 (In thousands)

PR

US

Total

Deferred tax assets:

Tax credits available for carryforward

$

261

$

2,781

$

3,042

Net operating loss and other carryforward available 

121,742

661,144

782,886

Postretirement and pension benefits

47,122

-

47,122

Allowance for credit losses

250,615

32,688

283,303

Depreciation

5,972

6,309

12,281

FDIC-assisted transaction

152,665

-

152,665

Lease liability

28,290

23,521

51,811

Unrealized net loss on investment securities

265,955

23,913

289,868

Difference in outside basis from pass-through entities

40,602

-

40,602

Mortgage Servicing Rights

13,711

-

13,711

Other temporary differences

17,122

7,815

24,937

Total gross deferred tax assets

944,057

758,171

1,702,228

Deferred tax liabilities:

Intangibles

81,174

54,623

135,797

Right of use assets

26,015

20,262

46,277

Deferred loan origination fees/cost

1,076

2,961

4,037

Loans acquired

23,353

-

23,353

Other temporary differences

1,531

-

1,531

Total gross deferred tax liabilities

133,149

77,846

210,995

Valuation allowance

137,863

402,333

540,196

Net deferred tax asset

$

673,045

$

277,992

$

951,037

The net deferred tax asset shown in the table above at March 31, 2023 is reflected in the consolidated statements of financial

condition as $

0.9

 billion in net deferred tax assets in the “Other assets” caption (December 31, 2022 - $

1.0

 billion) and $

3.2

 million in

deferred tax liabilities in the “Other liabilities” caption (December 31, 2022 - $

2.6

 million), reflecting the aggregate deferred tax

assets or liabilities of individual tax-paying subsidiaries of the Corporation in their respective tax jurisdiction, Puerto Rico or the

United States. 

At March 31, 2023 the net deferred tax asset of the U.S. operations amounted to $

671

 million with a valuation allowance of

approximately $

396

 million, for a net deferred tax asset after valuation allowance of approximately $

274

 million. The Corporation

evaluates the realization of the deferred tax asset on a quarterly basis by taxing jurisdiction. The U.S. operation has sustained

profitability for last three calendar years and for the quarter ended March 31, 2023. These financial results demonstrated financial

stability for the U.S. operations, despite the climate of uncertainty as a result of global geopolitical and health challenges. These

historical financial results are objectively verifiable positive evidence, evaluated together with the positive evidence of stable credit

metrics, in combination with the length of the expiration of the NOLs. On the other hand, the Corporation evaluated the negative

evidence accumulated over the years, including financial results lower than expectations and challenges to the economy due to

global geopolitical uncertainty. As of March 31, 2023, after weighting all positive and negative evidence, the Corporation concluded

that it is more likely than not that approximately $

274

 million of the deferred tax asset from the U.S. operations, comprised mainly of

net operating losses, will be realized. The Corporation based this determination on its estimated earnings available to realize the

deferred tax asset for the remaining carryforward period, together with the historical level of book income adjusted by permanent

differences. Management will continue to monitor and review the U.S. operation’s results and the pre-tax earnings forecast on a

quarterly basis to assess the future realization of the deferred tax asset. Management will closely monitor factors, including, net

income versus forecast, targeted loan growth, net interest income margin, changes in deposits costs, allowance for credit losses,

charge offs, NPLs inflows and NPA balances. 

At March 31, 2023, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $

630

 million.

The Corporation’s Puerto Rico Banking operation is not in a cumulative loss position and has sustained profitability for the last three

calendar years and for the quarter ended March 31, 2023. This is considered a strong piece of objectively verifiable positive

evidence that outweighs any negative evidence considered by management in the evaluation of the realization of the deferred tax

asset. Based on this evidence and management’s estimate of future taxable income, the Corporation has concluded that it is more

likely than not that such net deferred tax asset of the Puerto Rico Banking operations will be realized.

The Holding Company operation is in a cumulative loss position, taking into account taxable income exclusive of reversing

temporary differences, for the last three calendar years and for the quarter ended March 31, 2023. Management expects these

losses will be a trend in future years. This objectively verifiable negative evidence is considered by management strong negative

evidence that will suggest that income in future years will be insufficient to support the realization of all deferred tax assets. After

weighting of all positive and negative evidence management concluded, as of the reporting date, that it is more likely than not that

the Holding Company will not be able to realize any portion of the deferred tax assets. Accordingly, the Corporation has maintained

a valuation allowance on the deferred tax asset of $

138

 million as of March 31, 2023.

The reconciliation of unrecognized tax benefits, excluding interest, was as follows:

(In millions)

2023

2022

Balance at January 1

$

2.5

$

3.5

Balance at March 31

$

2.5

$

3.5

At March 31, 2023, the total amount of accrued interest recognized in the statement of financial condition amounted to $

2.6

 million

(December 31, 2022 - $

2.6

 million). The total interest expense recognized at March 31, 2023 was $

56

 thousand, (March 31, 2022–

$

83

 thousand). Management determined that at March 31, 2023 and December 31, 2022 there was

no

 need to accrue for the

payment of penalties. The Corporation’s policy is to report interest related to unrecognized tax benefits in income tax expense, while

the penalties, if any, are reported in other operating expenses in the consolidated statements of operations. 

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 $

4.3

million at March 31, 2023 (December 31, 2022 - $

4.3

 million).

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 does not anticipate a reduction in the total amount of unrecognized tax benefits within the

next 12 months. 

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, 2023, the following years remain subject to examination in the U.S.

Federal jurisdiction: 2019 and thereafter; and in the Puerto Rico jurisdiction, 2018 and thereafter.