Income taxes

6 Months Ended

Jun. 30, 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

June 30, 2023

June 30, 2022

(In thousands)

Amount 

% of pre-tax

income 

Amount

% of pre-tax

income

Computed income tax expense at statutory rates 

$

72,998

38

%

$

103,362

38

%

Net benefit of tax exempt interest income

(27,316)

(14)

(34,397)

(12)

Effect of income subject to preferential tax rate

278

-

(3,097)

(1)

Deferred tax asset valuation allowance

994

1

2,047

-

Difference in tax rates due to multiple jurisdictions

(3,869)

(2)

(6,817)

(3)

State and local taxes

3,037

2

3,566

1

Others

(2,619)

(2)

(452)

-

Income tax expense

$

43,503

22

%

$

64,212

23

%

Six months ended

June 30, 2023

June 30, 2022

(In thousands)

Amount 

% of pre-tax

income 

Amount

% of pre-tax

income 

Computed income tax expense at statutory rates 

$

149,983

38

%

$

201,674

38

%

Net benefit of tax exempt interest income

(49,218)

(12)

(77,266)

(15)

Deferred tax asset valuation allowance

(3,572)

(1)

5,938

1

Difference in tax rates due to multiple jurisdictions

(9,039)

(2)

(13,310)

(3)

Effect of income subject to preferential tax rate

(576)

-

(7,042)

(1)

State and local taxes

6,392

2

7,231

1

Others

(4,153)

(1)

(2,534)

-

Income tax expense

$

89,817

22

%

$

114,691

21

%

For the quarter and six months ended June 30, 2023, the Corporation recorded an income tax expense of $

43.5

 million and $

89.8

million, respectively, compared to $

64.2

 million and $

114.7

 million for the respective periods of 2022. The decrease in income tax

expense was due in essence to a lower pre-tax income, partially offset by lower exempt income for the quarter and six months

ended June 30, 2023.

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

June 30, 2023

 (In thousands)

PR

US

Total

Deferred tax assets:

Tax credits available for carryforward

$

261

$

6,934

$

7,195

Net operating loss and other carryforward available 

122,293

649,973

772,266

Postretirement and pension benefits

46,920

-

46,920

Allowance for credit losses

238,377

30,595

268,972

Depreciation

6,033

6,345

12,378

FDIC-assisted transaction

152,665

-

152,665

Lease liability

29,241

21,058

50,299

Unrealized net loss on investment securities 

235,339

22,720

258,059

Difference in outside basis from pass-through entities

32,234

-

32,234

Mortgage Servicing Rights

14,700

-

14,700

Other temporary differences

30,222

9,070

39,292

Total gross deferred tax assets

908,285

746,695

1,654,980

Deferred tax liabilities:

Intangibles

83,032

56,209

139,241

Right of use assets

26,856

18,283

45,139

Deferred loan origination fees/cost

2,096

2,478

4,574

Loans acquired

20,914

-

20,914

Other temporary differences

6,522

422

6,944

Total gross deferred tax liabilities

139,420

77,392

216,812

Valuation allowance

138,825

398,360

537,185

Net deferred tax asset

$

630,040

$

270,943

$

900,983

 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 June 30, 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 $

3.6

 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 June 30, 2023 the net deferred tax asset of the U.S. operations amounted to $

669

 million with a valuation allowance of

approximately $

398

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

271

 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 June 30, 2023. These financial results demonstrated financial

stability for the U.S. operations. 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 June 30, 2023, after weighting all positive and negative

evidence, the Corporation concluded that it is more likely than not that approximately $

271

 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,

the pre-tax earnings forecast, any new tax initiative, and other 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, to

assess the future realization of the deferred tax asset.

At June 30, 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 June 30, 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 June 30, 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 $

139

 million as of June 30, 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

Balance at June 30

$

2.5

$

3.5

At June 30, 2023, the total amount of accrued interest recognized in the statement of financial condition amounted to $

2.7

 million

(December 31, 2022 - $

2.6

 million). The total interest expense recognized at June 30, 2023 was $

53

 thousand, (June 30, 2022–

$

165

 thousand). Management determined that at June 30, 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 $

4.4

million at June 30, 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 anticipates a reduction in the total amount of unrecognized tax benefits within the next 12

months amounting to $

1.5

 million. 

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 June 30, 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.