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Income taxes
3 Months Ended
Mar. 31, 2024
Income Tax Disclosure  
Income Taxes
Note 30 – 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, 2024
March 31, 2023
(In thousands)
Amount
 
% of pre-tax
income
 
Amount
% of pre-tax
income
Computed income tax expense at statutory rates
 
$
59,569
38
%
$
76,985
38
%
Net benefit of tax exempt interest income
(28,759)
(18)
(21,902)
(11)
Effect of income subject to preferential tax rate
(1,420)
(1)
(855)
-
Deferred tax asset valuation allowance
2,563
1
(4,565)
(2)
Difference in tax rates due to multiple jurisdictions
(673)
-
(5,169)
(3)
Tax on intercompany
 
distributions
[1]
24,325
16
-
-
U.S., States, and local taxes
1,036
-
3,355
2
Others
(1,073)
(1)
(1,535)
(1)
Income tax expense
$
55,568
35
%
$
46,314
23
%
[1]
Includes $
16.5
 
million of out-of-period adjustment.
For the quarter ended March 31, 2024,
 
the Corporation recorded an income tax expense
 
of $
55.6
 
million compared to $
46.3
 
million
for the
 
quarter ended March
 
31, 2023. As
 
discussed in Note
 
2, the tax
 
expense for the
 
first quarter of
 
2024 includes $
23.0
 
million,
related
 
to
 
intercompany distributions,
 
out
 
of
 
which
 
$
16.5
 
million
 
were related
 
to
 
an
 
out-of-period adjustment
 
associated with
 
the
Corporation’s U.S. subsidiary’s non-payment of
 
taxes on certain intercompany distributions
 
to the Bank Holding
 
Company (BHC) in
Puerto Rico,
 
a foreign
 
corporation for
 
U.S. tax
 
purposes. During
 
years 2023
 
and 2022,
 
$
5.5
 
million and
 
$
5.4
 
million, respectively,
should have been
 
recognized as additional income
 
tax expense, and
 
an aggregate of
 
$
5.6
 
million in the
 
years prior to
 
2022.
 
As a
result of
 
this adjustment,
 
the deferred
 
tax assets
 
related to
 
NOL of
 
the BHC
 
and its
 
related valuation
 
allowance was
 
reduced by
$
53.7
 
million. The
 
Corporation also
 
recognized $
6.5
 
million in
 
income tax
 
expense during
 
the quarter
 
ended March
 
31, 2024,
 
to
reflect the U.S. federal tax withholding liability and estimated related Puerto Rico income tax arising from a $
50
 
million dividend paid
during the quarter.
 
During the quarter ended March 31,
 
2023, the Corporation reported a reversal of
 
a valuation allowance on a tax
credit expected to be realized on the U.S. operations.
 
The following table presents a breakdown of the
 
significant components of the Corporation’s deferred tax assets
 
and liabilities.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
March 31, 2024
 
(In thousands)
PR
US
Total
Deferred tax assets:
Tax credits available
 
for carryforward
$
263
$
10,749
$
11,012
Net operating loss and other carryforward available
 
53,852
619,457
673,309
Postretirement and pension benefits
37,314
-
37,314
Allowance for credit losses
246,566
29,866
276,432
Depreciation
6,774
6,651
13,425
FDIC-assisted transaction
152,665
-
152,665
Lease liability
28,280
19,272
47,552
Unrealized net loss on investment securities
309,191
20,406
329,597
Difference in outside basis from pass-through entities
44,008
-
44,008
Mortgage Servicing Rights
14,378
-
14,378
Other temporary differences
49,600
10,041
59,641
Total gross deferred
 
tax assets
942,891
716,442
1,659,333
Deferred tax liabilities:
Intangibles
85,564
52,715
138,279
Right of use assets
25,839
16,940
42,779
Deferred loan origination fees/cost
(823)
2,085
1,262
Loans acquired
19,703
-
19,703
Other temporary differences
6,854
422
7,276
 
Total gross deferred
 
tax liabilities
137,137
72,162
209,299
Valuation allowance
71,380
378,910
450,290
Net deferred tax asset
$
734,374
$
265,370
$
999,744
 
December 31, 2023
 
(In thousands)
PR
US
Total
Deferred tax assets:
Tax credits available
 
for carryforward
$
263
$
10,281
$
10,544
Net operating loss and other carryforward available
 
122,634
620,982
743,616
Postretirement and pension benefits
38,121
-
38,121
Allowance for credit losses
244,956
28,222
273,178
Depreciation
6,774
6,578
13,352
FDIC-assisted transaction
152,665
-
152,665
Lease liability
29,070
20,492
49,562
Unrealized net loss on investment securities
312,583
19,037
331,620
Difference in outside basis from pass-through entities
46,056
-
46,056
Mortgage Servicing Rights
14,085
-
14,085
Other temporary differences
47,679
9,625
57,304
Total gross deferred
 
tax assets
1,014,886
715,217
1,730,103
Deferred tax liabilities:
Intangibles
84,635
51,944
136,579
Right of use assets
26,648
18,030
44,678
Deferred loan origination fees/cost
(1,056)
1,486
430
Loans acquired
20,430
-
20,430
Other temporary differences
6,402
422
6,824
 
Total gross deferred
 
tax liabilities
137,059
71,882
208,941
Valuation allowance
139,347
374,035
513,382
Net deferred tax asset
$
738,480
$
269,300
$
1,007,780
The net
 
deferred tax
 
assets
 
shown in
 
the table
 
above at
 
March 31,
 
2024, is
 
reflected in
 
the consolidated
 
statements of
 
financial
condition as $
1.0
 
billion in net deferred tax assets in the
 
“Other assets” caption (December 31, 2023 - $
1.0
 
billion) and $
1.3
 
million in
deferred
 
tax
 
liabilities
 
in
 
the
 
“Other
 
liabilities”
 
caption
 
(December 31,
 
2023
 
-
 
$
1.3
 
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,
 
2024,
 
the
 
net
 
deferred
 
tax
 
assets
 
of
 
the
 
U.S.
 
operations
 
amounted
 
to
 
$
644
 
million
 
with
 
a
 
valuation
 
allowance
 
of
approximately $
379
 
million, for
 
net deferred
 
tax
 
assets after
 
valuation allowance
 
of
 
approximately $
265
 
million.
 
The
 
Corporation
evaluates the
 
realization of
 
the deferred
 
tax
 
assets on
 
a quarterly
 
basis by
 
taxing
 
jurisdiction. The
 
U.S.
 
operation has
 
sustained
profitability
 
for
 
the
 
last
 
three
 
calendar
 
years
 
and
 
for
 
the
 
quarter
 
ended
 
March
 
31,
 
2024.
 
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
 
inflationary pressures
 
and global
geopolitical uncertainty that have resulted in
 
a trend of reduction of pre-tax
 
income over the last three years.
 
As of March 31, 2024,
after weighting all positive
 
and negative evidence, the
 
Corporation concluded that it is
 
more likely than not
 
that approximately $
265
million
 
of
 
the
 
deferred
 
tax
 
assets
 
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
 
assets
 
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,
 
including
 
recent
 
earnings
 
trends,
 
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
deposit
 
costs,
 
allowance
 
for
 
credit
 
losses,
 
charge
 
offs,
 
NPLs
 
inflows
 
and
 
NPA
 
balances.
 
Significant
 
adverse
 
changes
 
or
 
a
combination of changes in these factors could impact
 
the future realization of the deferred tax assets.
At March
 
31, 2024, the
 
Corporation’s net
 
deferred tax assets
 
related to its
 
Puerto Rico
 
operations amounted to
 
$
734
 
million.
 
The
Corporation’s Puerto Rico
 
Banking operation has
 
a historical record
 
of profitability.
 
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
 
assets.
 
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 assets of the Puerto Rico Banking
 
operations will be realized.
The Holding Company operation has been in a cumulative
 
loss position in recent years.
 
Management expects these losses will be a
trend
 
in
 
future
 
years.
 
This
 
objectively
 
verifiable
 
negative
 
evidence is
 
considered
 
by
 
Management strong
 
negative
 
evidence that
suggests 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 assets of $
71
 
million as of March 31, 2024.
The reconciliation of unrecognized tax benefits, excluding
 
interest, was as follows:
 
 
 
 
 
(In millions)
2024
2023
Balance at January 1
$
1.5
$
2.5
Balance at March 31
$
1.5
$
2.5
At March 31,
 
2024, the total amount
 
of accrued interest recognized
 
in the statement
 
of financial condition amounted
 
to $
2.3
 
million
(December 31, 2023 - $
2.3
 
million). The total interest expense recognized
 
at March 31, 2024 was
 
$
30
 
thousand, (March 31, 2023–
$
56
 
thousand). Management
 
determined that
 
at
 
March
 
31,
 
2024 and
 
December 31,
 
2023, 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 $
2.9
million at March 31, 2024 (December 31, 2023 - $
2.9
 
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,
 
2024, the
 
following years
 
remain subject
 
to
 
examination in
 
the U.S.
Federal jurisdiction: 2020 and thereafter; and
 
in the Puerto Rico jurisdiction, 2018 and thereafter.