| 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) % of pre-tax 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 46.3 for the quarter ended March 31, 2023. As discussed in Note 2, the tax expense for the first quarter of 2024 includes $ 23.0 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 5.4 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 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 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 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 1.3 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 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 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 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 (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 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 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 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. |