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Income taxes | 3 Months Ended
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Mar. 31, 2021
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, 2021 |  |  |  | March 31, 2020 |
(In thousands) |  | Amount | % of pre-tax income |  |  |  | Amount | % of pre-tax income |
Computed income tax expense at statutory rates | $ | 127,299 | 38 | % |  | $ | 14,025 | 38 | %
Net benefit of tax exempt interest income |  | (34,163) | (10) |  |  |  | (32,896) | (88) |
Deferred tax asset valuation allowance |  | 10,321 | 3 |  |  |  | 5,538 | 15 |
Difference in tax rates due to multiple jurisdictions |  | (10,948) | (3) |  |  |  | 8,875 | 24 |
Effect of income subject to preferential tax rate |  | (3,329) | (1) |  |  |  | (1,900) | (5) |
Adjustment due to estimate on the annual effective rate |  | (10,328) | (3) |  |  |  | 9,004 | 24 |
State and local taxes |  | 61 | - |  |  |  | (555) | (2) |
Others |  | (2,082) | (1) |  |  |  | 1,006 | 2 |
Income tax expense | $ | 76,831 | 23 | % |  | $ | 3,097 | 8 | %
For the quarter ended March 31, 2021, the Corporation recorded an income tax expense of $76.8 million, compared to $3.1 million for the quarter ended March 31, 2020. The increase in income tax expense was primarily due to higher pre-tax income during the first quarter of 2021 compared to the same quarter of 2020. The following table presents a breakdown of the significant components of the Corporation’s deferred tax assets and liabilities.
|  |  | March 31, 2021
(In thousands) |  | PR |  | US |  | Total
Deferred tax assets: |  |  |  |  |  |
Tax credits available for carryforward | $ | 3,003 | $ | 2,781 | $ | 5,784
Net operating loss and other carryforward available |  | 130,535 |  | 696,884 |  | 827,419
Postretirement and pension benefits |  | 77,832 |  | - |  | 77,832
Deferred loan origination fees |  | 17,041 |  | (3,092) |  | 13,949
Allowance for credit losses |  | 321,981 |  | 33,545 |  | 355,526
Accelerated depreciation |  | 4,400 |  | 6,496 |  | 10,896
FDIC-assisted transaction |  | 152,665 |  | - |  | 152,665
Intercompany deferred gains |  | 1,412 |  | - |  | 1,412
Lease liability |  | 21,967 |  | 18,844 |  | 40,811
Difference in outside basis from pass-through entities |  | 56,932 |  | - |  | 56,932
Other temporary differences |  | 37,968 |  | 7,944 |  | 45,912
| Total gross deferred tax assets |  | 825,736 |  | 763,402 |  | 1,589,138
Deferred tax liabilities: |  |  |  |  |  |
Indefinite-lived intangibles |  | 74,138 |  | 43,552 |  | 117,690
Unrealized net gain (loss) on trading and available-for-sale securities |  | 39,536 |  | 5,027 |  | 44,563
Right of use assets |  | 19,883 |  | 17,181 |  | 37,064
Other temporary differences |  | 51,553 |  | 1,332 |  | 52,885
| Total gross deferred tax liabilities |  | 185,110 |  | 67,092 |  | 252,202
Valuation allowance |  | 118,575 |  | 415,079 |  | 533,654
Net deferred tax asset | $ | 522,051 | $ | 281,231 | $ | 803,282
|  |  | December 31, 2020
(In thousands) |  | PR |  | US |  | Total
Deferred tax assets: |  |  |  |  |  |
Tax credits available for carryforward | $ | 3,003 | $ | 5,269 | $ | 8,272
Net operating loss and other carryforward available |  | 124,355 |  | 698,842 |  | 823,197
Postretirement and pension benefits |  | 80,179 |  | - |  | 80,179
Deferred loan origination fees |  | 12,079 |  | (2,652) |  | 9,427
Allowance for loan losses |  | 373,010 |  | 38,606 |  | 411,616
Accelerated depreciation |  | 3,439 |  | 5,390 |  | 8,829
FDIC-assisted transaction |  | 152,665 |  | - |  | 152,665
Intercompany deferred gains |  | 1,728 |  | - |  | 1,728
Lease liability |  | 22,790 |  | 18,850 |  | 41,640
Difference in outside basis from pass-through entities |  | 61,222 |  | - |  | 61,222
Other temporary differences |  | 38,954 |  | 7,344 |  | 46,298
| Total gross deferred tax assets |  | 873,424 |  | 771,649 |  | 1,645,073
Deferred tax liabilities: |  |  |  |  |  |
Indefinite-lived intangibles |  | 73,305 |  | 37,745 |  | 111,050
Unrealized net gain (loss) on trading and available-for-sale securities |  | 67,003 |  | 8,595 |  | 75,598
Right of use assets |  | 20,708 |  | 15,510 |  | 36,218
Other temporary differences |  | 50,247 |  | 1,169 |  | 51,416
| Total gross deferred tax liabilities |  | 211,263 |  | 63,019 |  | 274,282
Valuation allowance |  | 112,871 |  | 407,225 |  | 520,096
Net deferred tax asset | $ | 549,290 | $ | 301,405 | $ | 850,695
The net deferred tax asset shown in the table above at March 31, 2021 is reflected in the consolidated statements of financial condition as $0.8 billion in net deferred tax assets in the “Other assets” caption (December 31, 2020 - $0.9 billion) and $866 thousand in deferred tax liabilities in the “Other liabilities” caption (December 31, 2020 - $897 thousand), 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. 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. At March 31, 2021 the net deferred tax asset of the U.S. operations amounted to $696 million with a valuation allowance of approximately $415 million, for a net deferred tax asset after valuation allowance of approximately $281 million. The Corporation evaluates the realization of the deferred tax asset by taxing jurisdiction. The U.S. operations are evaluated, as a whole,since a consolidated income tax return is filed. Currently management considers as negative evidence the economic uncertainty resulting from the effects of the COVID-19 pandemic. While the scope and duration of the COVID-19 pandemic, the actions taken by governmental authorities in response to it, and the direct and indirect impact of the pandemic on the economy are not certain, vaccination process in Puerto Rico and the United States, as well as the economic stimulus measures taken by the federal government as a result of the pandemic creates a positive economic outlook in the short term. Notwithstanding the challenges raised by the pandemic, the financial results of the U.S. operations for the year ended December 31,2020 and the quarter ended March 31,2021 were also positive. This objectively verifiable positive evidence together with the positive evidence of stable credit metrics, in combination with the length of the expiration of the NOLs are enough to overcome the negative evidence related to the COVID-19 pandemic. As of March 31,2021, after weighting all positive and negative evidence, the Corporation concluded that it is more likely than not that approximately $281 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 DTA. Management will closely monitor factors like, net income versus forecast, targeted loan growth, net interest income margin, allowance for credit losses, charge offs, NPLs inflows and NPA balances. If such factors worsen during future periods, they could constitute sufficient objectively verifiable negative evidence to overcome the positive evidence, that currently exists, and could require additional amounts of valuation allowance to be registered on the DTA. Any increases to the valuation allowance would be reflected as an income tax expense, reducing the Corporation’s earnings. At March 31, 2021, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $522 million net of valuation allowance pertaining to the Holding Company operation. The Corporation’s Puerto Rico Banking operation is not in a cumulative three-year loss position and has sustained profitability for the three-year period ended March 31, 2021. 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 as of March 31, 2021. The Holding Company operation is in a cumulative loss position, taking into account taxable income exclusive of reversing temporary differences, for the three years period ending March 31,2021. Management expects these losses will be a trend in future years. This objectively verifiable negative evidence is considered by management a strong negative evidence that will suggest that income in future years will be insufficient to support the realization of all deferred tax asset. 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, considering the criteria of ASC Topic 740. Accordingly, the Corporation has maintained a valuation allowance on the deferred tax asset of $119 million as of March 31,2021. The reconciliation of unrecognized tax benefits, excluding interest, was as follows:
(In millions) |  | 2021 |  |  | 2020
Balance at January 1 | $ | 14.8 |  | $ | 16.3
Balance at March 31 | $ | 14.8 |  | $ | 16.3
At March 31, 2021, the total amount of accrued interest recognized in the statement of financial condition approximated $5.2 million (December 31, 2020 - $4.8 million). The total interest expense recognized at March 31, 2021 was $364 thousand (March 31, 2020 - $854 thousand). Management determined that at March 31, 2021 and December 31, 2020 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 $10.5 million at March 31, 2021 (December 31, 2020 - $10.2 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 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, 2021, the following years remain subject to examination in the U.S. Federal jurisdiction: 2017 and thereafter; and in the Puerto Rico jurisdiction, 2014, 2016 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 $13.9 million, including interest.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 21 -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32857-109319 Reference 2: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 2 -Subparagraph (SAB Topic 11.C) -URI http://asc.fasb.org/extlink&oid=116825942&loc=d3e330215-122817 Reference 3: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 17 -Subparagraph (b) -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32809-109319 Reference 4: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SAB TOPIC 6.I.5.Q1) -URI http://asc.fasb.org/extlink&oid=116825942&loc=d3e330036-122817 Reference 5: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 10 -Section 50 -Paragraph 14 -URI http://asc.fasb.org/extlink&oid=84230637&loc=d3e32705-109319 Reference 6: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 270 -Section 50 -Paragraph 1 -URI http://asc.fasb.org/extlink&oid=6424409&loc=d3e44925-109338 Reference 7: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 Reference 8: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -SubTopic 30 -Section 50 -Paragraph 2 -Subparagraph (a) -URI http://asc.fasb.org/extlink&oid=6424122&loc=d3e41874-109331 + Details
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