XML 56 R40.htm IDEA: XBRL DOCUMENT v3.22.1
Income taxes
 3 Months Ended
Mar. 31, 2022
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, 2022

 

 

 

March 31, 2021

 

(In thousands)

 

Amount

% of pre-tax income

 

 

 

Amount

% of pre-tax income

 

Computed income tax expense at statutory rates

$

98,312

38

%

 

$

127,299

38

%

Net benefit of tax exempt interest income

 

(36,489)

(14)

 

 

 

(34,163)

(10)

 

Deferred tax asset valuation allowance

 

3,891

1

 

 

 

10,321

3

 

Difference in tax rates due to multiple jurisdictions

 

(6,493)

(2)

 

 

 

(10,948)

(3)

 

Effect of income subject to preferential tax rate

 

(3,945)

(2)

 

 

 

(3,329)

(1)

 

Adjustment due to estimate on the annual effective rate

 

(6,380)

(2)

 

 

 

(10,328)

(3)

 

State and local taxes

 

3,665

1

 

 

 

61

-

 

Others

 

(2,082)

(1)

 

 

 

(2,082)

(1)

 

Income tax expense

$

50,479

19

%

 

$

76,831

23

%

For the quarter ended March 31, 2022, the Corporation recorded an income tax expense of $50.5 million compared to $76.8 million for the quarter ended March 31, 2021. The decrease in income tax expense was primarily due to lower pre-tax income and higher tax-exempt income.

 

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

 

 

 

March 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

 

117,016

 

663,751

 

780,767

Postretirement and pension benefits

 

54,701

 

-

 

54,701

Deferred loan origination fees/cost

 

245

 

-

 

245

Allowance for credit losses

 

228,627

 

30,955

 

259,582

Accelerated depreciation

 

5,246

 

7,350

 

12,596

FDIC-assisted transaction

 

152,665

 

-

 

152,665

Intercompany deferred gains

 

1,739

 

-

 

1,739

Lease liability

 

31,292

 

22,856

 

54,148

Unrealized net gain on trading and available-for-sale securities

 

138,994

 

9,600

 

148,594

Difference in outside basis from pass-through entities

 

52,251

 

-

 

52,251

Other temporary differences

 

36,380

 

8,547

 

44,927

 

Total gross deferred tax assets

 

819,417

 

745,840

 

1,565,257

Deferred tax liabilities:

 

 

 

 

 

 

Indefinite-lived intangibles

 

77,467

 

52,012

 

129,479

Right of use assets

 

29,103

 

19,310

 

48,413

Deferred loan origination fees/cost

 

-

 

3,635

 

3,635

Other temporary differences

 

44,079

 

1,530

 

45,609

 

Total gross deferred tax liabilities

 

150,649

 

76,487

 

227,136

Valuation allowance

 

132,449

 

430,447

 

562,896

Net deferred tax asset

$

536,319

$

238,906

$

775,225

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

(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

 

112,331

 

665,164

 

777,495

Postretirement and pension benefits

 

57,002

 

-

 

57,002

Deferred loan origination fees/cost

 

2,788

 

-

 

2,788

Allowance for credit losses

 

233,500

 

31,872

 

265,372

Deferred gains

 

1,642

 

-

 

1,642

Accelerated depreciation

 

5,246

 

7,422

 

12,668

FDIC-assisted transaction

 

152,665

 

-

 

152,665

Lease liability

 

31,211

 

23,894

 

55,105

Difference in outside basis from pass-through entities

 

54,781

 

-

 

54,781

Other temporary differences

 

38,512

 

8,418

 

46,930

 

Total gross deferred tax assets

 

689,939

 

739,551

 

1,429,490

Deferred tax liabilities:

 

 

 

 

 

 

Indefinite-lived intangibles

 

76,635

 

51,150

 

127,785

Unrealized net gain (loss) on trading and available-for-sale securities

 

4,329

 

2,817

 

7,146

Right of use assets

 

29,025

 

20,282

 

49,307

Deferred loan origination fees/cost

 

-

 

3,567

 

3,567

Other temporary differences

 

43,856

 

1,530

 

45,386

 

Total gross deferred tax liabilities

 

153,845

 

79,346

 

233,191

Valuation allowance

 

128,557

 

410,970

 

539,527

Net deferred tax asset

$

407,537

$

249,235

$

656,772

The net deferred tax asset shown in the table above at March 31, 2022 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, 2021 - $0.7 billion) and $1.0 million in deferred tax liabilities in the “Other liabilities” caption (December 31, 2021 - $825 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.

 

At March 31, 2022 the net deferred tax asset of the U.S. operations amounted to $669 million with a valuation allowance of approximately $430 million, for a net deferred tax asset after valuation allowance of approximately $239 million. The Corporation evaluates the realization of the deferred tax asset by taxing jurisdiction. The U.S. operation had sustained profitability for the year ended December 31, 2021, and the quarter ended March 31, 2022. Years 2020 and 2021 have been impacted by the COVID-19 pandemic and other events. Year 2020 was unfavorably impacted by the ACL reserve build-ups and the impairment of expenses on the branch closures in the New York region. Year 2021 has been favorably impacted by a strong economic recovery that resulted in ACL reserve releases, reversing the year 2020 build-up. The financial results for year December 31,2021 and the quarter ended March 31,2022 is 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 new variants of COVID-19 and geopolitical uncertainty. As of March 31, 2022, after weighting all positive and negative evidence, the Corporation concluded that it is more likely than not that approximately $239 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, allowance for credit losses, charge offs, NPLs inflows and NPA balances. Strong financial results during year 2022 together with the additional income expected from the recent acquisition of K2 assets, along with new tax initiatives could be considered additional positive evidence that, in the future, could overcome totally or partially the negative evidence evaluated as of March 31, 2022, that could result in future adjustments to the valuation allowance.

 

At March 31, 2022, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $536 million.

 

The Corporation’s Puerto Rico Banking operation is not in a cumulative loss position and has sustained profitability for the three year period ended March 31, 2022. 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 three years period ending March 31, 2022. 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, considering the criteria of ASC Topic 740. Accordingly, the Corporation has maintained a valuation allowance on the deferred tax asset of $132 million as of March 2022.

 

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

(In millions)

 

2022

 

 

2021

Balance at January 1

$

3.5

 

$

14.8

Balance at March 31

$

3.5

 

$

14.8

At March 31, 2022, the total amount of accrued interest recognized in the statement of financial condition approximated $2.8 million (December 31, 2021 - $2.8 million). The total interest expense recognized at March 31, 2022 was $83 thousand, (March 31, 2021 - $364 thousand). Management determined that at March 31, 2022 and December 31, 2021 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 $5.6 million at March 31, 2022 (December 31, 2021 - $5.5 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, 2022, the following years remain subject to examination in the U.S. Federal jurisdiction: 2018 and thereafter; and in the Puerto Rico jurisdiction, 2017 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 $1.4 million, including interest.