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v3.22.2.2

Income taxes | 9 Months Ended
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Sep. 30, 2022
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 |
|  |  | September 30, 2022 |  |  |  | September 30, 2021 |
(In thousands) |  | Amount | % of pre-tax income |  |  |  | Amount | % of pre-tax income |
Computed income tax expense at statutory rates | $ | 183,893 | 38 | % |  | $ | 124,370 | 38 | %
Net benefit of tax exempt interest income |  | (45,499) | (9) |  |  |  | (34,294) | (10) |
Deferred tax asset valuation allowance |  | 3,724 | 1 |  |  |  | 3,529 | 1 |
Difference in tax rates due to multiple jurisdictions |  | (7,147) | (2) |  |  |  | (9,600) | (3) |
Effect of income subject to preferential tax rate |  | (109,588) | (22) |  |  |  | (5,441) | (2) |
Unrecognized tax benefits |  | (1,503) | - |  |  |  | (5,484) | (2) |
Adjustment due to estimate on the annual effective rate |  | 10,096 | 2 |  |  |  | 4,001 | 1 |
State and local taxes |  | 3,726 | 1 |  |  |  | 6,352 | 2 |
Others |  | 30,284 | 6 |  |  |  | 109 | - |
Income tax expense | $ | 67,986 | 14 | % |  | $ | 83,542 | 25 | %
|  |  | Nine months ended |
|  |  | September 30, 2022 |  |  |  | September 30, 2021 |
(In thousands) |  | Amount | % of pre-tax income |  |  |  | Amount | % of pre-tax income |
Computed income tax expense at statutory rates | $ | 385,567 | 38 | % |  | $ | 360,859 | 38 | %
Net benefit of tax exempt interest income |  | (123,324) | (12) |  |  |  | (105,297) | (11) |
Deferred tax asset valuation allowance |  | 9,662 | 1 |  |  |  | 19,682 | 2 |
Difference in tax rates due to multiple jurisdictions |  | (20,457) | (2) |  |  |  | (25,429) | (3) |
Effect of income subject to preferential tax rate |  | (116,630) | (11) |  |  |  | (10,175) | (1) |
Adjustment due to estimate on the annual effective rate |  | 10,655 | 1 |  |  |  | (6,732) | (1) |
Unrecognized tax benefits |  | (1,503) | - |  |  |  | (5,484) | (1) |
State and local taxes |  | 10,957 | 1 |  |  |  | 8,943 | 1 |
Others |  | 27,750 | 3 |  |  |  | (2,901) | - |
Income tax expense | $ | 182,677 | 18 | % |  | $ | 233,466 | 24 | %
For the quarter and nine months ended September 30, 2022, the Corporation recorded an income tax expense of $68.0 million and $182.7 million, respectively, compared to $83.5 million and $233.5 million for the respective periods of 2021. The decrease in income tax expense was primarily due to the effect of income subject to preferential tax rates mainly attributed to the gain from the sale of Evertec shares in connection with the Evertec Transactions and to higher tax exempt income for the quarter and nine months ended September 30, 2022. The following table presents a breakdown of the significant components of the Corporation’s deferred tax assets and liabilities.
|  |  | September 30, 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 |  | 121,840 |  | 640,545 |  | 762,385
Postretirement and pension benefits |  | 50,997 |  | - |  | 50,997
Deferred loan origination fees/cost |  | 20 |  | - |  | 20
Allowance for credit losses |  | 240,578 |  | 34,147 |  | 274,725
Accelerated depreciation |  | 5,246 |  | 7,367 |  | 12,613
FDIC-assisted transaction |  | 152,665 |  | - |  | 152,665
Intercompany deferred gains |  | 1,829 |  | - |  | 1,829
Lease liability |  | 28,747 |  | 20,960 |  | 49,707
Unrealized net loss on trading and available-for-sale securities |  | 291,285 |  | 26,109 |  | 317,394
Difference in outside basis from pass-through entities |  | 42,459 |  | - |  | 42,459
Other temporary differences |  | 33,017 |  | 8,218 |  | 41,235
| Total gross deferred tax assets |  | 968,944 |  | 740,127 |  | 1,709,071
Deferred tax liabilities: |  |  |  |  |  |
Indefinite-lived intangibles |  | 79,617 |  | 53,778 |  | 133,395
Right of use assets |  | 26,499 |  | 17,594 |  | 44,093
Deferred loan origination fees/cost |  | 574 |  | 3,506 |  | 4,080
Other temporary differences |  | 38,104 |  | 1,529 |  | 39,633
| Total gross deferred tax liabilities |  | 144,794 |  | 76,407 |  | 221,201
Valuation allowance |  | 138,219 |  | 444,444 |  | 582,663
Net deferred tax asset | $ | 685,931 | $ | 219,276 | $ | 905,207
|  |  | 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 September 30, 2022 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, 2021 - $0.7 billion) and $2.2 million in deferred tax liabilities in the “Other liabilities” caption (December 31, 2021 - $869 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 September 30, 2022 the net deferred tax asset of the U.S. operations amounted to $663 million with a valuation allowance of approximately $444 million, for a net deferred tax asset after valuation allowance of approximately $219 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 period ended September 30, 2022. Years 2020 and 2021 were 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 the period ended September 30, 2022 demonstrate financial stability for the U.S. operations, despite the climate of uncertainty as a result of recent global geopolitical and health challenges. 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 September 30, 2022, after weighting all positive and negative evidence, the Corporation concluded that it is more likely than not that approximately $219 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. If our U.S. operations continue to show actual and projected strong financial results along with new tax initiatives, this could be considered additional positive evidence that could overcome totally or partially the negative evidence evaluated as of September 30, 2022, that could increase the amount of benefit from net operating losses that the Corporation estimates to be realized in the future resulting in future adjustments to the valuation allowance. At September 30, 2022, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $686 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 September 30, 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 September 30, 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 $138 million as of September 30, 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
Balance at June 30 | $ | 3.5 |  | $ | 14.8
Reduction as a result of lapse of statute of limitations - July through September |  | (1.1) |  |  | -
Reduction as a result of settlements - July through September |  | - |  |  | (11.3)
Balance at September 30 | $ | 2.4 |  | $ | 3.5
At September 30, 2022, the total amount of accrued interest recognized in the statement of financial condition amounted to $2.5 million (December 31, 2021 - $2.8 million). The total interest expense recognized at September 30, 2022 was $202 thousand, net of the reduction of $448 thousand due to the expiration of the statute of limitation (September 30, 2021– $810 thousand, net of a reduction of $2.9 million due to the expiration of the statute of limitation). Management determined that at September 30, 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 $4.3 million at September 30, 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 anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $1.5 million, including interest. 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 September 30, 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.

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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=121826272&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=122134291&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=121826272&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=122134291&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=121826272&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 Reference 9: http://www.xbrl.org/2003/role/disclosureRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -SubTopic 10 -Section S99 -Paragraph 1 -Subparagraph (SX 210.4-08(h)(2)) -URI http://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 + Details
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