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Income taxes | 12 Months Ended
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Dec. 31, 2022
Income Tax Disclosure |
Income Taxes | Note 35 – Income taxes The components of income tax expense for the years ended December 31, are summarized in the following table. (In thousands) 2022 2021 2020 Current income tax (benefit) expense: Puerto Rico $ 156,425 $ 69,415 $ 33,281 Federal and States 9,034 10,232 3,613 Subtotal 165,459 79,647 36,894 Deferred income tax expense (benefit): Puerto Rico (4,373) 179,688 69,300 Federal and States (28,756) 49,683 5,744 Subtotal (33,129) 229,371 75,044 Total income tax expense $ 132,330 $ 309,018 $ 111,938 The reasons 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: 2022 2021 2020 (In thousands) Amount % of pre-tax income Amount % of pre-tax income Amount % of pre-tax income Computed income tax at statutory rates $ 463,114 38 % $ 466,465 38 % $ 231,960 38 % Benefit of net tax exempt interest income (165,065) (13) (139,426) (12) (126,232) (20) Effect of income subject to preferential tax rate (86,797) (7) (11,981) (1) (10,141) (2) Deferred tax asset valuation allowance (21,469) (2) 20,932 2 15,276 2 NOL Adjustments (34,817) (3) - - - - Difference in tax rates due to multiple jurisdictions (26,887) (2) (30,719) (3) (1,903) - Unrecognized tax benefits (1,503) - (5,484) - (2,163) - State and local taxes 14,981 1 14,629 1 4,350 - Others (9,227) (1) (5,398) - 791 - Income tax expense $ 132,330 11 % $ 309,018 25 % $ 111,938 18 % For the year ended December 31, 2022, the Corporation recorded income tax expense of $ 132.3 million, compared to $ 309.0 million for the same period of 2021. The decrease in income tax expense was mainly due to the reversal of a portion of the deferred tax asset (“DTA”) valuation allowance of the U.S. operations amounting to $ 68.2 million, to higher taxable income subject to preferential tax rates, primarily attributed to the gain from the sale of Evertec shares, and higher tax-exempt income recorded during this year. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their tax bases. Significant components of the Corporation’s deferred tax assets and liabilities at December 31 were as follows: December 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 121,742 661,144 782,886 Postretirement and pension benefits 47,122 - 47,122 Allowance for credit losses 250,615 32,688 283,303 Accelerated depreciation 5,972 6,309 12,281 FDIC-assisted transaction 152,665 - 152,665 Intercompany deferred gains 1,548 - 1,548 Lease liability 28,290 23,521 51,811 Unrealized net loss on investment securities 265,955 23,913 289,868 Difference in outside basis from pass-through entities 40,602 - 40,602 Other temporary differences 29,285 7,815 37,100 Total gross deferred tax assets 944,057 758,171 1,702,228 Deferred tax liabilities: Intangibles 81,174 54,623 135,797 Right of use assets 26,015 20,262 46,277 Deferred loan origination fees/cost 1,076 2,961 4,037 Other temporary differences 24,884 - 24,884 Total gross deferred tax liabilities 133,149 77,846 210,995 Valuation allowance 137,863 402,333 540,196 Net deferred tax asset $ 673,045 $ 277,992 $ 951,037 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: Intangibles 76,635 51,150 127,785 Unrealized net gain on investment 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 December 31, 2022 is reflected in the consolidated statements of financial condition as $ 1.0 billion in net deferred tax assets (in the “other assets” caption) (2021 - $ 0.7 billion in deferred tax asset in the “other assets” caption) and $ 2.6 million in deferred tax liabilities (in the “other liabilities” caption) (2021 - $ 825 thousand in deferred tax liabilities in the “other liabilities” caption), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corporation. The deferred tax asset related to the NOLs and other carryforwards as of December 31, 2022, expires as follows: (In thousands) 2023 $ 1,363 2024 9,310 2025 13,516 2026 13,367 2027 15,202 2028 260,622 2029 111,307 2030 121,017 2031 122,324 2032 55,335 2033 10,565 2034 5,666 2035 43,121 2036 171 $ 782,886 At December 31, 2022 the net deferred tax asset of the U.S. operations amounted to $ 680.3 million with a valuation allowance of $ 402.3 million, for a net DTA of $ 278 million. The Corporation evaluates on a quarterly basis the realization of the deferred tax asset by taxing jurisdiction. The U. S. operations sustained profitability for the three years period ended December 31, 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 had 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 year ended December 31, 2022, demonstrate financial stability for the U. S. operations, despite the climate of uncertainty as a result of recent global geopolitical challenges. These historical financial results together with pre-tax earnings forecasts are objectively verifiable positive evidence, evaluated in addition to 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 in prior years, and challenges to the economy due to global geopolitical uncertainty. Accordingly, after weighting all positive and negative evidence, the Corporation recorded during the fourth quarter of year 2022 a partial release of its valuation allowance amounting to $ 68.2 million and concluded that it is more likely than not that approximately $ 278 million of the DTA from the U.S. Operations will be realized. The Corporation has approximately $ 525 million in deferred tax asset related to federal NOLs with expiration dates between 2028 and 2033 and $ 135 million in DTA related to state NOLs with expiration dates between 2030 and 2036. 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, the pre-tax earnings forecast, any new tax initiative, and other factors, including net income versus forecast, targeted loan growth, net interest income margin, allowance for credit losses, charge offs, NPLs inflows and NPA balances. At December 31, 2022, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $ 673 million. The Corporation’s Puerto Rico Banking operation is not in a cumulative loss position and has sustained profitability for the three years period ended December 31, 2022. This is considered a strong piece of objectively verifiable positive evidence that outweigh 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 December 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 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 full valuation allowance on the deferred tax asset of $ 138 million as of December 2022. Under the Puerto Rico Internal Revenue Code, the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns. However, certain subsidiaries that are organized as limited liability companies with a partnership election are treated as pass-through entities for Puerto Rico tax purposes. The Code provides a dividends-received deduction of 100 % on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85 % on dividends received from other taxable domestic corporations. The Corporation’s subsidiaries in the United States file a consolidated federal income tax return. The intercompany settlement of taxes paid is based on tax sharing agreements which generally allocate taxes to each entity based on a separate return basis. The following table presents a reconciliation of unrecognized tax benefits. (In millions) Balance at January 1, 2021 $ 14.8 Reduction as a result of lapse of statute of limitations (11.3) Balance at December 31, 2021 $ 3.5 Reduction as a result of lapse of statute of limitations (1.0) Balance at December 31, 2022 $ 2.5 At December 31, 2022, the total amount of interest recognized in the statement of financial condition approximated $ 2.6 million (2021 - $ 2.8 million). The total interest expense recognized during 2022 was $ 268 thousand net of a reduction of $ 448 thousand due to the expiration of the statute of limitation (2021 - $ 892 thousand net of a reduction of $ 2.9 million). Management determined that, as of December 31, 2022 and 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 through earnings, would affect the Corporation’s effective tax rate, was approximately $ 4.3 million at December 31, 2022 (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 statute of limitations, 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. As of December 31, 2022, the following years remain subject to examination in the U.S. Federal jurisdiction – 2019 and thereafter and in the Puerto Rico jurisdiction – 2018 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 $ 1.5 million, including interest.

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