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Income taxes | 9 Months Ended
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Sep. 30, 2023
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, 2023 September 30, 2022 (In thousands) Amount % of pre-tax income Amount % of pre-tax income Computed income tax expense at statutory rates $ 68,426 38 % $ 183,893 38 % Net benefit of tax exempt interest income (22,862) (13) (35,403) (8) Effect of income subject to preferential tax rate (199) - (109,588) (22) Deferred tax asset valuation allowance 1,355 1 3,724 1 Difference in tax rates due to multiple jurisdictions (2,839) (2) (7,147) (2) Unrecognized tax benefits - - (1,503) - State and local taxes 2,436 1 3,726 1 Others (458) - 30,284 6 Income tax expense $ 45,859 25 % $ 67,986 14 % Nine months ended September 30, 2023 September 30, 2022 (In thousands) Amount % of pre-tax income Amount % of pre-tax income Computed income tax expense at statutory rates $ 218,409 38 % $ 385,567 38 % Net benefit of tax exempt interest income (72,080) (13) (112,669) (12) Effect of income subject to preferential tax rate (775) - (116,630) (11) Deferred tax asset valuation allowance (2,217) - 9,662 1 Difference in tax rates due to multiple jurisdictions (11,879) (3) (20,457) (2) Unrecognized tax benefits - - (1,503) - State and local taxes 8,829 2 10,957 1 Others (4,611) (1) 27,750 3 Income tax expense $ 135,676 23 % $ 182,677 18 % For the quarter and nine months ended September 30, 2023, the Corporation recorded an income tax expense of $ 45.9 million and $ 135.7 million, respectively, compared to $ 68.0 million and $ 182.7 million for the respective periods of 2022. The decrease in income tax expense was due in essence to a lower pre-tax income, including lower volume of income subject to preferential tax rates, for the quarter and nine months ended September 30, 2023. The following table presents a breakdown of the significant components of the Corporation’s deferred tax assets and liabilities. September 30, 2023 (In thousands) PR US Total Deferred tax assets: Tax credits available for carryforward $ 261 $ 10,754 $ 11,015 Net operating loss and other carryforward available 123,196 644,007 767,203 Postretirement and pension benefits 46,823 - 46,823 Allowance for credit losses 242,095 26,366 268,461 Depreciation 5,972 6,445 12,417 FDIC-assisted transaction 152,665 - 152,665 Lease liability 29,056 20,237 49,293 Unrealized net loss on investment securities 218,866 27,119 245,985 Difference in outside basis from pass-through entities 38,439 - 38,439 Mortgage Servicing Rights 14,685 - 14,685 Other temporary differences 30,804 7,395 38,199 Total gross deferred tax assets 902,862 742,323 1,645,185 Deferred tax liabilities: Intangibles 83,961 50,392 134,353 Right of use assets 26,655 17,506 44,161 Deferred loan origination fees/cost 1,990 1,944 3,934 Loans acquired 19,698 - 19,698 Other temporary differences 6,053 422 6,475 Total gross deferred tax liabilities 138,357 70,264 208,621 Valuation allowance 140,033 401,318 541,351 Net deferred tax asset $ 624,472 $ 270,741 $ 895,213 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 Depreciation 5,972 6,309 12,281 FDIC-assisted transaction 152,665 - 152,665 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 Mortgage Servicing Rights 13,711 - 13,711 Other temporary differences 17,122 7,815 24,937 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 Loans acquired 23,353 - 23,353 Other temporary differences 1,531 - 1,531 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 The net deferred tax asset shown in the table above at September 30, 2023, 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, 2022 - $ 1.0 billion) and $ 1.2 million in deferred tax liabilities in the “Other liabilities” caption (December 31, 2022 - $ 2.6 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 United States. At September 30, 2023 the net deferred tax asset of the U.S. operations amounted to $ 672 million with a valuation allowance of approximately $ 401 million, for a net deferred tax asset after valuation allowance of approximately $ 271 million. The Corporation evaluates the realization of the deferred tax asset on a quarterly basis by taxing jurisdiction. The U.S. operation has sustained profitability for last three calendar years and for the period ended September 30, 2023. While the pre-tax income for the nine-month period ended in September 2023 is lower when compared to the same period last year, these results, when combined with recent historical results, still demonstrated financial stability for the U.S. operations. The 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 reduction of pre-tax income for the year 2023. As of September 30, 2023, after weighting all positive and negative evidence, the Corporation concluded that it is more likely than not that approximately $ 271 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, 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, to assess the future realization of the deferred tax asset. At September 30, 2023, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $ 624 million. The Corporation’s Puerto Rico Banking operation is not in a cumulative loss position and has sustained profitability for the last three calendar years and for the period ended September 30, 2023. 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 last three calendar years and for the period ended September 30, 2023. 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. Accordingly, the Corporation has maintained a valuation allowance on the deferred tax asset of $ 140 million as of September 30, 2023. The reconciliation of unrecognized tax benefits, excluding interest, was as follows: (In millions) 2023 2022 Balance at January 1 $ 2.5 $ 3.5 Balance at March 31 $ 2.5 $ 3.5 Balance at June 30 $ 2.5 $ 3.5 Reduction as a result of lapse of statute of limitations - July through September - (1.1) Balance at September 30 $ 2.5 $ 2.4 At September 30, 2023, the total amount of accrued interest recognized in the statement of financial condition amounted to $ 2.7 million (December 31, 2022 - $ 2.6 million). The total interest expense recognized at September 30, 2023 was $ 79 thousand, (September 30, 2022– $ 202 thousand). Management determined that at September 30, 2023 and December 31, 2022 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 $ 4.4 million at September 30, 2023 (December 31, 2022 - $ 4.3 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 amounting to $ 1.5 million. 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, 2023, 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.

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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 https://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 https://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 https://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 https://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 https://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 https://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 https://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 https://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 https://asc.fasb.org/extlink&oid=120395691&loc=d3e23780-122690 + Details
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