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Income taxes | 12 Months Ended
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Dec. 31, 2023
Income Tax Disclosure |
Income Taxes | Note 35 – Income taxes The components of income tax expense for the years ended December 31, 2023, 2022, and 2021 are summarized in the following table. (In thousands) 2023 2022 2021 Current income tax expense: Puerto Rico $ 168,001 $ 156,425 $ 69,415 Federal and States 9,335 9,034 10,232 Subtotal 177,336 165,459 79,647 Deferred income tax (benefit) expense: Puerto Rico (50,871) (4,373) 179,688 Federal and States 7,732 (28,756) 49,683 Subtotal (43,139) (33,129) 229,371 Total income tax expense $ 134,197 $ 132,330 $ 309,018 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: 2023 2022 2021 (In thousands) Amount % of pre-tax income Amount % of pre-tax income Amount % of pre-tax income Computed income tax at statutory rates $ 253,327 38 % $ 463,114 38 % $ 466,465 38 % Net benefit of tax exempt interest income (95,222) (14) (165,065) (13) (139,426) (12) Effect of income subject to preferential tax rate (1,854) - (86,797) (7) (11,981) (1) Deferred tax asset valuation allowance 2,304 - (21,469) (2) 20,932 2 NOL Adjustments - - (34,817) (3) - - Difference in tax rates due to multiple jurisdictions (12,857) (2) (26,887) (2) (30,719) (3) Change in tax rates (18,714) (3) - - - - Unrecognized tax benefits (1,529) - (1,503) - (5,484) - Other tax benefits (2,925) - - - - - State and local taxes 25,401 3 14,981 1 14,629 1 Others (13,734) (2) (9,227) (1) (5,398) - Income tax expense $ 134,197 20 % $ 132,330 11 % $ 309,018 25 % For the year ended December 31, 2023, the Corporation recorded income tax expense of $ 134.2 million, compared to $ 132.3 million for the same period of 2022. The net increase of $ 1.9 million in income tax expense reflects the impact of the composition and source of taxable income between both years. For the year ended December 31, 2023, the income before tax was lower than for the year ended December 31, 2022, which would have resulted in a lower income tax expense; however, the income tax expense for 2022 benefited from: the reversal of a portion of the deferred tax assets valuation allowance of the U. S. operations, resulting in an income tax benefit of $ 68.2 million, higher exempt income, net of disallowance, and the gain on sale of Evertec shares, taxable at a preferential tax rate. 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, 2023 and 2022 were as follows: December 31, 2023 (In thousands) PR US Total Deferred tax assets: Tax credits available for carryforward $ 263 $ 10,281 $ 10,544 Net operating loss and other carryforward available 122,634 620,982 743,616 Postretirement and pension benefits 38,121 - 38,121 Allowance for credit losses 244,956 28,222 273,178 Depreciation 6,774 6,578 13,352 FDIC-assisted transaction 152,665 - 152,665 Lease liability 29,070 20,492 49,562 Unrealized net loss on investment securities 312,583 19,037 331,620 Difference in outside basis from pass-through entities 46,056 - 46,056 Mortgage Servicing Rights 14,085 - 14,085 Other temporary differences 47,679 9,625 57,304 Total gross deferred tax assets 1,014,886 715,217 1,730,103 Deferred tax liabilities: Intangibles 84,635 51,944 136,579 Right of use assets 26,648 18,030 44,678 Deferred loan origination fees/cost (1,056) 1,486 430 Loans acquired 20,430 - 20,430 Other temporary differences 6,402 422 6,824 Total gross deferred tax liabilities 137,059 71,882 208,941 Valuation allowance 139,347 374,035 513,382 Net deferred tax asset $ 738,480 $ 269,300 $ 1,007,780 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 December 31, 2023 is reflected in the consolidated statements of financial condition as $ 1.0 billion in net deferred tax assets (in the “other assets” caption) (December 31, 2022 - $ 1.0 billion) and $ 1.3 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. The net reduction in the valuation allowance of approximately $ 27 million during the year ended December 31, 2023 was due primarily to the change in the blended state tax rate applicable to net operating losses of the U.S. operation. The deferred tax asset related to the NOLs and other carryforwards as of December 31, 2023, expires as follows: (In thousands) 2024 $ 9,234 2025 13,516 2026 13,367 2027 15,202 2028 244,706 2029 111,307 2030 137,344 2031 106,295 2032 51,302 2033 8,198 2034 901 2035 32,244 $ 743,616 At December 31, 2023 the net deferred tax asset of the U.S. operations amounted to $ 643 million with a valuation allowance of $ 374 million, for a net deferred tax asset of $ 269 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, 2023. The financial results for year 2023 were lower than prior year; however, this additional component of negative evidence was offset by positive evidence of recent historical results, still demonstrating 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 December 31, 2023, after weighting all positive and negative evidence, the Corporation concluded that it is more likely than not that approximately $ 269 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, and other factors, including net income versus forecast, targeted loan growth, net interest income margin, changes in deposits costs, allowance for credit losses, charge offs, NPLs inflows and NPA balances, to assess the future realization of the deferred tax asset. At December 31, 2023, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $ 738 million. The Corporation’s Puerto Rico Banking operation has strong historical record of profitability. 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 ended December 31, 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 of the deferred tax asset. After weighting 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 full valuation allowance on the deferred tax asset of $ 139 million as of December 31, 2023. 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, 2022 $ 3.5 Reduction as a result of lapse of statute of limitations (1.0) Balance at December 31, 2022 $ 2.5 Reduction as a result of change in tax position (1.0) Balance at December 31, 2023 $ 1.5 At December 31, 2023, the total amount of interest recognized in the statement of financial condition approximated $ 2.3 million (2022 - $ 2.6 million). The total interest expense recognized during 2023 was $ 199 thousand net of a reduction of $ 475 thousand due to the expiration of the statute of limitation (2022 - $ 268 thousand net of a reduction of $ 448 thousand). Management determined that, as of December 31, 2023 and 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 $ 2.9 million at December 31, 2023 (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 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, 2023, the following years remain subject to examination in the U.S. Federal jurisdiction – 2020 and thereafter and in the Puerto Rico jurisdiction – 2018 and thereafter.

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