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Income taxes | 6 Months Ended
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Jun. 30, 2024
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 June 30, 2024 June 30, 2023 (In thousands) Amount % of pre-tax income Amount % of pre-tax income Computed income tax expense at statutory rates $ 81,843 38 % $ 72,998 38 % Net benefit of tax exempt interest income (33,220) (15) (27,316) (14) Effect of income subject to preferential tax rate 1,272 - 278 - Deferred tax asset valuation allowance (235) - 994 1 Difference in tax rates due to multiple jurisdictions (4,456) (2) (3,869) (2) Other tax benefits (4,500) (2) - - U.S., States, and local taxes 2,204 1 3,037 2 Others (2,449) (1) (2,619) (2) Income tax expense $ 40,459 19 % $ 43,503 22 % Six months ended June 30, 2024 June 30, 2023 (In thousands) Amount % of pre-tax income Amount % of pre-tax income Computed income tax expense at statutory rates $ 141,412 38 % $ 149,983 38 % Net benefit of tax exempt interest income (61,979) (16) (49,218) (12) Effect of income subject to preferential tax rate (148) - (576) - Deferred tax asset valuation allowance 2,328 - (3,572) (1) Difference in tax rates due to multiple jurisdictions (5,129) (1) (9,039) (2) Other tax benefits (4,500) (1) - - Tax on intercompany distributions [1] 24,325 6 - - U.S., States, and local taxes 3,240 1 6,392 2 Others (3,522) (1) (4,153) (1) Income tax expense $ 96,027 26 % $ 89,817 24 % [1] Includes $ 16.5 million of out-of-period adjustment. For the quarter and six months ended June 30, 2024, the Corporation recorded an income tax expense of $ 40.5 million and $ 96.0 million respectively, compared to $ 43.5 million and $ 89.8 million for the respective periods of 2023. During the first quarter of 2024, the Corporation recorded a tax expense related to tax withholding on certain intercompany distributions, amounting to $ 22.9 million, out of which $ 16.5 million corresponded to years 2014-2023 and $ 6.5 million was related to a distribution completed during the period ended March 31, 2024, as previously disclosed. As a result of this adjustment, the deferred tax assets related to NOL of the Bank Holding Company (BHC) and its related valuation allowance was reduced by $ 53.7 million. The following table presents a breakdown of the significant components of the Corporation’s deferred tax assets and liabilities. June 30, 2024 (In thousands) PR US Total Deferred tax assets: Tax credits available for carryforward $ 263 $ 14,204 $ 14,467 Net operating loss and other carryforward available 53,942 616,080 670,022 Postretirement and pension benefits 37,219 - 37,219 Allowance for credit losses 242,722 27,591 270,313 Depreciation 6,774 6,746 13,520 FDIC-assisted transaction 152,665 - 152,665 Lease liability 27,196 18,099 45,295 Unrealized net loss on investment securities 294,942 20,304 315,246 Difference in outside basis from pass-through entities 45,207 - 45,207 Mortgage Servicing Rights 14,063 - 14,063 Other temporary differences 47,615 9,882 57,497 Total gross deferred tax assets 922,608 712,906 1,635,514 Deferred tax liabilities: Intangibles 86,493 53,485 139,978 Right of use assets 24,764 15,911 40,675 Deferred loan origination fees/cost (749) 2,069 1,320 Loans acquired 18,229 - 18,229 Other temporary differences 6,931 422 7,353 Total gross deferred tax liabilities 135,668 71,887 207,555 Valuation allowance 71,145 378,912 450,057 Net deferred tax asset $ 715,795 $ 262,107 $ 977,902 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 The net deferred tax assets shown in the table above at June 30, 2024, 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, 2023 - $ 1.0 billion) and $ 1.4 million in deferred tax liabilities in the “Other liabilities” caption (December 31, 2023 - $ 1.3 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 June 30, 2024, the net deferred tax assets of the U.S. operations amounted to $ 641 million with a valuation allowance of approximately $ 379 million, for net deferred tax assets after valuation allowance of approximately $ 262 million. The Corporation evaluates the realization of the deferred tax assets on a quarterly basis by taxing jurisdiction. The U.S. operation has sustained profitability for the last three calendar years and for the period ended June 30, 2024. 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 inflationary pressures and global geopolitical uncertainty that have resulted in a trend of reduction of pre-tax income over the last three years. As of June 30, 2024, after weighting all positive and negative evidence, the Corporation concluded that it is more likely than not that approximately $ 262 million of the deferred tax assets 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 assets 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, including recent earnings trends, 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. Significant adverse changes or a combination of changes in these factors could impact the future realization of the deferred tax assets. At June 30, 2024, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $ 716 million. The Corporation’s Puerto Rico Banking operation has a historical record of profitability. 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 assets. 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 assets of the Puerto Rico Banking operations will be realized. The Holding Company operation has been in a cumulative loss position in recent years. Management expects these losses will be a trend in future years. This objectively verifiable negative evidence is considered by Management strong negative evidence that suggests 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 assets of $ 71 million as of June 30, 2024. The reconciliation of unrecognized tax benefits, excluding interest, was as follows: (In millions) 2024 2023 Balance at January 1 $ 1.5 $ 2.5 Balance at March 31 $ 1.5 $ 2.5 Balance at June 30 $ 1.5 $ 2.5 At June 30, 2024, the total amount of accrued interest recognized in the statement of financial condition amounted to $ 2.4 million (December 31, 2023 - $ 2.3 million). The total interest expense recognized at June 30, 2024 was $ 60 thousand, (June 30, 2023– $ 53 thousand). Management determined that at June 30, 2024 and December 31, 2023, 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 $ 3.0 million at June 30, 2024 (December 31, 2023 - $ 2.9 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 does not anticipate a reduction in the total amount of unrecognized tax benefits within the next 12 months. 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 June 30, 2024, 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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