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Income taxes
 6 Months Ended
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.