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Income taxes | 3 Months Ended
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Mar. 31, 2025
Income Tax Disclosure |
Income Taxes | Note 30 – Income taxes The table below presents a reconciliation of the statutory income tax rate to the effective income tax rate: Quarters ended March 31, 2025 March 31, 2024 (In thousands) Amount % of pre-tax income Amount % of pre-tax income Computed income tax expense at statutory rates $ 83,462 38 % $ 59,569 38 % Net benefit of tax exempt interest income (39,955) (18) (28,759) (18) Effect of income subject to preferential tax rate (913) - (1,420) (1) Deferred tax asset valuation allowance 3,882 1 2,563 1 Difference in tax rates due to multiple jurisdictions (2,975) (1) (673) - Tax on intercompany distributions [1] - - 24,325 16 State and local taxes 4,036 1 1,036 - Others (2,474) (1) (1,073) (1) Income tax expense $ 45,063 20 % $ 55,568 35 % [1] Includes $ 16.5 million of out-of-period adjustment 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 March 31, 2025, and December 31, 2024, were as follows: March 31, 2025 (In thousands) PR US Total Deferred tax assets: Tax credits available for carryforward $ 4,861 $ 27,774 $ 32,635 Net operating loss and other carryforward available 58,060 603,736 661,796 Postretirement and pension benefits 28,190 - 28,190 Allowance for credit losses 244,976 27,014 271,990 Depreciation 7,700 7,381 15,081 FDIC-assisted transaction 152,665 - 152,665 Lease liability 26,658 15,218 41,876 Unrealized net loss on investment securities 221,538 17,007 238,545 Difference in outside basis from pass-through entities 53,381 - 53,381 Mortgage Servicing Rights 14,815 - 14,815 Other temporary differences 38,635 8,870 47,505 Total gross deferred tax assets 851,479 707,000 1,558,479 Deferred tax liabilities: Intangibles 89,280 56,710 145,990 Right of use assets 24,190 13,371 37,561 Deferred loan origination fees/cost (1,154) 2,607 1,453 Loans acquired 17,907 - 17,907 Other temporary differences 6,826 429 7,255 Total gross deferred tax liabilities 137,049 73,117 210,166 Valuation allowance 75,598 386,913 462,511 Net deferred tax asset $ 638,832 $ 246,970 $ 885,802 December 31, 2024 (In thousands) PR US Total Deferred tax assets: Tax credits available for carryforward $ 4,861 $ 24,728 $ 29,589 Net operating loss and other carryforward available 52,211 610,279 662,490 Postretirement and pension benefits 27,786 - 27,786 Allowance for credit losses 247,153 24,415 271,568 Depreciation 7,700 7,229 14,929 FDIC-assisted transaction 152,665 - 152,665 Lease liability 25,167 16,451 41,618 Unrealized net loss on investment securities 252,411 20,996 273,407 Difference in outside basis from pass-through entities 50,144 - 50,144 Mortgage Servicing Rights 14,475 - 14,475 Other temporary differences 41,127 9,072 50,199 Total gross deferred tax assets 875,700 713,170 1,588,870 Deferred tax liabilities: Intangibles 88,351 55,926 144,277 Right of use assets 22,784 14,454 37,238 Deferred loan origination fees/cost (1,880) 2,085 205 Loans acquired 18,415 - 18,415 Other temporary differences 6,799 429 7,228 Total gross deferred tax liabilities 134,469 72,894 207,363 Valuation allowance 69,837 386,914 456,751 Net deferred tax asset $ 671,394 $ 253,362 $ 924,756 The net deferred tax assets shown in the table above at March 31, 2025, is reflected in the consolidated statements of financial condition as $ 887.5 million in net deferred tax assets in the “Other assets” caption (December 31, 2024 - $ 926.3 million) and $ 1.7 million in deferred tax liabilities in the “Other liabilities” caption (December 31, 2024 - $ 1.6 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 March 31, 2025, the net deferred tax assets of the U.S. operations amounted to $ 633.9 million with a valuation allowance of approximately $ 386.9 million, for net deferred tax assets after valuation allowance of approximately $ 247.0 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 last three years and for the quarter ended March 31, 2025. 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 years. As of March 31, 2025, after weighting all positive and negative evidence, the Corporation concluded that it is more likely than not that approximately $ 247.0 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, non-performing loans held-in-portfolio (“NPLs”) inflows and non-performing asset (“NPA”) balances. Significant adverse changes or a combination of changes in these factors could impact the future realization of the deferred tax assets At March 31, 2025, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $ 638.8 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 $ 75.6 million as of March 31, 2025. The reconciliation of unrecognized tax benefits, excluding interest, was as follows: (In millions) 2025 2024 Balance at January 1 $ 1.5 $ 1.5 Balance at March 31 $ 1.5 $ 1.5 At March 31, 2025, the total amount of accrued interest recognized in the statement of financial condition amounted to $ 2.4 million (December 31, 2024 - $ 2.4 million). The total interest expense recognized at March 31, 2025 was $ 30 thousand, (March 31, 2024– $ 30 thousand). Management determined that at March 31, 2025 and December 31, 2024, 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 that if recognized, would affect the Corporation’s effective tax rate, was approximately $ 3.0 million at March 31, 2025 (December 31, 2024 - $ 3.0 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 March 31, 2025, 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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