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INCOME TAXES | 12 Months Ended
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Dec. 31, 2022
Income Tax Disclosure [Abstract] |
INCOME TAXES | INCOME TAXES OFG is subject to the provisions of the PR Code. The PR Code imposed a maximum statutory corporate tax rate of 37.5%. OFG has operations in the mainland United States through its wholly owned subsidiaries OPC, OFG Ventures and OFG USA LLC (“OFG USA”), which is a direct subsidiary of the Bank, and has two branches in the USVI. The United States subsidiaries are subject to federal income taxes at the corporate level, while the USVI branches are subject to federal income taxes under a mirror system and a 10% surtax included in the maximum tax rate. OPC is subject to Florida state taxes, OFG USA is subject to North Carolina state taxes, and current investments in OFG Ventures are subject to state taxes in Missouri. In addition, during 2021, OFG incorporated in Grand Cayman, as a foreign wholly owned subsidiary, OFG Reinsurance. OFG Reinsurance is tax exempt in Grand Cayman. Effective December 30, 2022, OFG sold its pension plan administration operations in OPC and thereafter OPC discontinued its operations. Under the PR Code, all companies are treated as separate taxable entities and are not entitled to file consolidated tax returns. OFG and its subsidiaries organized under the laws of Puerto Rico are subject to Puerto Rico regular income tax or the alternative minimum tax (“AMT”) on income earned from all sources. OFG’s subsidiaries organized outside of Puerto Rico are taxed in Puerto Rico only with respect to income from Puerto Rico sources or effectively connected to a Puerto Rico trade or business. The AMT is payable if it exceeds regular income tax. The excess of AMT over regular income tax paid in any one year may be used to offset regular income tax in future years, subject to certain limitations. The components of income tax expense for 2022, 2021, and 2020 were as follows:
| Year Ended December 31,
| 2022 |  | 2021 |  | 2020
| (In thousands)
Current income tax expense (benefit) | $ | 16,740 |  |  | $ | 4,836 |  |  | $ | (7,347) |
Deferred income tax expense | 61,126 |  |  | 63,616 |  |  | 27,846 |
Total income tax expense | $ | 77,866 |  |  | $ | 68,452 |  |  | $ | 20,499 |
In relation to the exempt income level, the Bank’s investment securities portfolio and loans portfolio generated net tax-exempt interest income of $26.3 million, $14.4 million and $15.2 million during 2022, 2021 and 2020, respectively. OIB generated exempt income of $4.4 million, $9.5 million and $4.1 million for 2022, 2021, and 2020, respectively. OFG maintained an effective tax rate lower than statutory rate for 2022, mainly related to an increase in US Treasury securities and other exempt investments. OFG’s income tax expense differs from amounts computed by applying the applicable statutory rate to income before income taxes as follows:
| Year Ended December 31,
| 2022 |  | 2021 |  | 2020
| Amount |  | Rate |  | Amount |  | Rate |  | Amount |  | Rate
| (Dollars in thousands)
Income tax expense at statutory rates | $ | 91,539 |  |  | 37.50 | % |  | $ | 80,476 |  |  | 37.50 | % |  | $ | 35,567 |  |  | 37.50 | %
Tax of exempt income, net | (11,523) |  |  | -4.72 | % |  | (9,489) |  |  | -4.42 | % |  | (7,272) |  |  | -7.67 | %
Disallowed net operating loss carryover | (267) |  |  | -0.11 | % |  | (179) |  |  | (0.08) | % |  | 202 |  |  | 0.21 | %
Change in valuation allowance | (502) |  |  | -0.21 | % |  | 803 |  |  | 0.37 | % |  | 2,267 |  |  | 2.39 | %
Unrecognized tax benefits, net | 69 |  |  | 0.03 | % |  | 70 |  |  | 0.03 | % |  | (1,941) |  |  | -2.05 | %
Capital gain at preferential rate | (787) |  |  | -0.32 | % |  | (3) |  |  | — | % |  | (450) |  |  | -0.47 | %
Tax rate difference (ordinary vs capital) | (247) |  |  | -0.10 | % |  | (480) |  |  | -0.22 | % |  | (4,218) |  |  | -4.45 | %
Bargain purchase gain | — |  |  | — | % |  | — |  |  | — | % |  | (2,751) |  |  | -2.90 | %
Return to provision adjustments | (407) |  |  | -0.17 | % |  | (933) |  |  | -0.43 | % |  | (1,099) |  |  | -1.16 | %
Foreign tax credit | — |  |  | — | % |  | 187 |  |  | 0.09 | % |  | 361 |  |  | 0.38 | %
Other items, net | (9) |  |  | — | % |  | (2,000) |  |  | -0.94 | % |  | (167) |  |  | -0.16 | %
Income tax expense | $ | 77,866 |  |  | 31.90 | % |  | $ | 68,452 |  |  | 31.90 | % |  | $ | 20,499 |  |  | 21.62 | %
OFG’s effective tax rate for 2022 and 2021 was 31.90%. For 2020, the effective tax rate was 21.62%, and it was mainly affected by several items pertaining to the year 2020 that were not expected to reoccur on future years, such as the bargain purchase gain and tax rate differentials. OFG classifies unrecognized tax benefits in other liabilities. These gross unrecognized tax benefits would affect the effective tax rate if realized. At December 31, 2022, the amount of unrecognized tax benefits was $867 thousand (December 31, 2021 - $798 thousand). OFG had accrued $69 thousand at December 31, 2022 (December 31, 2021 - $70 thousand) for the payment of interest and penalties related to unrecognized tax benefits. The following table presents a reconciliation of unrecognized tax benefits:
| Year Ended December 31,
| 2022 |  | 2021 |  | 2020
| (In thousands)
Balance at beginning of year | $ | 798 |  |  | $ | 728 |  |  | $ | 2,668 |
Additions for tax positions of prior years | 69 |  |  | 70 |  |  | 50 |
Reduction for tax positions as a result of lapse of statute of limitations or new information resulting in a change in assessment | — |  |  | — |  |  | (1,990) |
Balance at end of year | $ | 867 |  |  | $ | 798 |  |  | $ | 728 |
OFG follows a two-step approach for recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates that it is more likely than not that the position will be sustained on audit, including resolution of related appeals of litigation processes, if any. The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. The amount of unrecognized tax benefits may increase or decrease in the future due to new or current tax year positions, expiration of open income tax returns, changes in management’s judgment about the level of uncertainty, status of examinations, litigation and legislative activity. For 2022, there was a net increase in unrecognized tax benefit of $69 thousand. The statute of limitations under the PR Code is four years and the statute of limitations for federal tax purposes is three years, after a tax return is due or filed, whichever is later. OFG is potentially subject to income tax audits in the Commonwealth of Puerto Rico for taxable years 2018 to 2021, until the applicable statute of limitations expires. In addition, OFG’s US subsidiaries are potentially subject to income tax audits by the IRS for taxable years 2019 to 2021. Tax audits by their nature are often complex and can require several years to complete. The determination of the deferred tax expense or benefit is generally based on changes in the carrying amounts of assets and liabilities that generate temporary differences. The carrying value of OFG’s net deferred tax assets assumes that OFG will be able to generate sufficient future taxable income based on estimates and assumptions. If these estimates and related assumptions change in the future, OFG may be required to record valuation allowances against its deferred tax assets resulting in additional income tax expense in the consolidated statements of operations. Significant components of OFG’s deferred tax assets and liabilities as of December 31, 2022, and 2021 were as follows:
| December 31,
| 2022 |  | 2021
| (In thousands)
Deferred tax asset: |  |  |
Allowance for credit losses and other reserves | $ | 57,273 |  |  | $ | 61,009 |
Scotiabank PR discount | 1,453 |  |  | $ | 2,053 |
Loans and other real estate valuation adjustment | 2,313 |  |  | 3,660 |
Deferred loan charge-offs | 72,376 |  |  | 115,661 |
Net operating loss carry forwards | 9,022 |  |  | 8,460 |
Alternative minimum tax | 14,467 |  |  | 15,385 |
Unrealized net loss included in other comprehensive income | — |  |  | 301 |
Unrealized net loss on available-for-sale securities | 16,422 |  |  | — |
Goodwill | 10,252 |  |  | 16,961 |
Acquired portfolio | 45,761 |  |  | 53,687 |
Other assets allowances | 1,538 |  |  | 929 |
Other deferred tax assets | 16,570 |  |  | 20,291 |
Total gross deferred tax asset | 247,447 |  |  | 298,397 |
Less: valuation allowance | (9,143) |  |  | (9,645) |
Net gross deferred tax assets | 238,304 |  |  | 288,752 |
Deferred tax liability: |  |  |
Acquired loans tax basis | (137,195) |  |  | (137,402) |
FDIC-assisted Eurobank acquisition, net | (5,760) |  |  | (6,636) |
Customer deposit and customer relationship intangibles | (7,314) |  |  | (10,324) |
Building valuation adjustment | (6,540) |  |  | (6,976) |
Unrealized net gain on available-for-sale securities | — |  |  | (1,572) |
Unrealized net gain included in other comprehensive income | (152) |  |  | — |
Servicing asset | (16,041) |  |  | (15,311) |
Other deferred tax liabilities | (9,817) |  |  | (11,468) |
Total gross deferred tax liabilities | (182,819) |  |  | (189,689) |
Net deferred tax asset | $ | 55,485 |  |  | $ | 99,063 |
As of December 31, 2022 and 2021, OFG’s net deferred tax asset, net of a valuation allowance of $9.1 million and $9.6 million, respectively, amounted to $55.5 million and $99.1 million, respectively. The decrease in valuation allowance of $502 thousand was mainly related to additional taxable income in OFG’s operations. In assessing the realizability of the deferred tax asset, management considers whether it is more likely than not that some portion or the entire deferred tax asset will not be realized. The ultimate realization of the deferred tax asset is dependent upon the generation of future income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future income, and tax planning strategies in making this assessment. Based upon the assessment of positive and negative evidence, the level of historical taxable income, projections for future taxable income over the periods in which the deferred tax asset are deductible, and provisions of certain closing agreements, management believes it is more likely than not that OFG will realize the benefits of these deductible differences, net of the existing valuation allowances, at December 31, 2022. The amount of the deferred tax asset that is considered realizable could be reduced in the near term if there are changes in estimates of future taxable income.

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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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