Income taxes

3 Months Ended

Mar. 31, 2014

Income Tax Disclosure [Abstract]

Income Tax Disclosure Text Block

Note 32 – Income taxes

The reason for the difference between the income tax expense (benefit) 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
		March 31, 2014				March 31, 2013
(In thousands)		Amount	% of pre-tax income			Amount	% of pre-tax income
Computed income tax at statutory rates	$	42,772	39	%	$	(53,155)	30	%
Net benefit of net tax exempt interest income		(11,386)	(10)			(7,418)	4
Deferred tax asset valuation allowance		(13,939)	(13)			(3,425)	2
Non-deductible expenses		8,319	7			6,010	(3)
Difference in tax rates due to multiple jurisdictions		(6,991)	(6)			(2,059)	1
Effect of income subject to preferential tax rate		2,278	2			2,137	(1)
Others		2,211	2			1,033	(1)
Income tax expense (benefit)	$	23,264	21	%	$	(56,877)	32	%

Income tax expense amounted to $23.3 million for the quarter ended March 31, 2014, compared with an income tax benefit of $ 56.9 million for the same quarter of 2013. The increase in income tax expense was primarily due tohigher income before tax on the Puerto Rico operations and higher marginal income tax rate in Puerto Rico partially offset by higher net exempt interest income. The income tax benefit recognized during the first quarter of 2013 was due to the loss generated on the Puerto Rico banking operations by the bulk sale of non-performing assets. The Puerto Rico statutory tax rate increased from 30% to 39% effective for taxable years beginning after December 31, 2012 as a result of Act Number 40 enacted on June 30, 2013.

The following table presents the components of the Corporation's deferred tax assets and liabilities.

(In thousands)			March 31, 2014		December 31, 2013
Deferred tax assets:
Tax credits available for carryforward		$	12,019	$	8,195
Net operating loss and other carryforward available			1,256,558		1,269,523
Postretirement and pension benefits			49,060		51,742
Deferred loan origination fees			7,538		7,718
Allowance for loan losses			752,318		760,956
Deferred gains			9,004		9,313
Accelerated depreciation			7,760		7,577
Intercompany deferred gains			2,917		3,235
Other temporary differences			33,888		34,443
	Total gross deferred tax assets		2,131,062		2,152,702
Deferred tax liabilities:
Differences between the assigned values and the tax basis of assets and liabilities
	recognized in purchase business combinations		34,101		37,938
Difference in outside basis between financial and tax reporting on sale of a business			381		349
FDIC-assisted transaction			87,439		79,381
Unrealized net gain on trading and available-for-sale securities			13,626		3,822
Deferred loan origination costs			638		554
Other temporary differences			13,329		13,038
	Total gross deferred tax liabilities		149,514		135,082
Valuation allowance			1,239,564		1,257,977
Net deferred tax asset		$	741,984	$	759,643

The net deferred tax asset shown in the table above at March 31,2014 is reflected in the consolidated statements of financial condition as $774 million in net deferred tax assets in the “Other assets” caption (December 31, 2013 - $762 million) and $32million in deferred tax liabilities in the “Other liabilities” caption (December 31, 2013 - $2million), reflecting the aggregate deferred tax assets or liabilities of individual tax-paying subsidiaries of the Corporation.

A deferred tax asset should be reduced by a valuation allowance if based on the weight of all available evidence, it is more likely than not (a likelihood of more than 50%) that some portion or the entire deferred tax asset will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. The determination of whether a deferred tax asset is realizable is based on weighting all available evidence, including both positive and negative evidence. The realization of deferred tax assets, including carryforwards and deductible temporary differences, depends upon the existence of sufficient taxable income of the same character during the carryback or carryforward period. The analysis considers all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing taxable temporary differences, future taxable income exclusive of reversing temporary differences and carryforwards, taxable income in prior carryback years and tax-planning strategies.

The Corporation recorded a valuation allowance in the year 2008 since in consideration of the requirement of ASC 740 management considered that it is more likely than not that all of the U.S. operation deferred tax asset will not be realized. For purposes of assessing the realization of the deferred tax assets in the U.S. mainland management evaluates and weights all available positive and negative evidence. The Corporation's U.S. mainland operations is not in a cumulative loss position for the three-year period ended March 31, 2014 taking into account taxable income exclusive of reversing temporary differences. This represents positive evidence within management's evaluation. The book income for 2013 and the first quarter of 2014 was significantly impacted by a reversal of the loan loss provision due to the improved credit quality of the loan portfolios. However, the U.S. mainland operations did not report taxable income for the years 2011, 2012 and 2013. Future realization of the deferred tax assets ultimately depends on the existence of sufficient taxable income of the appropriate character within the carryforward period available under the tax law. The lack of taxable income together with the uncertainties regarding future performance represents strong negative evidence within management's evaluation. This determination should be updated each quarter and adjusted as any changes arise. After weighting of all positive and negative evidence management concluded, as of the reporting date, that it is more likely than not that the Corporation will not be able to realize any portion of the deferred tax assets, considering the criteria of ASC Topic 740.

At March 31, 2014, the Corporation's net deferred tax asset related to its Puerto Rico operations amounted to $773 million.

The Corporation's Puerto Rico Banking operation is not in a cumulative three year loss position and has sustained profitability during the years 2012 and 2013 and the first quarter of 2014, exclusive of the loss generated on the sales of non-performing assets that took place in 2013 which is not a continuing condition of the operations. This is considered a strong piece of objectively verifiable positive evidence that out weights any negative evidence considered by management in the evaluation of the realization of the deferred tax asset. Based on this evidence, the Corporation has concluded that it is more likely than not that such net deferred tax asset of the Puerto Rico operations will be realized.

The reconciliation of unrecognized tax benefits was as follows:

(In millions)		2014		2013
Balance at January 1	$	9.8	$	13.4
Additions for tax positions -January through March		0.3		0.2
Balance at March 31	$	10.1	$	13.6

At March 31, 2014, the total amount of interest recognized in the statement of financial condition approximated $3.8 million (December 31, 2013 - $3.6 million). The total interest expense recognized at March 2014 was $200 thousand (December 31, 2013 - $1.4 million). Management determined that at March 31, 2014 and December 31, 2013 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, whiles 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 $12.4million at March 31,2014 (December 31, 2013- $11.9million).

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 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 31,2014, the following years remain subject to examination in the U.S. Federal jurisdiction: 2010 and thereafter; and in the Puerto Rico jurisdiction, 2009 and thereafter. The Corporation anticipates a reduction in the total amount of unrecognized tax benefits within the next 12 months, which could amount to approximately $7.7million.

		Quarters ended
		March 31, 2014				March 31, 2013
(In thousands)		Amount	% of pre-tax income			Amount	% of pre-tax income
Computed income tax at statutory rates	$	42,772	39	%	$	(53,155)	30	%
Net benefit of net tax exempt interest income		(11,386)	(10)			(7,418)	4
Deferred tax asset valuation allowance		(13,939)	(13)			(3,425)	2
Non-deductible expenses		8,319	7			6,010	(3)
Difference in tax rates due to multiple jurisdictions		(6,991)	(6)			(2,059)	1
Effect of income subject to preferential tax rate		2,278	2			2,137	(1)
Others		2,211	2			1,033	(1)
Income tax expense (benefit)	$	23,264	21	%	$	(56,877)	32	%