Income taxes

9 Months Ended

Sep. 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

September 30, 2024

September 30, 2023

(In thousands)

Amount 

% of pre-tax

income 

Amount

% of pre-tax

income

Computed income tax expense at statutory rates 

$

74,169

38

%

$

68,426

38

%

Net benefit of tax exempt interest income

(29,055)

(13)

(22,862)

(13)

Effect of income subject to preferential tax rate

(327)

-

(199)

-

Deferred tax asset valuation allowance

451

-

1,355

1

Difference in tax rates due to multiple jurisdictions

(6,764)

(3)

(2,839)

(2)

U.S., States, and local taxes

3,429

1

2,436

1

Others

560

-

(458)

-

Income tax expense

$

42,463

22

%

$

45,859

25

%

Nine months ended

September 30, 2024

September 30, 2023

(In thousands)

Amount 

% of pre-tax

income 

Amount

% of pre-tax

income 

Computed income tax expense at statutory rates 

$

215,582

38

%

$

218,409

38

%

Net benefit of tax exempt interest income

(91,035)

(16)

(72,080)

(13)

Effect of income subject to preferential tax rate

(475)

-

(775)

-

Deferred tax asset valuation allowance

2,779

-

(2,217)

-

Difference in tax rates due to multiple jurisdictions

(11,893)

(2)

(11,879)

(3)

Other tax benefits

(4,500)

(1)

-

-

Tax on intercompany distributions

[1]

24,325

4

-

-

U.S., States, and local taxes

6,669

1

8,829

2

Others

(2,962)

(1)

(4,611)

(1)

Income tax expense

$

138,490

24

%

$

135,676

23

%

[1]

Includes $

16.5

 million of out-of-period adjustment.

For the quarter and nine months ended September 30, 2024, the Corporation recorded an income tax expense of $

42.5

 million and

$

138.5

 million respectively, compared to $

45.9

 million and $

135.7

 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.

September 30, 2024

 (In thousands)

PR

US

Total

Deferred tax assets:

Tax credits available for carryforward

$

263

$

20,192

$

20,455

Net operating loss and other carryforward available 

54,294

609,814

664,108

Postretirement and pension benefits

36,895

-

36,895

Allowance for credit losses

248,766

24,588

273,354

Depreciation

6,774

6,864

13,638

Deferred loan origination fees/cost

2,470

(2,323)

147

FDIC-assisted transaction

152,665

-

152,665

Lease liability

26,138

16,913

43,051

Unrealized net loss on investment securities

237,859

13,489

251,348

Difference in outside basis from pass-through entities

47,413

-

47,413

Mortgage Servicing Rights

14,854

-

14,854

Other temporary differences

44,651

9,136

53,787

Total gross deferred tax assets

873,042

698,673

1,571,715

Deferred tax liabilities:

Intangibles

87,422

54,256

141,678

Right of use assets

23,725

14,806

38,531

Loans acquired

17,123

-

17,123

Other temporary differences

7,139

422

7,561

Total gross deferred tax liabilities

135,409

69,484

204,893

Valuation allowance

71,596

378,911

450,507

Net deferred tax asset

$

666,037

$

250,278

$

916,315

 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 September 30, 2024, is reflected in the consolidated statements of financial

condition as $

917.8

 million in net deferred tax assets in the “Other assets” caption (December 31, 2023 - $

1.0

 billion) and $

1.5

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 September 30, 2024, the net deferred tax assets of the U.S. operations amounted to $

629

 million with a valuation allowance of

approximately $

379

 million, for net deferred tax assets after valuation allowance of approximately $

250

 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 September 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 September 30,

2024, after weighting all positive and negative evidence, the Corporation concluded that it is more likely than not that approximately

$

250

 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 September 30, 2024, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $

666

 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 $

72

 million as of September 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

Balance at September 30

$

1.5

$

2.5

At September 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 September 30, 2024 was $

70

 thousand,

(September 30, 2023– $

79

 thousand). Management determined that at September 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 that if recognized, would affect the Corporation’s effective tax rate, was approximately $

3.0

 million at September 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 September 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.