Income taxes

12 Months Ended

Dec. 31, 2024

Income Tax Disclosure

Income Taxes

Note 34 – Income taxes

The components of income tax expense for the years ended December 31, 2024, 2023, and 2022 are summarized in the following

table.

(In thousands)

2024

2023

2022

Current income tax expense:

Puerto Rico

$

107,405

$

168,001

$

156,425

Federal and States

51,291

9,335

9,034

 Subtotal

158,696

177,336

165,459

Deferred income tax (benefit) expense:

Puerto Rico

(6,982)

(50,871)

(4,373)

Federal and States

30,692

7,732

(28,756)

 Subtotal

23,710

(43,139)

(33,129)

Total income tax expense (benefit)

$

182,406

$

134,197

$

132,330

The table below presents a reconciliation of the statutory income tax rate to the effective income tax rate.:

2024

2023

2022

(In thousands)

Amount 

% of pre-tax

income

Amount

% of pre-tax

income

Amount

% of pre-tax

income

Computed income tax at statutory rates 

$

298,732

38

%

$

253,327

38

%

$

463,114

38

%

Net benefit of tax exempt interest income

(125,732)

(16)

(95,222)

(14)

(165,065)

(13)

Effect of income subject to preferential tax rate

(29)

-

(1,854)

-

(86,797)

(7)

Deferred tax asset valuation allowance

3,390

-

2,304

-

(21,469)

(2)

NOL Adjustments

-

-

-

-

(34,817)

(3)

Difference in tax rates due to multiple jurisdictions

(17,111)

(2)

(12,857)

(2)

(26,887)

(2)

Unrecognized tax benefits

-

-

(1,529)

-

(1,503)

-

Other tax benefits

(4,500)

-

(2,925)

-

-

-

Tax on intercompany distributions

[1]

24,325

3

-

-

-

-

State and local taxes

9,634

1

6,687

3

14,981

1

Others

(6,303)

(1)

(13,734)

(2)

(9,227)

(1)

Income tax expense (benefit)

$

182,406

23

%

$

134,197

23

%

$

132,330

11

%

[1]

Includes $

16.5

 million of out-of-period adjustment.

For the year ended December 31, 2024, the Corporation recorded income tax expense of $

182.4

 million, compared to $

134.2

 million

for the same period of 2023. The net increase of $

48.2

 million in income tax expense reflects the impact of the composition and

source of taxable income between both years. 

In addition, and as disclosed in Note 1, during the first quarter of 2024, the income tax expense for that period included $

22.9

million, related to intercompany distributions, out of which $

16.5

 million were related to an out-of-period adjustment associated with

the Corporation’s U.S. subsidiary’s non-payment of taxes on certain intercompany distributions to the Bank Holding Company (BHC)

in Puerto Rico, a foreign corporation for U.S. tax purposes. During years 2023 and 2022, $

5.5

 million and $

5.4

 million, respectively,

should have been recognized as additional income tax expense, and an aggregate of $

5.6

 million in the years prior to 2022. As a

result of this adjustment, the deferred tax assets related to NOL of the BHC and its related valuation allowance was reduced by

$

52.2

 million. The Corporation also recognized $

6.5

 million in income tax expense during the quarter ended March 31, 2024, to

reflect the U.S. federal tax withholding liability and estimated related Puerto Rico income tax arising from a $

50.0

 million dividend

paid during that quarter. 

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

December 31, 2024 and 2023 were as follows:

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

 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 asset shown in the table above at December 31, 2024, is reflected in the consolidated statements of financial

condition as $

926.3

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

1.0

 billion) and $

1.6

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.

The net reduction in the valuation allowance of approximately $

56.6

 million during the year ended December 31,

2024, was primarily due to the use of the BHC NOL of $

52.2

 million related to the additional income recognized on certain

intercompany distributions received during prior years until year 2023, as disclosed above and in Note 1; also, for the first quarter of

year 2024 an additional distribution was issued and the NOL and valuation allowance was reduced by $

17.1

 million as a result of

such additional income. These variances were partially offset due to the increase in valuation allowance, mostly attributed to the

change in the blended state tax rate applicable to net operating losses of the U.S. operation.

The deferred tax asset related to the NOLs and other carryforwards as of December 31, 2024, expires as follows:

(In thousands)

2025

$

45

2026

-

2027

-

2028

225,301

2029

118,823

2030

127,798

2031

103,594

2032

15,836

2033

20,738

2034

-

2035

50,356

$

662,490

At December 31, 2024 the net deferred tax asset of the U.S. operations amounted to $

640.3

 million with a valuation allowance of

$

386.9

 million, for a net deferred tax asset of $

253.4

 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 three years period ended December 31,

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 December 31, 2024, after weighting all positive and negative evidence, the Corporation concluded that it is

more likely than not that approximately $

253.4

 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 December 31, 2024, the Corporation’s net deferred tax assets related to its Puerto Rico operations amounted to $

671.4

 million.

The Corporation’s Puerto Rico Banking operation has strong historical record of profitability. This is considered a strong piece of

objectively verifiable positive evidence that outweigh any negative evidence considered by Management in the evaluation of the

realization of the deferred tax asset. 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 asset 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 $

69.8

 million as of December 31, 2024.

The Corporation’s subsidiaries in the United States file a consolidated federal income tax return. The intercompany settlement of

taxes paid is based on tax sharing agreements which generally allocate taxes to each entity based on a separate return basis.

The following table presents a reconciliation of unrecognized tax benefits.

(In millions)

Balance at January 1, 2023

$

2.5

Reduction as a result of change in tax position

(1.0)

Balance at December 31, 2023

$

1.5

Balance at December 31, 2024

$

1.5

At December 31, 2024, the total amount of interest recognized in the statement of financial condition approximated $

2.4

 million

(2023 - $

2.3

 million). The total interest expense recognized during 2024 was $

110

 thousand (2023 - $

199

 thousand net of a

reduction of $

475

 thousand). Management determined that, as of December 31, 2024 and 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 December 31, 2024 (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 statute of limitations, 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. As of December 31, 2024, the following years remain subject to examination in the

U.S. Federal jurisdiction – 2021 and thereafter and in the Puerto Rico jurisdiction – 2018 and thereafter.