INCOME TAXES	9 Months Ended
Sep. 30, 2017
INCOME TAXES	NOTE 21 - INCOME TAXES Income tax expense includes Puerto Rico and USVI income taxes as well as applicable U.S. federal and state taxes. The Corporation is subject to Puerto Rico income tax on its income from all sources. As a Puerto Rico corporation, First BanCorp. is treated as a foreign corporation for U.S. and USVI income tax purposes and is generally subject to U.S. and USVI income tax only on its income from sources within the U.S. and USVI or income effectively connected with the conduct of a trade or business in those regions. Any such tax paid in the U.S. and USVI is also either creditable against the Corporation’s Puerto Rico tax liability or taken as a deduction against taxable income, subject to certain conditions and limitations. Under the Puerto Rico Internal Revenue Code of 2011, as amended (the “2011 PR Code”), the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns and, thus, the Corporation is generally not entitled to utilize losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from a net operating loss (“NOL”), a particular subsidiary must be able to demonstrate sufficient taxable income within the applicable NOL carry-forward period. The 2011 PR Code allows entities organized as limited liability companies to perform an election to become a non-taxable “pass-through” entity and utilize losses to offset income from other “pass-through” entities, subject to certain limitations, with the remaining net income passing-through to its partner entities. The 2011 PR Code also provides a dividend received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations. On March 1, 2017, the Corporation completed the applicable regulatory filings to change the tax status of its subsidiary, First Federal Finance, from a taxable corporation to a non-taxable “pass-through” entity. This election allows the Corporation to realize tax benefits of its deferred tax assets associated with pass-through ordinary net operating losses available at the banking subsidiary, FirstBank, which were subject to a full valuation allowance as of December 31, 2016, against now pass-through ordinary income from this profitable subsidiary. On March 1, 2017, the Corporation also completed the applicable regulatory filings to change the tax status of its subsidiary, FirstBank Insurance, from a taxable corporation to a non-taxable “pass-through” entity. This election allows the Corporation to offset pass-through income projected to be earned by FirstBank Insurance with the projected net operating losses at the holding company (the “Holding Company”) level. The Corporation has maintained an effective tax rate lower than the maximum statutory rate mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and Puerto Rico income taxes and by doing business through an International Banking Entity (“IBE”) unit of the Bank, and through the Bank’s subsidiary, FirstBank Overseas Corporation, whose interest income and gain on sales is exempt from Puerto Rico income taxation. The IBE and FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs operating in Puerto Rico on the specific activities identified in the IBE Act. An IBE that operates as a unit of a bank pays income taxes at the corporate standard rates to the extent that the IBE’s net income exceeds 20% of the bank’s total net taxable income. For the third quarter and first nine months of 2017, the Corporation recorded income tax benefits of $8.4 million and $7.2 million, respectively, compared to income tax expense of $10.4 million and $23.7 million, for comparable periods in 2016. The tax benefit for the third quarter of 2017, as compared to the tax expense for the same period in 2016, was primarily driven by the tax benefit recognized associated with the storm-related loss recorded in the third quarter of 2017 and a lower effective tax rate driven by an increase in the projected ratio of exempt to taxable income. The tax benefit for the first nine months of 2017, as compared to the tax expense for the same period in 2016, was mostly attributable to the tax benefit recognized related to the storm-related charges and the $13.2 million tax benefit recorded in the first quarter of 2017 as a result of the above discussed change in tax status of certain subsidiaries from taxable corporations to limited liability companies that have elected to be treated as partnerships for income tax purposes in Puerto Rico. The $13.2 million tax benefit was primarily associated with the reversal of the $13.9 million deferred tax asset valuation allowance previously recorded at FirstBank related to pass-through ordinary net operating losses, partially offset by the elimination of the $0.7 million deferred tax asset previously recorded at FirstBank Insurance. A lower effective tax rate for the first nine months of 2017, as compared to the same period in 2016, also contributed to the positive variance in income tax expense. For the nine-month period ended September 30, 2017, the Corporation calculated the provision for income taxes by applying the estimated annual effective tax rate for the full fiscal year to ordinary income or loss. In the computation of the consolidated worldwide annual estimated effective tax rate, ASC 740-270 requires the exclusion of legal entities with pre-tax losses from which a tax benefit cannot be recognized. The Corporation’s estimated annual effective tax rate in the first nine months of 2017, excluding entities from which a tax benefit cannot be recognized and discrete items, was 20% compared to 24% for the first nine months of 2016. The estimated annual effective tax rate including all entities for 2017 was -2% (21% excluding discrete items, primarily the tax benefit resulting from the previously mentioned change in the tax status of two subsidiaries) compared to 25% for the first nine months of 2016. The Corporation’s net deferred tax asset amounted to $299.8 million as of September 30, 2017, net of a valuation allowance of $186.9 million, and management concluded, based upon the assessment of all positive and negative evidence, that it is more likely than not that the Corporation will generate sufficient taxable income within the applicable NOL carry-forward periods to realize such amount. The net deferred tax asset of the Corporation’s banking subsidiary, FirstBank, amounted to $299.5 million as of September 30, 2017, net of a valuation allowance of $146.6 million, compared to a net deferred tax asset of $277.4 million, net of a valuation allowance of $171.0 million, as of December 31, 2016. We have U.S. and USVI sourced NOLs that we incurred in prior years. Section 382 of the U.S. Internal Revenue Code (the “Section 382”) limits the ability to utilize U.S. and USVI NOLs for income tax purposes at such jurisdictions following an event resulting in an ownership change. Generally, an ownership change occurs when certain shareholders increase their aggregate ownership by more than 50 percentage points over their lowest ownership percentage over a three-year testing period. Upon the occurrence of a Section 382 ownership change, the use of NOLs attributable to the period prior to the ownership change is subject to limitations and only a portion of the U.S. and USVI NOLs may be used by the Corporation to offset its annual U.S. and USVI taxable income, if any. During the third quarter of 2017, the Corporation completed a formal ownership change analysis within the meaning of Section 382 covering a comprehensive period, and concluded that an ownership change occurred during such comprehensive period. The ownership change and resulting Section 382 limitation did not cause a U.S. or USVI income tax liability or material income tax expense related to prior periods since the Corporation had sufficient post ownership change NOLs in those jurisdictions to offset taxable income. The Section 382 limitation could result in higher U.S. and USVI liabilities in the future than we would incur in the absence of such limitation. Prospectively, the Corporation expects that it will be able to mitigate the adverse effects associated with the Section 382 limitation as any such tax paid in the U.S. or USVI could be creditable against Puerto Rico tax liabilities or taken as deduction against taxable income. However, our ability to reduce our Puerto Rico tax liability through such a credit or deduction depends on our tax profile at each annual taxable period, which depends on various factors. For the third quarter of 2017, as a result of the Section 382 limitation and based on the tax profile as of September 30, 2017, the Corporation incurred an income tax expense of approximately $1.6 million related to its U.S. operations. The limitation did not affect the USVI operations for the third quarter of 2017. As of September 30, 2017, the Corporation did not have Unrecognized Tax Benefits (“UTBs”) recorded on its books. Audit periods remain open for review until the statute of limitations has passed. The statute of limitations under the 2011 PR code is four years; the statute of limitations for U.S. Virgin Islands and U.S. income taxes is three years after a tax return is due or filed, whichever is later. The completion of an audit by the taxing authorities or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Corporation’s liability for income taxes. Any such adjustment could be material to the results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. On January 23, 2017, the Corporation received confirmation from the IRS that the audit for the years 2011 and 2012 were closed with no adjustments to the previously filed returns. For Virgin Islands and U.S. income tax purposes, all tax years subsequent to 2012 remain open to examination. For Puerto Rico tax purposes, all tax years subsequent to 2012 remain open to examination.

NOTE 21 - INCOME TAXES

Income tax expense includes Puerto Rico and USVI income taxes as well as applicable U.S. federal and state taxes. The Corporation is subject to Puerto Rico income tax on its income from all sources. As a Puerto Rico corporation, First BanCorp. is treated as a foreign corporation for U.S. and USVI income tax purposes and is generally subject to U.S. and USVI income tax only on its income from sources within the U.S. and USVI or income effectively connected with the conduct of a trade or business in those regions. Any such tax paid in the U.S. and USVI is also either creditable against the Corporation’s Puerto Rico tax liability or taken as a deduction against taxable income, subject to certain conditions and limitations.

Under the Puerto Rico Internal Revenue Code of 2011, as amended (the “2011 PR Code”), the Corporation and its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns and, thus, the Corporation is generally not entitled to utilize losses from one subsidiary to offset gains in another subsidiary. Accordingly, in order to obtain a tax benefit from a net operating loss (“NOL”), a particular subsidiary must be able to demonstrate sufficient taxable income within the applicable NOL carry-forward period. The 2011 PR Code allows entities organized as limited liability companies to perform an election to become a non-taxable “pass-through” entity and utilize losses to offset income from other “pass-through” entities, subject to certain limitations, with the remaining net income passing-through to its partner entities. The 2011 PR Code also provides a dividend received deduction of 100% on dividends received from “controlled” subsidiaries subject to taxation in Puerto Rico and 85% on dividends received from other taxable domestic corporations.

On March 1, 2017, the Corporation completed the applicable regulatory filings to change the tax status of its subsidiary, First Federal Finance, from a taxable corporation to a non-taxable “pass-through” entity. This election allows the Corporation to realize tax benefits of its deferred tax assets associated with pass-through ordinary net operating losses available at the banking subsidiary, FirstBank, which were subject to a full valuation allowance as of December 31, 2016, against now pass-through ordinary income from this profitable subsidiary.

On March 1, 2017, the Corporation also completed the applicable regulatory filings to change the tax status of its subsidiary, FirstBank Insurance, from a taxable corporation to a non-taxable “pass-through” entity. This election allows the Corporation to offset pass-through income projected to be earned by FirstBank Insurance with the projected net operating losses at the holding company (the “Holding Company”) level.

The Corporation has maintained an effective tax rate lower than the maximum statutory rate mainly by investing in government obligations and mortgage-backed securities exempt from U.S. and Puerto Rico income taxes and by doing business through an International Banking Entity (“IBE”) unit of the Bank, and through the Bank’s subsidiary, FirstBank Overseas Corporation, whose interest income and gain on sales is exempt from Puerto Rico income taxation. The IBE and FirstBank Overseas Corporation were created under the International Banking Entity Act of Puerto Rico, which provides for total Puerto Rico tax exemption on net income derived by IBEs operating in Puerto Rico on the specific activities identified in the IBE Act. An IBE that operates as a unit of a bank pays income taxes at the corporate standard rates to the extent that the IBE’s net income exceeds 20% of the bank’s total net taxable income.

For the third quarter and first nine months of 2017, the Corporation recorded income tax benefits of $8.4 million and $7.2 million, respectively, compared to income tax expense of $10.4 million and $23.7 million, for comparable periods in 2016. The tax benefit for the third quarter of 2017, as compared to the tax expense for the same period in 2016, was primarily driven by the tax benefit recognized associated with the storm-related loss recorded in the third quarter of 2017 and a lower effective tax rate driven by an increase in the projected ratio of exempt to taxable income.

The tax benefit for the first nine months of 2017, as compared to the tax expense for the same period in 2016, was mostly attributable to the tax benefit recognized related to the storm-related charges and the $13.2 million tax benefit recorded in the first quarter of 2017 as a result of the above discussed change in tax status of certain subsidiaries from taxable corporations to limited liability companies that have elected to be treated as partnerships for income tax purposes in Puerto Rico. The $13.2 million tax benefit was primarily associated with the reversal of the $13.9 million deferred tax asset valuation allowance previously recorded at FirstBank related to pass-through ordinary net operating losses, partially offset by the elimination of the $0.7 million deferred tax asset previously recorded at FirstBank Insurance. A lower effective tax rate for the first nine months of 2017, as compared to the same period in 2016, also contributed to the positive variance in income tax expense.

For the nine-month period ended September 30, 2017, the Corporation calculated the provision for income taxes by applying the estimated annual effective tax rate for the full fiscal year to ordinary income or loss. In the computation of the consolidated worldwide annual estimated effective tax rate, ASC 740-270 requires the exclusion of legal entities with pre-tax losses from which a tax benefit cannot be recognized. The Corporation’s estimated annual effective tax rate in the first nine months of 2017, excluding entities from which a tax benefit cannot be recognized and discrete items, was 20% compared to 24% for the first nine months of 2016. The estimated annual effective tax rate including all entities for 2017 was -2% (21% excluding discrete items, primarily the tax benefit resulting from the previously mentioned change in the tax status of two subsidiaries) compared to 25% for the first nine months of 2016.

The Corporation’s net deferred tax asset amounted to $299.8 million as of September 30, 2017, net of a valuation allowance of $186.9 million, and management concluded, based upon the assessment of all positive and negative evidence, that it is more likely than not that the Corporation will generate sufficient taxable income within the applicable NOL carry-forward periods to realize such amount. The net deferred tax asset of the Corporation’s banking subsidiary, FirstBank, amounted to $299.5 million as of September 30, 2017, net of a valuation allowance of $146.6 million, compared to a net deferred tax asset of $277.4 million, net of a valuation allowance of $171.0 million, as of December 31, 2016.

We have U.S. and USVI sourced NOLs that we incurred in prior years. Section 382 of the U.S. Internal Revenue Code (the “Section 382”) limits the ability to utilize U.S. and USVI NOLs for income tax purposes at such jurisdictions following an event resulting in an ownership change. Generally, an ownership change occurs when certain shareholders increase their aggregate ownership by more than 50 percentage points over their lowest ownership percentage over a three-year testing period. Upon the occurrence of a Section 382 ownership change, the use of NOLs attributable to the period prior to the ownership change is subject to limitations and only a portion of the U.S. and USVI NOLs may be used by the Corporation to offset its annual U.S. and USVI taxable income, if any.

During the third quarter of 2017, the Corporation completed a formal ownership change analysis within the meaning of Section 382 covering a comprehensive period, and concluded that an ownership change occurred during such comprehensive period. The ownership change and resulting Section 382 limitation did not cause a U.S. or USVI income tax liability or material income tax expense related to prior periods since the Corporation had sufficient post ownership change NOLs in those jurisdictions to offset taxable income. The Section 382 limitation could result in higher U.S. and USVI liabilities in the future than we would incur in the absence of such limitation. Prospectively, the Corporation expects that it will be able to mitigate the adverse effects associated with the Section 382 limitation as any such tax paid in the U.S. or USVI could be creditable against Puerto Rico tax liabilities or taken as deduction against taxable income. However, our ability to reduce our Puerto Rico tax liability through such a credit or deduction depends on our tax profile at each annual taxable period, which depends on various factors. For the third quarter of 2017, as a result of the Section 382 limitation and based on the tax profile as of September 30, 2017, the Corporation incurred an income tax expense of approximately $1.6 million related to its U.S. operations. The limitation did not affect the USVI operations for the third quarter of 2017.

As of September 30, 2017, the Corporation did not have Unrecognized Tax Benefits (“UTBs”) recorded on its books. Audit periods remain open for review until the statute of limitations has passed. The statute of limitations under the 2011 PR code is four years; the statute of limitations for U.S. Virgin Islands and U.S. income taxes is three years after a tax return is due or filed, whichever is later. The completion of an audit by the taxing authorities or the expiration of the statute of limitations for a given audit period could result in an adjustment to the Corporation’s liability for income taxes. Any such adjustment could be material to the results of operations for any given quarterly or annual period based, in part, upon the results of operations for the given period. On January 23, 2017, the Corporation received confirmation from the IRS that the audit for the years 2011 and 2012 were closed with no adjustments to the previously filed returns. For Virgin Islands and U.S. income tax purposes, all tax years subsequent to 2012 remain open to examination. For Puerto Rico tax purposes, all tax years subsequent to 2012 remain open to examination.