INCOME TAXES

12 Months Ended

Dec. 31, 2021

Income Tax Disclosure [Abstract]

INCOME TAXES [Text Block]

NOTE 28 – 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, accordingly, 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 jurisdictions. Any such tax paid in the U.S. and USVI is also creditable against the Corporation’s Puerto Rico tax

liability, 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. Pursuant to the 2011 PR Code, the carry-forward period for NOLs incurred during taxable years that

commenced after December 31, 2004 and ended before January 1, 2013 is 12 years; for NOLs incurred during taxable years

commencing after December 31, 2012, the carryover period is 10 years. The 2011 PR Code 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.

The Corporation has maintained an effective tax rate lower than the maximum statutory rate of 37.5% mainly by investing in

government obligations and MBS 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 gains on sales is exempt from Puerto Rico income taxation. The IBE unit 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.

The CARES Act of 2020 includes several provisions to stimulate the U.S. economy in the midst of the COVID-19 pandemic. The

CARES Act of 2020 includes tax provisions that temporarily modified the taxable income limitations for NOL usage to offset future

taxable income, NOL carryback provisions and other related income, and non-income based tax laws. Due to the fact that the COVID-

19 pandemic is still ongoing, the Federal Government extended some of the benefits and continued the economic stimulus from the

CARES Act of 2020. The Corporation has evaluated such provisions and determined that the impact of the CARES Act of 2020 on the

income tax provision and deferred tax assets as of December 31, 2021 was not significant.

The components of income tax expense are summarized below for the indicated periods:

Year Ended December 31,

2021

2020

2019

(In thousands)

Current income tax expense

$

28,469

$

18,421

$

16,986

Deferred income tax expense (benefit):

 Reversal of deferred tax asset valuation allowance

-

(8,000)

-

 Other deferred income tax expense

118,323

3,629

55,009

Total income tax expense

$

146,792

$

14,050

$

71,995

The differences between the income tax expense applicable to income before the provision for income taxes and the

amount computed by applying the statutory tax rate in Puerto Rico were as follows for the indicated periods:

Year Ended December 31, 

2021

2020

2019

Amount

% of Pretax

Income

Amount

% of Pretax

Income

Amount

% of Pretax

Income

(Dollars in thousands)

Computed income tax at statutory rate

$

160,431

37.5

%

$

43,621

37.5

%

$

89,764

37.5

%

Federal and state taxes

7,014

1.6

%

4,944

4.2

%

4,467

1.6

%

Benefit of net exempt income

(20,717)

(4.8)

%

(26,780)

(23.0)

%

(24,811)

(10.4)

%

Disallowed NOL carryforward resulting from 

net exempt income

8,791

2.0

%

9,054

7.8

%

15,887

6.6

%

Deferred tax valuation allowance

(13,572)

(3.2)

%

(12,095)

(10.4)

%

(14,108)

(5.9)

%

Share-based compensation windfall

(1,044)

(0.2)

%

157

0.1

%

(1,165)

(0.5)

%

Other permanent differences

(1,185)

(0.3)

%

(387)

(0.3)

%

(1,712)

(0.7)

%

Tax return to provision adjustments

(406)

(0.1)

%

597

0.5

%

1,846

0.8

%

Other-net

7,480

1.7

%

(5,061)

(4.3)

%

1,827

1.1

%

 Total income tax expense 

$

146,792

34.2

%

$

14,050

12.1

%

$

71,995

30.1

%

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 as of December 31, 2021 and 2020 were as follows:

December 31, 

2021

2020

(In thousands)

Deferred tax asset:

 NOL and capital losses carryforward 

$

137,860

$

220,496

 Allowance for credit losses

105,917

151,586

 Alternative Minimum Tax credits available for carryforward

37,361

27,396

 Unrealized loss on OREO valuation

7,703

13,426

 Settlement payment-closing agreement

7,031

7,031

 Legal and other reserves

4,576

4,120

 Reserve for insurance premium cancellations

881

941

 Differences between the assigned values and tax bases of assets

 and liabilities recognized in purchase business combinations

8,926

11,956

 Unrealized loss on available-for-sale securities, net

14,181

-

 Other

4,420

8,647

 Total gross deferred tax assets

$

328,856

$

445,599

Deferred tax liabilities:

 Servicing assets

10,510

9,571

 Pension Plan assets

2,035

-

 Unrealized gain on available-for-sale securities, net

-

4,730

 Other

506

53

 Total gross deferred tax liabilities

13,051

14,354

Valuation allowance

(107,323)

(101,984)

 Net deferred tax asset

$

208,482

$

329,261

Accounting for income taxes requires that companies assess whether a valuation allowance should be recorded against their

deferred tax asset based on an assessment of the amount of the deferred tax asset that is “more likely than not” to be realized.

Valua tion allowances are established, when necessary, to reduce deferred tax assets to the amount that is more likely than not to be

realized. Management assesses the valuation allowance recorded against deferred tax assets at each reporting date. The determina tion

of whether a valuation allowance for deferred tax assets is appropriate is subject to considerable judgment and requires the evaluation

of positive and negative evidence that can be objectively verified. Consideration must be given to all sources of taxable income

available to realize the deferred tax asset, including, as applicable, the future reversal of existing temporary differences, future taxable

income forecasts exclusive of the reversal of temporary differences and carryforwards, and tax planni ng strategies. In estimating taxes,

management assesses the relative merits and risks of the appropriate tax treatment of transactions considering statutory, judicial, and

regulatory guidance.

Total deferred tax assets of FirstBank, the banking subsidiary, amounted to $

208.4

 million as of December 31, 2021, net of a

valuation allowance of $

69.7

 million, compared to total deferred tax asset of $

329.1

 million, net of a valuation allowance of $

59.9

million, as of December 31, 2020. The decrease in deferred tax assets was mainly driven by the aforementioned credit losses reserve

releases and the usage of NOLs. The increase in the valuation allowance was primarily related to the change in the market value of

available-for-sale securities. The Corporation maintains a full valuation allowance for its deferred tax assets associated with capital

losses carry forward. Therefore, changes in the unrealized losses of available -for-sale securities result in a change in the deferred tax

asset and an equal change in the valuation allowance without having an effect on earnings.

After completion of the deferred tax asset valuation allowance analysis for the fourth quarter of 2021 management concluded that,

as of December 31, 2021, it is more likely than not that FirstBank will generate sufficient taxable income to realize $

66.3

 million of its

deferred tax assets related to NOLs within the applicable carry-forward periods.

The positive evidence considered by management in arriving at its conclusion includes factors such as: FirstBank’s three-year

cumulative income position; sustained periods of profitability; management’s proven ability to forecast future income accurately and

execute tax strategies; forecasts of future profitability, under several potential scenarios that support the partial utilization of NOLs

prior to their expiration from 2022 through 2024; and the utilization of NOLs over the past three-years. The negative evidence

considered by management includes: uncertainties around the state of the Puerto Rico economy, including considerations on the

impact of the pandemic recovery funds together with the ultimate sustainability of the latest fiscal plan certified by the PROMESA

oversight board.

Management’s estimate of future taxable income is based on internal projections that consider historical performance, multiple

internal scenarios and assumptions, as well as external data that management believes is reasonable. If events are identified that affect

the Corporation’s ability to utilize its deferred tax assets, the analysis will be updated to determine if any adjustments to the valuation

allowance are required. If actual results differ significantly from the current estimates of future taxable income, even if caused by

adverse macro-economic conditions, the remaining valuation allowance may need to be increased. Such an increase could have a

material adverse effect on the Corporation’s financial condition and results of operations. Conversely, a higher than projected

proportion of taxable income to exempt income could lead to a higher usage of available NOLs and a lower amount of disallowed

NOLs from projected levels of tax-exempt income, per the 2011 PR code, which in turn could result in further releases to the deferred

tax valuation allowance; any such decreases could have a material positive effect on the Corporation’s financial condition and results

of operations.

As of December 31, 2021, approximately $

177.9

 million of the deferred tax assets of the Corporation are attributable to temporary

differences or tax credit carryforwards that have no expiration date, compared to $

210.7

 million in 2020. The valuation allowance

attributable to FirstBank’s deferred tax assets of $

69.7

 million as of December 31, 2021 is related to the estimated NOL disallowance

attributable to projected levels of tax-exempt income, NOLs attributable to the Virgin Islands jurisdiction, and capital losses. The

remaining balance of $

37.6

 million of the Corporation’s deferred tax asset valuation allowance non-attributable to FirstBank is mainly

related to NOLs and capital losses at the holding company level. The Corporation will continue to provide a valuation allowance

against its deferred tax assets in each applicable tax jurisdiction until the need for a valuation allowance is eliminated. The need for a

valuation allowance is eliminated when the Corporation determines that it is more likely than not the deferred tax assets will be

realized. The ability to recognize the remaining deferred tax assets that continue to be subject to a valuation allowance will be

evaluated on a quarterly basis to determine if there are any significant events that would affect the ability to utilize these deferred tax

assets.

The Corporation has U.S. and USVI sourced NOL carryforwards. Section 382 of the U.S. Internal Revenue Code (“Section 382”)

limits the ability to utilize U.S. and USVI NOLs for income tax purposes in such jurisdictions following an event that is considered to

be 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.

In 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 had occurred during such period. The Section 382 limitation has

resulted in higher U.S. and USVI income tax liabilities than the Corporation would have incurred in the absence of such limitation.

The Corporation has mitigated to an extent the adverse effects associated with the Section 382 limitation as any such tax paid in the

U.S. or USVI is creditable against Puerto Rico tax liabilities or taken as a deduction against taxable income. However, the

Corporation’s ability to reduce its Puerto Rico tax liability through such a credit or deduction depends on our tax profile at each annual

taxable period, which is dependent on various factors. For 2021, 2020 and 2019, the Corporation incurred an income tax expense of

approximately $

6.8

 million, $

4.9

 million and $

4.5

 million, respectively, related to its U.S. operations. The limitation did not impact

the USVI operations in 2021, 2020 and 2019. 

The Corporation accounts for uncertain tax positions under the provisions of ASC Topic 740. The Corporation’s policy is to report

interest and penalties related to unrecognized tax benefits in income tax expense. As of December 31, 2021, the Corporation had $

0.2

million of accrued interest and penalties related to uncertain tax positions in the amount of $

1.1

 million that it acquired from BSPR,

which, if recognized, would decrease the effective income tax rate in future periods. 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, the status of

examinations, litigation and legislative activity, and the addition or elimination of uncertain tax positions. The statute of limitations

under the 2011 PR code is four years; the statute of limitations for U.S. and USVI income tax purposes 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. For U.S. and USVI income tax purposes, all tax years subsequent to 2017 remain open to examination. For Puerto Rico tax

purposes, all tax years subsequent to 2016 remain open to examination.