INCOME TAXES

9 Months Ended

Sep. 30, 2023

INCOME TAXES [Abstract]

INCOME TAXES

NOTE 17 – 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, FirstBank 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 (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 Puerto Rico 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 (an “IBE”) unit of the Bank, and through the Bank’s subsidiary, FirstBank Overseas Corporation, whose

interest income and gains on sales are 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.

For the third quarter of 2023, the Corporation recorded an income tax expense of $

27.0

 million compared to $

32.0

 million in the

third quarter of 2022. For the first nine months of 2023, the Corporation recorded an income tax expense of $

89.2

 million compared to

$

109.2

 million for the same period in 2022. The decrease in income tax expense for the third quarter of 2023, as compared to the same

quarter of the previous year, was the result of a lower effective tax rate due to increased business activities in a wholly-owned

subsidiary of FirstBank, which is engaged in lending and investing activities, that provided additional tax advantages under the Puerto

Rico tax code, as well as a higher proportion of exempt income to taxable income. The decrease in income tax expense for the first

nine months of 2023, as compared to the same period in 2022, was mainly related to lower pre-tax income , the aforementioned tax

advantages and a higher proportion of exempt to taxable income. The Corporation’s estimated annual effective tax rate, excluding

entities with pre-tax losses from which a tax benefit cannot be recognized and discrete items, was

28.2

% for the first nine months of

2023, compared to

31.8

% for the first nine months of 2022.

As of September 30, 2023, the Corporation had a deferred tax asset of $

150.8

 million, net of a valuation allowance of $

195.1

million against the deferred tax asset, compared to a deferred tax asset of $

155.6

 million, net of a valuation allowance of $

185.5

million, as of December 31, 2022. The net deferred tax asset of the Corporation’s banking subsidiary, FirstBank, amounted to $

150.8

million as of September 30, 2023, net of a valuation allowance of $

157.9

 million, compared to a net deferred tax asset of $

155.6

million, net of a valuation allowance of $

149.5

 million, as of December 31, 2022. The Corporation maintains a full valuation

allowance for its deferred tax assets associated with capital losses carry forward and unrealized losses of available-for-sale debt

securities.

In 2017, the Corporation completed a formal ownership change analysis within the meaning of Section 382 of the U.S. Internal

Revenue Code (“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 that we 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 can be creditable against Puerto Rico tax liabilities or taken as a 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 is dependent on various factors. For the quarter and nine-month period ended September 30, 2023,

the Corporation incurred current income tax expense of approximately $

2.8

 million and $

6.8

 million, respectively, related to its U.S.

operations, compared to $

3.0

 million and $

7.1

 million, respectively, for comparable periods in 2022. The limitation did not impact the

USVI operations in the quarters and nine-month periods ended September 30, 2023 and 2022. 

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 positions in income tax expense. As of September 30, 2023, the Corporation had

$

0.2

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

0.8

 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 after a tax return is due or filed, whichever is later; 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

2019 remain open to examination. For Puerto Rico tax purposes, all tax years subsequent to 2018 remain open to examination.