INCOME TAXES

12 Months Ended

Dec. 31, 2023

INCOME TAXES [Abstract]

INCOME TAXES

NOTE 22 – INCOME TAXES 

The Corporation is subject to Puerto Rico income tax on its income from all sources. Under the PR Tax Code, the Corporation and

its subsidiaries are treated as separate taxable entities and are not entitled to file consolidated tax returns. However, certain subsidiaries

that are organized as limited liability companies with a partnership election are treated as pass-through entities for Puerto Rico tax

purposes. The Corporation conducts business through certain entities that have special tax treatments, including doing business

through an IBE unit of the Bank and through FirstBank Overseas Corporation, each of which are generally exempt from Puerto Rico

income taxation under the International Banking Entity Act of Puerto Rico (“IBE Act”), and through a wholly-owned subsidiary that

engages in certain Puerto Rico qualified investing and lending activities that have certain tax advantages under Act 60 of 2019.

Under the PR Tax Code, 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 PR Tax 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 PR Tax

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. In addition, the IBE unit of the Bank and

FirstBank Overseas Corporation, which were created under the IBE Act, have an exemption on net income derived from specific

activities identified in such 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.

Income tax expense also includes USVI income taxes, as well as applicable U.S. federal and state taxes. As a Puerto Rico

corporation, FirstBank 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 jurisdictions. 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.

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

Year Ended December 31,

2023

2022

2021

(In thousands)

Current income tax expense

$

88,467

$

88,296

$

28,469

Deferred income tax expense

6,105

54,216

118,323

Total income tax expense

$

94,572

$

142,512

$

146,792

The Corporation maintains an effective tax rate lower than the Puerto Rico maximum statutory tax rate of

37.5

%. 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, 

2023

2022

2021

Amount

% of Pretax

Income

Amount

% of Pretax

Income

Amount

% of Pretax

Income

(Dollars in thousands)

Computed income tax at statutory rate

$

149,038

37.5

%

$

167,844

37.5

%

$

160,431

37.5

%

Federal and state taxes

10,008

2.4

%

10,268

2.2

%

7,014

1.6

%

Benefit of net exempt income

(35,153)

(8.8)

%

(31,266)

(7.0)

%

(20,717)

(4.8)

%

Disallowed NOL carryforward resulting from net exempt income

(1)

-

-

%

14,221

3.2

%

8,791

2.0

%

Deferred tax valuation allowance

(1)

-

-

%

(8,410)

(1.9)

%

(13,572)

(3.2)

%

Share-based compensation windfall

(2,134)

(0.5)

%

(1,492)

(0.3)

%

(1,044)

(0.2)

%

Preferential tax treatment on qualified investing and lending activities

(19,125)

(4.8)

%

(4,500)

(1.0)

%

-

-

%

Other permanent differences

(5,138)

(1.3)

%

(3,147)

(0.7)

%

(1,185)

(0.3)

%

Tax return to provision adjustments

(1,709)

(0.4)

%

(519)

(0.1)

%

(406)

(0.1)

%

Other-net

(1,215)

(0.3)

%

(487)

(0.1)

%

7,480

1.7

%

 Total income tax expense 

$

94,572

23.8

%

$

142,512

31.8

%

$

146,792

34.2

%

(1)

During 2022 the Corporation fully utilized certain NOLs which under the PR Tax Code were disallowed for carryforward purposes; therefore, there was no adjustment in 2023 in the amount of disallowed NOL

carryforward and any related deferred tax valuation allowance.

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, 2023 and 2022 were as follows:

As of December 31,

2023

2022

(In thousands)

Deferred tax asset:

 NOL and capital loss carryforwards

$

48,633

$

72,485

 Allowance for credit losses

102,005

104,014

 Alternative Minimum Tax credits available for carryforward

39,898

40,823

 Unrealized loss on OREO valuation

6,360

6,462

 Settlement payment-closing agreement

-

7,031

 Legal and other reserves

4,059

6,345

 Reserve for insurance premium cancellations

824

781

 Differences between the assigned values and tax bases of assets

 and liabilities recognized in purchase business combinations

6,690

5,665

 Unrealized loss on available-for-sale debt securities, net

82,944

100,776

 Other

7,833

7,722

 Total gross deferred tax assets

$

299,246

$

352,104

Deferred tax liabilities:

 Servicing assets

9,002

9,786

 Pension Plan assets

832

719

 Other

97

509

 Total gross deferred tax liabilities

9,931

11,014

Valuation allowance

(139,188)

(185,506)

 Net deferred tax asset

$

150,127

$

155,584

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.

Valuation 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 determination

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 planning strategies. In estimating taxes,

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

regulatory guidance.

As of December 31, 2023, the Corporation had a deferred tax asset of $

150.1

 million, net of a valuation allowance of $

139.2

million, 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 $

150.1

 million as of December 31, 2023,

net of a valuation allowance of $

111.4

 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 decrease in the valuation allowance was related primarily to changes in the market

value of available-for-sale debt securities and the expiration of capital loss carryforwards, both which resulted in an equal change in

the deferred tax asset without impacting earnings. The Corporation maintains a full valuation allowance for its deferred tax assets

associated with capital loss carryforwards, NOL carryforwards, and unrealized losses of available-for-sale debt securities. 

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.

As of December 31, 2023, approximately $

253.9

 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 $

279.9

 million in 2022. The valuation allowance

attributable to FirstBank’s deferred tax assets of $

111.4

 million as of December 31, 2023 is related to the change in the market value

of available-for-sale debt securities, NOLs attributable to the Virgin Islands jurisdiction, and capital loss carryforwards. The remaining

balance of $

27.8

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

NOLs 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. As of December 31, 2023, of the $

48.6

million of NOL and capital loss carryforwards deferred tax assets, $

35.4

 million, which are fully valued, have expiration dates ranging

from year 2024 through year 2037. From this amount, approximately $

15.3

 million expires in year 2024 and are not expected to be

realized.

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 than 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 2023, 2022, and 2021, FirstBank incurred current income tax

expense of approximately $

9.9

 million, $

10.3

 million, and $

6.8

 million, respectively, related to its U.S. operations. The limitation did

not impact the USVI operations in 2023, 2022, and 2021.

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 December 31, 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. During 2023, a $

0.3

million benefit was

recognized as a result of the expiration of uncertain tax positions acquired from BSPR.

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 PR Tax 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.