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INCOME TAXES | 12 Months Ended
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Dec. 31, 2017
INCOME TAXES [Text Block] | NOTE 27 – 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 con duct of a trade or business in those regions. 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 subs idiary 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 rem aining 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 electi on 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 earned by FirstBank Insurance with net operating losses available at the holding company (the “Holding Company”) level. The Corporation has maintain ed 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 c orporate standard rate to the extent that the IBE’s net income exceeds 20% of the bank’s total net taxable income. The components of income tax benefit (expense) are summarized below:
|  |  | Year Ended December 31,
|  |  | 2017 |  |  | 2016 |  |  | 2015
(In thousands) |  |  |  |  |  |  |  |  |
Current income tax expense |  | $ | (8,179) |  | $ | (13,151) |  | $ | (6,339)
Deferred income tax benefit (expense) |  |  | 13,152 |  |  | (23,879) |  |  | (80)
Total income tax benefit (expense) |  | $ | 4,973 |  | $ | (37,030) |  | $ | (6,419)
| 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:
|  | Year Ended December 31, |
|  | 2017 |  |  | 2016 |  |  | 2015 |
|  | Amount | % of Pretax Income |  |  | Amount | % of Pretax Income |  |  | Amount | % of Pretax Income |
(Dollars in thousands) |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
Computed income tax at |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
statutory rate | $ | (24,173) |  | (39.0) | % |  | $ | (50,801) |  | (39.0) | % |  | $ | (10,810) |  | (39.0) | %
Federal and state taxes |  | (2,335) |  | (3.8) | % |  |  | - |  | - | % |  |  | (190) |  | (0.7) | %
Change in tax status of subsidiaries |  | 13,161 |  | 21.2 | % |  |  | - |  | - | % |  |  | - |  | - | %
Benefit of net exempt income |  | 16,596 |  | 26.8 | % |  |  | 14,995 |  | 11.5 | % |  |  | 9,780 |  | 35.3 | %
Effect of capital losses subject to preferential rates |  | (2,102) |  | (3.4) | % |  |  | (727) |  | (0.6) | % |  |  | (3,019) |  | (10.9) | %
Disallowed NOL carryforward resulting from |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
| net exempt income |  | (5,091) |  | (8.2) | % |  |  | (6,396) |  | (4.9) | % |  |  | (7,717) |  | (27.8) | %
Nontax deductible expenses |  | (467) |  | (0.8) | % |  |  | (212) |  | (0.2) | % |  |  | 365 |  | 1.3 | %
Return to provision adjustments |  | (607) |  | (1.0) | % |  |  | (434) |  | (0.3) | % |  |  | 1,174 |  | 4.2 | %
Deferred tax valuation allowance |  | 10,037 |  | 16.2 | % |  |  | 5,976 |  | 4.6 | % |  |  | 2,881 |  | 10.4 | %
Other-net |  | (46) |  | - | % |  |  | 569 |  | 0.3 | % |  |  | 1,117 |  | 4.0 | %
Total income tax |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |
benefit (expense) | $ | 4,973 |  | 8.0 | % |  | $ | (37,030) |  | (28.6) | % |  | $ | (6,419) |  | (23.2) | %
For 2017, the Corporation recorded an income tax benefit of approximately $5.0 million compared to an income tax expense of $37.0 million for 2016. The tax benefit for 2017, when compared to the tax expense for 2016, was mostly attributable to the tax benefit related to the storm-related charges and to the $13.2 million tax benefit recorded in 2017 as a result of the above discussed change in tax status of certain subsidiaries from taxable corporations to limited liability companies that have electe d to be treated as partnerships for income tax purposes in Puerto Rico. The effective tax rate for the year ended December 31, 2017 was (8)% compared to 28% for the year ended December 31, 2016.
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, 2017 and 2016 were as follows:
|  |  | December 31,
|  |  | 2017 |  |  | 2016
(In thousands) |  |  |  |  |  |
Deferred tax asset: |  |  |  |  |  |
Net operating loss carryforward |  | $ | 376,423 |  | $ | 374,091
Allowance for loan and lease losses |  |  | 94,111 |  |  | 79,330
Tax credits available for carryforward |  |  | 6,598 |  |  | 8,006
Unrealized loss on OREO valuation |  |  | 14,784 |  |  | 11,467
Unrealized net loss on equity investment |  |  | - |  |  | 187
Settlement payment-closing agreement |  |  | 7,313 |  |  | 7,313
Legal and other reserves |  |  | 2,333 |  |  | 1,807
Impairment on investment |  |  | - |  |  | 4,438
Unrealized loss on available-for-sale securities, net |  |  | - |  |  | 502
Reserve for insurance premium cancellations |  |  | 635 |  |  | 724
Other |  |  | 8,326 |  |  | 15,720
Total gross deferred tax assets |  |  | 510,523 |  |  | 503,585
Deferred tax liabilities: |  |  |  |  |  |
Differences between the assigned values and tax bases of assets |  |  |  |  |  |
and liabilities recognized in purchase business combinations |  |  | 5,143 |  |  | 5,247
Servicing assets |  |  | 8,625 |  |  | 8,997
Unrealized gain on available-for-sale securities, net |  |  | 1,306 |  |  | -
Other |  |  | 9,457 |  |  | 468
Total gross deferred tax liabilities |  |  | 24,531 |  |  | 14,712
Valuation allowance |  |  | (191,183) |  |  | (207,216)
Net deferred tax asset |  | $ | 294,809 |  | $ | 281,657
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 det ermination 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 source s 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 taking into account statutory, judicial, and regulatory guidance. The Corporation’s net deferred tax assets amounted to $294.8 million as of December 31, 201 7, net of a valuation allowance of $191.2 million. The net deferred tax assets of the Corporation’s banking subsidiary, FirstBank, amounted to $294.7 million as of December 31, 201 7, net of a valuation allowance of $150.7 million, compared to a deferred tax asset of $277.4 million, net of a valuation allowance of $171.0 million, as of December 31, 201 6. During 201 7, management reassessed the need for a valuation allo wance and concluded, based upon the assessment of all positive and negative evidence, that it is more likely than not that FirstBank will generate sufficient taxable income within the applicable NOL carry-forward periods to realize $294.7 million of its de ferred tax assets. The positive evidence considered by management to assess on the adequacy of the valuation allowance as of December 31, 201 7 included factors such as: FirstBank’s three-year cumulative gain position; forecasts of future profitability unde r several potential scenarios that support the partial utilization of NOLs prior to their expir ation between 2021 through 2024; and three consecutive years of taxable income. These factors demonstrate demand for FirstBank’s products and services and improv ements in credit quality measures that have result ed in reduced credit exposures, and have resulted in improvements in both sustainability of profitability and management’s ability to forecast future losses. The negative evidence considered by management i ncludes: consideration of the uncertainty surrounding the future economic conditions of the hurricane-affected areas, its probable effects on the loan portfolios’ credit quality, the uncertainty related to the Puerto Rico government financial condition, an d the still elevated levels of non-performing assets. In determining whether management’s projections of future taxable income used to conclude on the adequacy of the valuation allowance are reliable, management considered objective evidence supporting th e forecast’s assumptions and assess the Bank’s recent experience and ability to reasonably project future results of operations. The analysis included the evaluation of multiple financial scenarios, including scenarios where credit losses remain elevated. Further, while Puerto Rico’s economy is expected to remain challenging due to inherent uncertainties, the Corporation believes that it can reasonably forecast future taxable income at sufficient levels over the future period of time that FirstBank has avai lable to realize part of the December 31, 2017 net deferred tax asset as further described below. The Corporation expects to realize approximately $173.2 million of deferred tax assets associated with FirstBank’s NOLs prior to their expiration periods, co mpared to $171.5 million expected to be realized as of December 31, 201 6. In addition, as of December 31, 201 7, approximately $125.6 million of the deferred tax assets of the Corporation are attributable to temporary differences or tax credit carry-forward s that have no expiration date, compared to $117.0 million in 201 6. Approximately $5.6 million of other non-NOL-related deferred tax assets of the Corporation are fully reserved with a valuation allowance, compared to $12.9 million as of December 31, 201 6, given limitations and uncertainties as to their future utilization. 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 signif icant events that would affect the ability to utilize these deferred tax assets. 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 effe ct on the Corporation’s financial condition and results of operations. Conversely, better than expected results and continued positive results and trends could result in further releases to the deferred tax valuation allowance; any such decreases could hav e a material positive effect on the Corporation’s financial condition and results of operations. The Corporation has U.S. and USVI sourced NOL carryforwards. 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 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 percentag e 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 o f 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 2017, the Corporation completed a formal ownership ch ange analysis within the meaning of Section 382 and concluded that an ownership change occurred during the comprehensive period evaluated. 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 periods prior 2017 since the Corporation had s ufficient post-ownership change NOLs in those jurisdictions to offset taxable income. The Section 382 limitation could now result in higher U.S. and USVI liabilities in the future than we would incur in the absence of such limitation. Prospectively, the C orporation 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 a deduction against taxable inco me. 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 2017 year, and as a result of the Section 382 limi tation, the Corporation incurred an income tax expense of approximately $2.3 million related to its U.S. operations. The limitation did not impact the USVI operations for the 2017 year. As a result of the Section 382 limitations in the U.S and USVI, combined with the availability of NOLs in the home country (Puerto Rico) which could limit the use of foreign tax credits, management believes that for purposes of the disclosure requirement of the components of the net deferred tax asset, the presentation of the gross foreign branch deferred tax assets, the related valuation allowance, and the related home country deferred tax liabilities, as applicable, better reflects prospectively the interaction between the foreign deferred tax assets/liabilities and the tax computations in the home country. Given the change in circumstances resulting from the Section 382 limitations, the gross up presentation was applied prospectively and did not have an effect in the consolidated financial results. As of December 31, 2017, the Corporation did not have Unrecognized T ax Benefits (“UTBs”) recorded on its books. The Corporation classifies all interest and penalties, if any, related to tax uncertainties as income tax expense. 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. and USVI income tax purposes is three years after a tax return is due or filed, whichever is later, for each. 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 bas ed, in part, upon the results of operations for the given period. For U.S. and USVI income tax purposes, all tax years subsequent to 2012 remain open to examination. During 2015 and 2016, the IRS audited the US income tax return for the 2012 year. During t he first quarter of 2017, the Corporation received confirmation from the IRS that the audit for the 2011 and 2012 years were closed with no adjustments to the previously filed returns. For Puerto Rico tax purposes, all tax years subsequent to 2012 remain o pen to examination. On December 22, 2017, the United States President signed into law H.R.1 after its approval by the U.S. Congress (“the US Tax Reform”). H.R.1 includes an overhaul of individual, business and international taxes, which affected our branc h operations in the U.S. and the USVI. The bill includes, among other things, a reduction in corporate tax rates from 35% to 21%, a repeal of the corporate alternative minimum tax regime, changes to business deductions and NOLs, a 15.5% tax on the deemed r epatriation of liquid assets, a 10% tax on base erosion payments and a minimum 10.5% tax on inclusion of global intangible low-tax income by U.S. shareholders. The change in tax rate did not have a material affect on the 2017 income statement. The Corporat ion operates branches in the U.S. and USVI and is subject to Puerto Rico income taxes on its worldwide income, thus, the net deferred tax assets associated with the U.S. and USVI branch operations are offset by either a valuation allowance or a home countr y deferred tax liability. The change in the tax law will also affect the Corporation’s U.S. and USVI income tax computation for 2018 by changing the limitations for certain deductions and reducing the U.S. and USVI’s effective tax rate. The effect of these changes on the income tax provision related to U.S. and USVI is not expected to be significant.

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- Definition The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 740 -URI http://asc.fasb.org/topic&trid=2144680 + Details
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