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INCOME TAXES
 9 Months Ended
Sep. 30, 2022
Income Tax Disclosure [Abstract]  
INCOME TAXES [Text Block]
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,
 
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
 
(“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 2022,
 
the Corporation
 
recorded an
 
income tax
 
expense of
 
$
32.0
 
million compared
 
to $
37.1
 
million in
 
the
third quarter of 2021. The variance was primarily related
 
to lower pre-tax income and a lower estimated
 
effective tax rate as a result of
a higher
 
proportion of
 
exempt to
 
taxable income
 
when compared
 
to the
 
same period
 
in 2021.
 
For the
 
first nine
 
months of
 
2022, the
Corporation recorded
 
an income tax
 
expense of $
109.2
 
million compared
 
to $
105.2
 
million for the
 
same period in
 
2021. The increase
in income tax expense for the nine-month period ended
 
September 30, 2022, as compared to the same period a year
 
ago, was related to
higher pre-tax
 
income, partially offset
 
by a higher
 
proportion of exempt
 
to taxable income
 
resulting in a
 
lower estimated effective
 
tax
rate.
 
 
For
 
the
 
quarter
 
and
 
nine-month
 
period
 
ended
 
September
 
30,
 
2022,
 
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
 
Topic
 
740-270,
 
“Income
 
Taxes”
 
(“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
 
2022, excluding entities from which
 
a tax benefit cannot be recognized
 
and discrete items,
was
31.8
%, compared
 
to
33.2
% for
 
the first
 
nine months
 
of 2021.
 
The estimated
 
annual effective
 
tax rate,
 
including all
 
entities, for
2022
 
was
32.0
% (
32.4
% excluding
 
discrete items),
 
compared
 
to
33.6
% for
 
the first
 
nine months
 
of 2021
 
(
33.8
% excluding
 
discrete
items).
 
The
 
Corporation’s
 
net
 
deferred
 
tax
 
asset
 
amounted
 
to
 
$
166.1
 
million
 
as
 
of
 
September
 
30,
 
2022,
 
net
 
of
 
a
 
valuation
 
allowance
 
of
$
195.8
 
million, and
 
management concluded,
 
based upon
 
the assessment
 
of all
 
positive and
 
negative evidence,
 
that it was
 
more likely
than not
 
that the Corporation
 
will generate suff
 
icient 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 $
166.0
 
million as
 
of September
30,
 
2022, net
 
of a
 
valuation
 
allowance of
 
$
158.7
 
million, compared
 
to a
 
net deferred
 
tax asset
 
of $
208.4
 
million, net
 
of a
 
valuation
allowance of $
69.7
 
million, as of December 31, 2021. The
 
decrease in the deferred tax assets was
 
mainly driven by the usage of
 
NOLs
as well as the
 
credit losses reserve
 
release. The increase
 
in the valuation allowance
 
during the first nine
 
months of 2022 was
 
primarily
related to the change in the market
 
value of available-for-sale debt
 
securities. The Corporation maintains a
 
full valuation allowance for
its
 
deferred
 
tax
 
assets
 
associated
 
with
 
capital
 
losses
 
carry
 
forward,
 
thus,
 
the
 
change
 
in
 
the
 
market
 
value
 
of
 
available-for-sale
 
debt
securities resulted
 
in a
 
change in
 
the deferred
 
tax asset
 
and
 
an equal
 
change in
 
the valuation
 
allowance
 
without having
 
an effect
 
on
earnings.
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 the
 
third quarter
 
and nine-month
 
period ended
 
September 30,
2022, the Corporation
 
incurred current income
 
tax expense of
 
approximately $
3.0
 
million and $
7.1
 
million, respectively,
 
related to its
U.S. operations,
 
compared to
 
$
2.1
 
million and
 
$
4.5
 
million, respectively,
 
for the
 
comparable periods
 
in 2021.
 
The limitation
 
did not
impact the USVI operations in the third quarter and nine-month periods ended September
 
30, 2022 and 2021.
On August 16, 2022, the
 
“Inflation Reduction Act of 2022” (the
 
“IRA”) was signed into law in
 
the United States. The IRA includes
various tax provisions, including
 
an excise tax on stock
 
repurchases, and a corporate
 
alternative minimum tax that
 
generally applies to
U.S.
 
corporations
 
with
 
average
 
adjusted
 
financial
 
statement
 
income
 
over
 
a
 
three-year
 
period
 
in
 
excess
 
of
 
$1
 
billion.
 
We
 
do
 
not
currently expect
 
the IRA to
 
have a material
 
impact on
 
our financial
 
results, including
 
on our annual
 
estimated effective
 
tax rate or
 
on
our liquidity.
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,
 
2022,
 
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 the
 
quarter ended
 
September 30,
2022, a
 
$
0.4
 
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
 
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
 
2018
 
remain
 
open
 
to
examination. For Puerto Rico tax purposes, all tax years subsequent to
 
2017 remain open to examination.