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INCOME TAXES | 3 Months Ended
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Mar. 31, 2024
INCOME TAXES [Abstract] |
INCOME TAXES | NOTE 16 – INCOME TAXES The Corporation is subject to Puerto Rico income tax on its income from all sources. Under the Puerto Rico Internal Revenue Code, as amended (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. For the first quarter of 2024, the Corporation recorded an income tax expense of $23.9 million compared to $ 31.9 million in the first quarter of 2023. The decrease in income tax expense was mainly driven by a lower effective tax rate during the first quarter of 2024 and, to a lesser extent, by lower pre-tax income. During the fourth quarter of 2023, the Corporation engaged in certain business activities with preferential tax treatment under the PR Tax Code which resulted in a lower effective tax rate for the year 2023. The Corporation has maintained an effective tax rate lower than the Puerto Rico maximum statutory rate of 37.5 %. 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 24.3 % for the first quarter of 2024, compared to 31.2 % for the first quarter of 2023. As of March 31, 2024, the Corporation had a deferred tax asset of $ 147.7 million, net of a valuation allowance of $ 140.1 million against the deferred tax asset, compared to a deferred tax asset of $ 150.1 million, net of a valuation allowance of $ 139.2 million, as of December 31, 2023. The net deferred tax asset of the Corporation’s banking subsidiary, FirstBank, amounted to $ 147.7 million as of March 31, 2024, net of a valuation allowance of $ 112.7 million, compared to a net deferred tax asset of $ 150.1 million, net of a valuation allowance of $ 111.4 million, as of December 31, 2023. 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. 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 first quarters of 2024 and 2023, FirstBank incurred current income tax expense of approximately $ 2.2 million and $ 2.5 million, respectively, related to its U.S. operations. The limitation did not impact the USVI operations in the first quarters of 2024 and 2023, respectively. The Corporation accounts for uncertain tax positions under the provisions of ASC Topic 740, Income Taxes. The Corporation’s policy is to report interest and penalties related to unrecognized tax positions in income tax expense. As of March 31, 2024, 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 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.

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