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INCOME TAXES | 12 Months Ended
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Dec. 31, 2024
INCOME TAXES [Abstract] |
INCOME TAXES | NOTE 20 – 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. Furthermore, 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”). 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. In addition to the IBE entities, the bank has 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 carryforward period for NOLs incurred during taxable years commencing after December 31, 2012 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. 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, 2024 2023 2022 (In thousands) Current income tax expense $ 78,352 $ 88,467 $ 88,296 Deferred income tax expense 14,131 6,105 54,216 Total income tax expense $ 92,483 $ 94,572 $ 142,512 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, 2024 2023 2022 Amount % of Pretax Income Amount % of Pretax Income Amount % of Pretax Income (Dollars in thousands) Computed income tax at statutory rate $ 146,702 37.5 % $ 149,038 37.5 % $ 167,844 37.5 % Federal and state taxes 10,690 2.7 % 10,008 2.4 % 10,268 2.2 % Benefit of net exempt income (40,599) (10.4) % (35,153) (8.8) % (31,266) (7.0) % Disallowed NOL carryforward resulting from net exempt income (1) - - % - - % 14,221 3.2 % Deferred tax valuation allowance (1) - - % - - % (8,410) (1.9) % Share-based compensation windfall (823) (0.2) % (2,134) (0.5) % (1,492) (0.3) % Preferential tax treatment on qualified investing and lending activities (19,642) (5.0) % (19,125) (4.8) % (4,500) (1.0) % Other permanent differences (4,284) (1.1) % (5,138) (1.3) % (3,147) (0.7) % Tax return to provision adjustments 23 - % (1,709) (0.4) % (519) (0.1) % Other-net 416 0.1 % (1,215) (0.3) % (487) (0.1) % Total income tax expense $ 92,483 23.6 % $ 94,572 23.8 % $ 142,512 31.8 % (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 and 2024 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, 2024 and 2023 were as follows: As of December 31, 2024 2023 (In thousands) Deferred tax asset: NOL and capital loss carryforwards $ 36,721 $ 48,633 Allowance for credit losses 88,149 102,005 Alternative Minimum Tax credits available for carryforward 33,220 39,898 Unrealized loss on OREO valuation 4,126 6,360 Share-based compensation cost 4,763 3,569 Legal and other reserves 3,121 4,059 Reserve for insurance premium cancellations 746 824 Differences between the assigned values and tax bases of assets and liabilities recognized in purchase business combinations 8,007 6,690 Unrealized loss on available-for-sale debt securities, net 76,616 82,944 Other 8,808 4,264 Total gross deferred tax assets $ 264,277 $ 299,246 Deferred tax liabilities: Servicing assets 8,282 9,002 Pension Plan assets 472 832 Other 87 97 Total gross deferred tax liabilities 8,841 9,931 Valuation allowance (119,080) (139,188) Net deferred tax asset $ 136,356 $ 150,127 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, 2024, the Corporation had a net deferred tax asset of $ 136.4 million, net of a valuation allowance of $ 119.1 million, compared to a net 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 $ 136.4 million as of December 31, 2024, net of a valuation allowance of $ 98.5 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 decrease in the net deferred tax asset was mainly related to the usage of alternative minimum tax credits and the decrease in the ACL. Meanwhile, 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 net 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, 2024, approximately $ 233.5 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 $ 253.9 million in 2023. The valuation allowance attributable to FirstBank’s deferred tax assets of $ 98.5 million as of December 31, 2024 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 $ 20.6 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 were any significant events that would affect the ability to utilize these deferred tax assets. As of December 31, 2024, of the $ 36.7 million of NOL and capital loss carryforwards deferred tax assets, $ 21.9 million, which are fully valued, have expiration dates ranging from year 2025 through year 2037. From this amount, approximately $ 3.4 million expires in year 2025 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 2024, 2023, and 2022, FirstBank incurred current income tax expense of approximately $ 10.6 million, $ 9.9 million, and $ 10.3 million, respectively, related to its U.S. operations. The limitation did not impact the USVI operations in 2024, 2023, and 2022. 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 December 31, 2024, the Corporation had $ 0.4 million in uncertain tax positions, which includes $ 0.1 million of accrued interest and penalties, acquired from BSPR, which, if recognized, would decrease the effective income tax rate in future periods. During 2024, a $ 0.4 million tax contingency accrual release was recognized as a result of the expiration of the statute of limitation on uncertain tax positions, which were 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 2020 remain open to examination. For Puerto Rico tax purposes, all tax years subsequent to 2018 remain open to examination.

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