Thursday, November 15, 2018

Tax reform, hurricanes create losses at Popular Inc.

By on January 23, 2018

SAN JUAN – Puerto Rico-based financial institution Popular Inc. on Wednesday reported net loss of $102.2 million for the quarter ended Dec. 31, 2017, compared with net income of $20.7 million for the quarter that ended Sept. 30, 2017, reflecting a noncash income-tax expense of $168.4 million during the quarter.

The loss was justified as a result of the impact of the Federal Tax Cut & Jobs Act on the corporation’s U.S. deferred-tax asset, according to a statement.

“While our fourth quarter and year-end results reflected the impact of a significant noncash charge to earnings due to the recently enacted federal tax reform, this charge had no impact on regulatory capital. The fourth-quarter results were also impacted by the effects of hurricanes Maria and Irma. However, notwithstanding this impact, we saw growth in our net interest income on a year-over-year basis,” said Ignacio Álvarez, the bank’s president & chief executive officer.

“I am also pleased to report that our operations have substantially recovered from the impact of the storms, with 164 of our branches in P.R. and the U.S. Virgin Islands fully operational, Álvarez continued. “We are also beginning to see increased loan demand in our consumer loans portfolios, especially in auto loans. We remain pleased with our U.S. operations, which experienced 16% growth in commercial loans during 2017.”

On Dec. 22, the Tax Cut & Jobs Act was signed into law by President Trump. The law, among other things, reduced the maximum corporate tax rate from 35% to 21% in the United States. As a result, during the fourth quarter of 2017, the corporation recorded an income-tax expense of $168.4 million, related to the write-down of the deferred-tax asset (DTA) from its U.S. operations, according to the bank.

The law contains other provisions, effective Jan. 1, 2018, which may impact Popular’s tax calculations and related income-tax expense in future years. Management, the report said, will continue to evaluate the impact of the law and “may make further adjustments as a result of additional analysis and additional guidance issued on the legislation.”

During the fourth quarter of 2017, the corporation continued normalizing its operations after the impact of hurricanes Irma and Maria, which made landfall in September. The bank continues to assess the impact of the hurricanes on its buildings and operations. As of January, 164 of Banco Popular de Puerto Rico’s (BPPR) bank branches were open and 558 ATMs were operating.

Popular said it is working on a plan to reopen its remaining closed retail locations as soon as possible. In the month of December 2017, client debit and credit card purchase activity exceeded the December 2016 activity, demonstrating significant improvement in economic activity on the island and progress toward normalized levels.

Impact on earnings related to hurricanes

The following summarizes the estimated impact on the corporation’s earnings for the third and fourth quarters of 2017 as a result of the impact of hurricanes Irma and Maria, net of estimated insurance receivables of $1.1 million.

As of the end of fourth quarter 2017, Popular maintained a reserve for loan losses of $117.6 million for noncovered loans, based on management’s best estimate of the impact of the hurricanes on the corporation’s loan portfolios. This represents a downward adjustment of $4.6 million from the amounts initially estimated at the end of third quarter 2017.

In addition, during the fourth quarter the corporation increased its estimate of losses associated with the hurricanes for the covered portfolio by $10.2 million, resulting in an incremental provision expense of $2.3 million during the quarter, according to the bank’s release.

The corporation services a portfolio of loans amounting to $1.5 billion as of Dec. 31, which were previously sold by the corporation with “credit recourse.” The bank has estimated additional losses associated with the potential repurchase liability of loans subject to credit recourse as a result of the hurricanes. For fourth quarter 2017, the provision for indemnity reserves of $11.1 million included $3.4 million to account for these estimated losses. As of Dec. 31, 2017, the reserve for loans subject to credit recourse amounted to $58.8 million.

At the end of the fourth quarter, Popular recorded year-to-date expenses related to structural damages of $6.5 million, net of the related insurance receivable of $1.1 million, which was a downward adjustment of $300,000 and $6.4 million, respectively, from the initial estimates at the end of the third quarter.

In addition to the previously mentioned incremental provision and direct operating expenses, results for the third and fourth quarters of 2017 were impacted by the hurricanes in the form of a reduction in revenue resulting from reduced merchant transaction activity, the waiver of certain late fees and service charges to businesses and consumers in hurricane-affected areas, as well as the economic and operational disruption on the corporation’s mortgage origination, servicing and loss mitigation activities.

For the fourth quarter of 2017, the bank estimates these revenue captions resulted in a decrease in income of about $20 million when compared with pre-hurricane levels, taking into account the earnings for the comparative quarter of the previous year, among other measures, primarily driven by the disruption in the bank’s operations. This compares to an impact of about $11 million during the third quarter, the bank said.

 

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