Popular Inc. reported a net loss of $102.2 million for the quarter ended Dec. 31, 2017, compared to a net income of $20.7 million for the prior reflecting a non-cash income tax expense of $168.4 million due to the impact of the Federal Tax Cut and Jobs Act in the corporation’s U.S. deferred tax asset.
President Donald Trump signed the Act on Dec. 22, 2017, which, among other things, reduced the maximum corporate tax rate from 35 percent to 21 percent in the U.S. mainland.
As a result, during the fourth quarter of 2017 the bank recorded an income tax expense of $168.4 million, related to the write-down of the deferred tax asset from its U.S. operations, company officials confirmed.
The Act contains other provisions, effective Jan. 1, which may impact Popular Inc.’s tax calculations and related income tax expense in future years.
“While our fourth quarter and year end results reflected the impact of a significant non-cash charge to earnings due to the recently enacted federal tax reform, this charge had no impact on regulatory capital,” said Popular Inc. President Ignacio Álvarez.
Fourth quarter results were also impacted by the effects of Hurricanes María and Irma.
“While Irma caused significant damage to the U.S. Virgin Islands and interrupted our business activity for a short time in Florida and Puerto Rico, María’s impact on Puerto Rico was extensive,” he said. “Although Puerto Rico has made meaningful progress in its recovery efforts, we are still experiencing challenges in the restoration of electric power.”
The company continues to assess the impact of the storms on its buildings and operations. As of Jan. 12, 164 of Banco Popular de Puerto Rico’s bank branches are open and 558 ATMs are operating. Popular is working on a plan to reopen its remaining closed retail locations as soon as possible, bank officials said.
“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 a 16 percent growth in commercial loans during 2017,” he said.
Post-hurricanes, Popular Inc. has seen an uptick in consumer and commercial loan originations, particularly in sectors like auto and personal loans. Álvarez said there are additional lending opportunities to come in sectors such as construction. However, Hurricane Maria negatively affected areas of the business, including credit and debit cards processing income, ATM fees and the pace of mortgage originations.
Popular Inc.’s Puerto Rico mortgage business originated $98 million in loans in the fourth quarter, down from $126 million in the third quarter, reflecting a significant impact to originations from Hurricane María.
Recovery will depend on power restoration, funds influx
“The pace of economic recovery will be heavily dependent on the speed of the remaining power restoration and the magnitude in timing of funds flowing into Puerto Rico from federal agencies and insurance companies,” he said.
“These funds, which are estimated to exceed $25 billion, are likely to have similar impact on the economy. The island has not yet received the vast majority of expected insurance payments and U.S. Federal release bond,” the executive added in a call with analysts.
He also mentioned the migration of Puerto Rico’s population, saying it has not made a dent on its deposits and accounts during the fourth quarter. However, he admitted that 80 Popular employees leave the island, or about 1 percent of its local workforce.
Looking beyond the immediate impact and the recovery process, the island’s longer term economic prospects will depend on the decisions regarding Puerto Rico’s rebuilding, he said.
“The island was facing structural problems, which have been going on for years, and we now have a unique opportunity to tackle these problems. Not to go back to where we were, but to make important structural changes in areas such as energy, housing, health and education,” Álvarez said.
For the full year 2017, Popular Inc. reported net income of $108 million, which includes the effect of $168 million expense related to the impact of the U.S. tax reform on its U.S. mainland operations
Adjusted net income from continuing operations was $276 million, up from the prior year’s $258 million, mostly due to both the impact of the hurricanes and $64 million in provision expense related to its U.S. tax portfolio.