Related party transactions with affiliated company

6 Months Ended

Jun. 30, 2011

Related party transactions with affiliated company

Note 4 – Related party transactions with affiliated company

On September 30, 2010, the Corporation completed the sale of a 51% majority interest in EVERTEC to an unrelated third-party, including the Corporation’s merchant acquiring and processing and technology businesses (the “EVERTEC transaction”), and retained a 49% ownership interest in Carib Holdings (referred to as “EVERTEC”). EVERTEC continues to provide various processing and information technology services to the Corporation and its subsidiaries and gives BPPR access to the ATH network owned and operated by EVERTEC. The investment in EVERTEC was initially recorded at a fair value of $177 million at September 30, 2010, which was determined based on the third-party buyer’s enterprise value of EVERTEC as determined in an orderly transaction between market participants, reduced by the debt incurred, net of debt issue costs, utilized as part of the sale transaction. Prospectively, the investment in EVERTEC is accounted for under the equity method and evaluated for impairment if events or circumstances indicate that a decrease in value of the investment has occurred that is other than temporary. Refer to the Corporation’s 2010 Annual Report for details on this sale to an unrelated third-party.

The Corporation’s investment in EVERTEC, including the impact of intra-entity eliminations, amounted to $210 million at June 30, 2011 (December 31, 2010 - $197 million), and is included as part of “other assets” in the consolidated statements of condition. The increase in the investment balance from December 31, 2010 to June 30, 2011 is due to the recognition of the Corporation’s share of the earnings of EVERTEC, net of intra-entity profits and losses. The Corporation did not receive any distributions from EVERTEC during the period from January 1, 2011 through June 30, 2011.

The Corporation’s proportionate share of income or loss from EVERTEC is included in other operating income in the consolidated statements of operations since October 1, 2010. The Corporation recognized a $12.0 million loss in other operating income for the quarter ended June 30, 2011 as part of its equity method investment in EVERTEC ($14.0 million loss for the six months ended June 30, 2011), which consisted of $0.7 million of the Corporation’s share in EVERTEC’s net income ($12.5 million for the six months ended June 30, 2011), more than offset by $12.7 million of intercompany income eliminations (investor-investee transactions at 49%) ($26.5 million for the six months ended June 30, 2011). The unfavorable impact of the elimination in non-interest income was offset by the elimination of 49% of the professional fees (expense) paid by the Corporation to EVERTEC during the same period.

The following tables present the impact of transactions and service payments between the Corporation and EVERTEC (as an affiliate) and their impact on the results of operations for the quarter and six months ended June 30, 2011. Items that represent expenses to the Corporation are presented with parenthesis. For consolidation purposes, the Corporation eliminates 49% of the income (expense) between EVERTEC and the Corporation from the corresponding categories in the consolidated statements of operations and the net effect of all items at 49% is eliminated against other operating income, which is the category used to record the Corporation’s share of income (loss) as part of its equity method investment in EVERTEC. The 51% majority interest in the table that follows represents the share of transactions with the affiliate that is not eliminated in the consolidation of the Corporation’s results of operations.

	Quarters ended						Six months ended
	June 30, 2011						June 30, 2011
(In thousands)	100%			51% majority interest			100%			51% majority interest			Category
Interest income on loan to EVERTEC	$	881		$	450		$	1,937		$	988		Interest income
Interest income on investment securities issued by EVERTEC		962			491			1,925			982		Interest income
Interest expense on deposits		(107	)		(55	)		(402	)		(205	)	Interest expense
ATH and credit cards interchange income from services to EVERTEC		7,279			3,712			14,072			7,177		Other service fees
Processing fees on services provided by EVERTEC		(37,122	)		(18,932	)		(75,800	)		(38,658	)	Professional fees
Rental income charged to EVERTEC		1,797			917			3,604			1,838		Net occupancy
Transition services provided to EVERTEC		297			152			666			340		Other operating expenses

The Corporation had the following financial condition accounts outstanding with EVERTEC at June 30, 2011 and December 31, 2010. The 51% majority interest represents the share of transactions with the affiliate that is not eliminated in the consolidation of the Corporation’s statement of condition.

	At June 30, 2011				At December 31, 2010
(In thousands)	100%		51% majority interest		100%		51% majority interest
Loans	$	53,202	$	27,133	$	58,126	$	29,644
Investment securities		35,000		17,850		35,000		17,850
Deposits		32,635		16,644		38,761		19,768
Accounts receivables (Other assets)		3,788		1,932		3,922		2,000
Accounts payable (Other liabilities)		17,083		8,712		17,416		8,882

Prior to the EVERTEC sale transaction on September 30, 2010, EVERTEC had certain performance bonds outstanding, which were guaranteed by the Corporation under a general indemnity agreement between the Corporation and the insurance companies issuing the bonds. The Corporation agreed to maintain, for a 5-year period following September 30, 2010, the guarantee of the performance bonds. The EVERTEC’s performance bonds guaranteed by the Corporation amounted to approximately $10.4 million at June 30, 2011. Also, EVERTEC had an existing letter of credit issued by BPPR, for an amount of $2.9 million. As part of the merger agreement, the Corporation also agreed to maintain outstanding this letter of credit for a 5-year period. EVERTEC and the Corporation entered into a Reimbursement Agreement, in which EVERTEC will reimburse the Corporation for any losses incurred by the Corporation in connection with the performance bonds and the letter of credit. Possible losses resulting from these agreements are considered insignificant.

Furthermore, under the terms of the sale of EVERTEC, the Corporation was required for a period of twelve months following September 30, 2010 to sell its equity interests in Serfinsa and Consorcio de Tarjetas Dominicanas, S.A (“CONTADO”) to EVERTEC, subject to complying with certain rights of first refusal in favor of the Serfinsa and CONTADO shareholders. During the six months ended June 30, 2011, the Corporation sold its equity interest in CONTADO to CONTADO shareholders and EVERTEC and recognized a gain of $16.7 million, net of tax, upon the sale. The Corporation’s investment in CONTADO, accounted for under the equity method, amounted to $16 million at December 31, 2010. During the quarter ended June 30, 2011, the Corporation sold its equity investment in Serfinsa and recognized a gain of approximately $212 thousand, net of tax. The Corporation’s investment in Serfinsa, accounted for under the equity method, amounted to $1.8 million at December 31, 2010.