Related party transactions

6 Months Ended

Jun. 30, 2022

Related Party Transactions

Related Party Transactions

Note 22 – Related party transactions

The Corporation considers its equity method investees as related parties. The following provides information on transactions with equity method investees considered related parties.

EVERTEC

The Corporation has an investment in Evertec, Inc. (“Evertec”), which provides 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. As of June 30, 2022, the Corporation held 11,654,803 shares of Evertec, representing an ownership stake of 16.3%. As of June 30, 2022, the Corporation had significant influence over Evertec. Accordingly, as of June 30, 2022, the investment in Evertec was 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.

As discussed in Note 33, Subsequent Events, on July 1, 2022, the Corporation’s wholly owned subsidiary, Banco Popular de Puerto Rico (“BPPR”), completed its previously announced acquisition of certain assets from Evertec Group, LLC (“Evertec Group”), a wholly owned subsidiary of Evertec, Inc. (“Evertec”) (NYSE: EVTC), to service certain BPPR channels.

As a result of the closing of the transaction, BPPR acquired from Evertec Group certain critical channels, including BPPR’s retail and business digital banking and commercial cash management applications. BPPR also entered into amended and restated service agreements with Evertec Group pursuant to which Evertec Group will continue to provide various information technology and transaction processing services to Popular, BPPR and their respective subsidiaries.

Under the amended service agreements, the Evertec Group will no longer have exclusive rights to provide certain of Popular’s technology services. The amended service agreements includes discounted pricing and lowered caps on contractual pricing escalators tied to the Consumer Price Index. As part of the transaction, BPPR and Evertec entered into a revenue sharing structure for BPPR in connection with its merchant acquiring relationship with Evertec.

As consideration for the transaction, BPPR delivered to Evertec Group 4,589,169 shares of Evertec common stock valued at closing at $169 million (based on Evertec’s stock price on June 30, 2022 of $36.88), resulting in an after-tax gain of approximately $112 million.

As a result of the transfer of the shares used as consideration for the transaction, Popular’s ownership stake in Evertec was reduced from approximately 16.3% to approximately 10.6% at the closing of the transaction. In connection with the transaction, Popular has agreed to further reduce its voting interest in Evertec to no more than 4.5%, whether through selling shares of Evertec common stock or a conversion of such shares into non-voting preferred stock within 90 days of the closing of the transaction. Popular expects to sell down its stake in Evertec to no more than 4.5%, subject to market conditions, and intends to return to Popular shareholders, via common stock repurchases, any after-tax gains resulting from such sale, subject to the receipt of regulatory approvals.

The Corporation recorded $1.2 million in dividends distributions during the six months ended June 30, 2022 from its investments in Evertec (June 30, 2021 - $1.2 million). The Corporation’s equity in Evertec is presented in the table which follows and is included as part of “other assets” in the Consolidated Statements of Financial Condition.

(In thousands)		June 30, 2022		December 31, 2021
Equity investment in Evertec	$	125,330	$	110,299

The Corporation had the following financial condition balances outstanding with Evertec at June 30, 2022 and December 31, 2021. Items that represent liabilities to the Corporation are presented with parenthesis.

(In thousands)	June 30, 2022		December 31, 2021
Accounts receivable (Other assets)	$	2,800	$	5,668
Deposits		(106,200)		(150,737)
Accounts payable (Other liabilities)		(1,252)		(3,431)
Net total	$	(104,652)	$	(148,500)

The Corporation’s proportionate share of income or loss from Evertec is included in other operating income in the consolidated statements of operations. The following table presents the Corporation’s proportionate share of Evertec’s income (loss) and changes in stockholders’ equity for the quarters and six months ended June 30, 2022 and 2021.

		Quarter ended		Six Months ended
(In thousands)		June 30, 2022		June 30, 2022
Share of income from the investment in Evertec	$	5,480	$	11,827
Share of other changes in Evertec's stockholders' equity		1,410		3,168
Share of Evertec's changes in equity recognized in income	$	6,890	$	14,995

		Quarter ended		Six Months ended
(In thousands)		June 30, 2021		June 30, 2021
Share of income from the investment in Evertec	$	7,967	$	13,716
Share of other changes in Evertec's stockholders' equity		237		400
Share of Evertec's changes in equity recognized in income	$	8,204	$	14,116

The following tables present the transactions and service payments between the Corporation and Evertec (as an affiliate) and their impact on the results of operations for the quarters and six months ended June 30, 2022 and 2021. Items that represent expenses to the Corporation are presented with parenthesis.

		Quarter ended		Six Months ended
(In thousands)	June 30, 2022			June 30, 2022			Category
Interest expense on deposits		$	(135)		$	(267)	Interest expense
ATH and credit cards interchange income from services to Evertec			7,272			13,955	Other service fees
Rental income charged to Evertec			1,577			3,258	Net occupancy
Processing fees on services provided by Evertec			(66,459)			(128,681)	Professional fees
Other services provided to Evertec			202			420	Other operating expenses
Total		$	(57,543)		$	(111,315)

	Quarter ended		Six Months ended
(In thousands)	June 30, 2021		June 30, 2021			Category
Interest expense on deposits	$	(75)		$	(164)	Interest expense
ATH and credit cards interchange income from services to Evertec		6,976			13,429	Other service fees
Rental income charged to Evertec		1,396			2,943	Net occupancy
Processing fees on services provided by Evertec		(60,740)			(120,881)	Professional fees
Other services provided to Evertec		219			340	Other operating expenses
Total	$	(52,224)		$	(104,333)

Centro Financiero BHD León

At June 30, 2022, the Corporation had a 15.84% equity interest in Centro Financiero BHD León, S.A. (“BHD León”), one of the largest banking and financial services groups in the Dominican Republic. During the six months ended June 30, 2022, the Corporation recorded $14.5 million in earnings from its investment in BHD León (June 30, 2021 - $12.6 million), which had a carrying amount of $184.8 million at June 30, 2022 (December 31, 2021 - $180.3 million). The Corporation received $ 16.0 million in dividends distributions during the six months ended June 30, 2022 from its investment in BHD León (June 30, 2021 - $4.3 million).

Investment Companies

The Corporation, through its subsidiary Popular Asset Management LLC (“PAM”), provides advisory services to several investment companies registered under the Investment Company Act of 1940 in exchange for a fee. The Corporation, through its subsidiary BPPR, also provides administrative, custody and transfer agency services to these investment companies. These fees are calculated at an annual rate of the average net assets of the investment company, as defined in each agreement. Due to its advisory role, the Corporation considers these investment companies as related parties.

For the six months ended June 30, 2022 administrative fees charged to these investment companies amounted to $1.3 million (June 30, 2021 - $2.3 million) and waived fees amounted to $0.5 million (June 30, 2021 - $0.8 million), for a net fee of $0.8 million (June 30, 2021 - $1.5 million).