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Business Combinations
 12 Months Ended
Dec. 31, 2022
Business Combinations [Abstract]  
Business Combination
Note 4
–
 
Business combinations
Acquisition of key customer channels and business
 
from Evertec
On July
 
1,
 
2022, BPPR
 
completed its
 
previously announced
 
acquisition of
 
certain assets
 
used by
 
Evertec Group,
 
LLC (“Evertec
Group”),
 
a
 
wholly
 
owned
 
subsidiary
 
of
 
Evertec,
 
Inc.
 
(“Evertec”),
 
to
 
service
 
certain
 
BPPR
 
channels
 
(“Business
 
Acquisition
Transaction”).
As
 
a
 
result
 
of
 
the closing
 
of
 
the Business
 
Acquisition Transaction,
 
BPPR
 
acquired
 
from
 
Evertec Group
 
certain critical
 
channels,
including
 
BPPR’s
 
retail
 
and
 
business
 
digital
 
banking
 
and
 
commercial
 
cash
 
management
 
applications.
 
In
 
connection
 
with
 
the
Business Acquisition Transaction, 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, Evertec
 
Group no
 
longer has
 
exclusive rights
 
to provide
 
certain of
 
Popular’s technology
services. The
 
amended service
 
agreements include
 
discounted pricing
 
and lowered
 
caps on
 
contractual pricing
 
escalators tied
 
to
the Consumer Price Index. As
 
part of the transaction, BPPR and Evertec
 
also entered into a revenue sharing
 
structure for BPPR in
connection
 
with
 
its
 
merchant
 
acquiring
 
relationship
 
with
 
Evertec.
 
Under
 
the
 
terms
 
of
 
the
 
amended
 
and
 
restated
 
Master
 
Service
Agreement (“MSA”), Evertec will be entitled to receive monthly payments
 
from the Corporation to the extent that Evertec’s revenues,
covered under the MSA, fall below certain agreed
 
annualized minimum amounts.
As consideration for the
 
Business Acquisition Transaction, BPPR delivered
 
to Evertec Group
4,589,169
 
shares of Evertec common
stock valued at closing at $
169.2
 
million (based on Evertec’s stock price on June 30, 2022 of $
36.88
). A total of $
144.8
 
million of the
consideration for
 
the transaction
 
was attributed
 
to the
 
acquisition of
 
the critical
 
channels of
 
which $
28.7
 
million were
 
attributed to
Software
 
Intangible
 
Assets
 
and
 
$
116.1
 
million
 
were
 
attributed
 
to
 
goodwill.
 
The
 
transaction
 
was
 
accounted
 
for
 
as
 
a
 
business
combination.
 
The
 
remaining
 
$
24.2
 
million
 
was
 
attributed
 
to
 
the
 
renegotiation of
 
the
 
MSA
 
with
 
Evertec
 
and
 
was
 
recorded
 
as
 
an
expense. The Corporation also recorded a credit of $
6.9
 
million in Evertec billings under the MSA during the third quarter of 2022 as
a result of the Business Acquisition Transaction, resulting in a net
 
expense charge of $
17.3
 
million.
On
 
August
 
15,
 
2022,
 
the
 
Corporation
 
completed
 
the
 
sale
 
of
 
its
 
remaining
7,065,634
 
shares
 
of
 
common
 
stock
 
of
 
Evertec
 
(the
“Evertec Stock Sale”, and collectively
 
with the Business Acquisition Transaction,
 
the “Evertec Transactions”). Following
 
the Evertec
Stock
 
Sale, Popular
 
no longer
 
owns any
 
Evertec common
 
stock. The
 
impact of
 
the
 
gain on
 
the sale
 
of
 
Evertec shares
 
used as
consideration
 
for
 
the
 
Business
 
Acquisition
 
Transaction
 
in
 
exchange
 
for
 
the
 
acquired
 
applications
 
on
 
July
 
1,
 
2022
 
and
 
the
 
net
expense associated with the renegotiation of the MSA, together with the Evertec Stock Sale and the related accounting adjustments
of the Evertec Transactions, resulted in an aggregate after-tax gain
 
of $
226.6
 
million, recorded during the third quarter of 2022.
 
The following
 
table presents
 
the fair
 
values of
 
the consideration
 
and major
 
classes of
 
identifiable assets
 
acquired by
 
BPPR as
 
of
July 1, 2022.
(In thousands)
Fair Value
Stock consideration
$
144,785
Total consideration
$
144,785
Assets:
Developed technology - Software intangible assets
 
$
28,650
Total assets
 
$
28,650
Net assets acquired
$
28,650
Goodwill on acquisition
$
116,135
The fair
 
value initially
 
assigned to the
 
assets acquired is
 
preliminary and subject
 
to refinement
 
for up
 
to one
 
year after
 
the closing
date
 
of
 
the
 
acquisition
 
as
 
new
 
information
 
relative
 
to
 
closing
 
date
 
fair
 
value
 
becomes
 
available. As
 
the
 
Corporation finalizes
 
its
analysis, there may
 
continue to be
 
adjustments to the
 
recorded carrying values, and
 
thus the recognized
 
goodwill may increase
 
or
decrease.
The
 
following
 
is
 
a
 
description
 
of
 
the
 
methods
 
used
 
to
 
determine
 
the
 
fair
 
values
 
of
 
significant
 
assets
 
acquired
 
in
 
the
 
Business
Acquisition Transaction:
Developed technology – Software intangible assets
In order
 
to determine
 
the fair
 
value of
 
the developed
 
technology acquired,
 
the Corporation
 
considered the
 
guidance in
 
ASC Topic
820,
 
Fair Value
 
Measurements. The
 
Corporation
 
used the
 
cost
 
replacement methodology
 
and
 
estimated the
 
cost
 
that
 
would
 
be
incurred in developing the acquired technology as the assets’ fair value. In developing this
 
estimate, the Corporation considered the
historical direct costs as well as indirect costs and applied an inflation factor to arrive at what would be the current replacement cost.
To
 
this
 
estimated
 
cost,
 
the
 
Corporation
 
applied
 
an
 
obsolescence
 
factor
 
to
 
arrive
 
at
 
the
 
estimated
 
fair
 
value
 
of
 
the
 
acquired
technology.
 
The obsolescence
 
factor considered
 
the estimated
 
remaining useful
 
life of
 
the acquired
 
software, considering existing
and
 
upcoming technology
 
changes,
 
as
 
well
 
as
 
the
 
scalability
 
of
 
the
 
system
 
architecture for
 
further
 
developments. This
 
software
acquired
 
for
 
internal
 
use
 
is
 
recorded
 
within
 
Other
 
Assets
 
in
 
the
 
accompanying
 
Consolidated
 
Financial
 
Statements
 
and
 
will
 
be
amortized over its current estimated remaining useful
 
life of
5
 
years.
 
Goodwill
The goodwill
 
is the
 
residual difference
 
between the consideration
 
transferred to
 
Evertec and
 
the fair
 
value of
 
the assets
 
acquired,
net of
 
the liabilities assumed,
 
if any.
 
The entire amount
 
of goodwill is
 
deductible for income
 
tax purposes pursuant
 
to P.R.
 
Internal
Revenue Code (“IRC”) section 1033.07 over a
15
-year period.
The Corporation believes
 
that given the
 
amount of assets
 
acquired and the
 
size of
 
the operations acquired
 
in relation to
 
Popular’s
operations, the historical results of Evertec are not
 
material to Popular’s results, and thus
 
no pro forma information is presented.
Acquisition of K2 Capital Group LLC’s equipment leasing and financing
 
business
 
On October
 
15, 2021, Popular
 
Equipment Finance, LLC
 
(“PEF”), a newly
 
formed wholly-owned subsidiary
 
of Popular Bank
 
(“PB”),
completed the
 
acquisition of
 
certain assets
 
and
 
the
 
assumption of
 
certain
 
liabilities of
 
K2
 
Capital Group
 
LLC’s
 
(“K2”) equipment
leasing and
 
financing business
 
based in
 
Minnesota (the
 
“Acquired Business”).
 
Commercial loans
 
acquired by
 
PEF as
 
part of
 
this
transaction consisted of $
105
 
million in commercial direct financing leases and $
14
 
million in working capital lines.
 
Specializing in the healthcare industry,
 
the Acquired Business provided a
 
variety of lease products, including
 
operating and finance
leases,
 
and
 
also
 
offers
 
private
 
label
 
vendor
 
finance
 
programs
 
to
 
equipment
 
manufacturers
 
and
 
healthcare
 
organizations.
 
The
acquisition provides PB with a national equipment
 
leasing platform that complements its existing health
 
care lending business.
The
 
following
 
table
 
presents
 
the
 
fair
 
values
 
of
 
the
 
consideration
 
and
 
major
 
classes
 
of
 
identifiable
 
assets
 
acquired
 
and
 
liabilities
assumed by PEF as of October 15, 2021.
(In thousands)
Fair Value
Cash consideration
$
156,628
Contingent consideration
9,241
Total consideration
$
165,869
Assets:
Cash and due from banks
$
800
Commercial loans
115,575
Premises and equipment
8,996
Accrued income receivable
57
Other assets
2,822
Other intangible assets
2,887
Total assets
 
$
131,137
Other liabilities
14,439
Total liabilities
$
14,439
Net assets acquired
$
116,698
Goodwill on acquisition
$
49,171
The fair
 
value initially
 
assigned to the
 
assets acquired is
 
preliminary and subject
 
to refinement
 
for up
 
to one
 
year after
 
the closing
date
 
of
 
the
 
acquisition
 
as
 
new
 
information
 
relative
 
to
 
closing
 
date
 
fair
 
value
 
becomes
 
available. As
 
the
 
Corporation finalizes
 
its
analysis, there may
 
continue to be
 
adjustments to the
 
recorded carrying values, and
 
thus the recognized
 
goodwill may increase
 
or
decrease.
Following is a description of
 
the methods used to determine
 
the fair values of significant
 
assets acquired and liabilities assumed
 
on
the K2 Transaction:
Commercial Loans
In determining the fair value
 
of commercial direct financing leases, the specific
 
terms and conditions of each lease
 
agreement were
considered.
 
The
 
fair
 
values
 
for
 
commercial
 
direct
 
financing
 
leases
 
were
 
calculated
 
based
 
on
 
the
 
fair
 
value
 
of
 
the
 
underlying
collateral, or from
 
the cash flows
 
expected to be
 
collected discounted at
 
a market rate
 
commensurate with the
 
credit risk profile
 
of
the
 
lessee at
 
origination in
 
instances where
 
there
 
was a
 
purchase option
 
at the
 
end of
 
the lease
 
term
 
with a
 
stated
 
guaranteed
residual value. Fair values for commercial working capital lines were calculated based on the present value of remaining contractual
payments discounted
 
at a
 
market rate
 
commensurate with
 
the credit
 
risk profile
 
of the
 
borrower at
 
origination. These
 
commercial
loans were
 
accounted for
 
under ASC
 
Subtopic 310-20.
 
As of
 
October 15,
 
2021, the
 
gross contractual
 
receivable for
 
commercial
loans amounted to $
125
 
million. An allowance for credit losses of $
1
 
million was recognized as of October 15, 2021 with an offset to
provision for credit losses, which represents the estimate
 
of contractual cash flows not expected to be
 
collected.
Goodwill
The
 
amount
 
of
 
goodwill
 
is
 
the
 
residual
 
difference
 
between
 
the
 
consideration
 
transferred
 
to
 
K2
 
and
 
the
 
fair
 
value
 
of
 
the
 
assets
acquired,
 
net
 
of
 
the
 
liabilities
 
assumed.
 
The
 
entire
 
amount
 
of
 
goodwill
 
is
 
deductible
 
for
 
income
 
tax
 
purposes
 
pursuant
 
to
 
U.S.
Internal Revenue Code (“IRC”) section 197 over
 
a
15
-year period.
 
During the third
 
quarter of 2022,
 
the Corporation revised
 
its projected earnings
 
related to this
 
Acquired Business, and
 
accordingly,
recorded a goodwill impairment charge of $
9.0
 
million.
 
Contingent consideration
The fair value of the contingent consideration, which related to approximately $
29
 
million in earnout payments that could be payable
to K2 over a three-year period, was calculated based
 
on a Montecarlo Simulation model.
 
During the
 
third quarter
 
of 2022,
 
the Corporation
 
updated its
 
estimates related
 
to the
 
ability to
 
realize the
 
earnings targets
 
for the
contingent payment, and accordingly, recorded a positive adjustment of $
9.2
 
million related this liability.
The Corporation believes that given the
 
amount of assets and liabilities assumed
 
and the size of the operations
 
acquired in relation
to
 
Popular’s operations,
 
the
 
historical results
 
of
 
K2
 
are
 
not significant
 
to
 
Popular’s results,
 
and thus
 
no
 
pro
 
forma
 
information is
presented.