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Related party transactions

3 Months Ended

Mar. 31, 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 March 31, 2022, the Corporation held 11,654,803 shares of EVERTEC, representing an ownership stake of 16.26%. The Corporation continues to have significant influence over EVERTEC. Accordingly, the investment in EVERTEC is accounted for under the equity method and is evaluated for impairment if events or circumstances indicate that a decrease in value of the investment has occurred that is other than temporary.

As disclosed in Note 39 - Subsequent Events - to the financial statements included in Form 10K for the year ended December 31, 2021, on February 24, 2022, the Corporation and BPPR, entered into an Asset Purchase Agreement (the “Purchase Agreement”), with EVERTEC and Evertec Group, LLC, a wholly owned subsidiary of EVERTEC (“EVERTEC Group”), pursuant to which BPPR will purchase from EVERTEC Group certain information technology and related assets currently used by EVERTEC to service certain of BPPR’s key channels (the “Acquired Assets”) under the Amended and Restated Master Service Agreement (the “MSA”), dated September 30, 2010, among the Corporation, BPPR and EVERTEC. In connection with the purchase of the Acquired Assets, BPPR will assume certain liabilities relating to the Acquired Assets (together with the purchase of the Acquired Assets, the “Transaction”). The Transaction is expected to close on or about June 30, 2022, subject to the satisfaction of certain closing conditions.

In connection with the consummation of the Transaction (the “Closing”), the Corporation will transfer to EVERTEC Group, as consideration for the Transaction, shares of EVERTEC’s common stock (“EVERTEC Common Stock”) having an aggregate value of approximately $197 million, subject to certain purchase price adjustments, based on a price per share of $42.84, which value was determined at the time of entering into the Purchase Agreement. As a result of this transfer, the Corporation expects that its percentage ownership of the outstanding shares of EVERTEC Common Stock will be reduced from its current level, which is approximately 16.2%, to approximately 10.5% immediately following the Closing. As part of the transaction, the Corporation has also agreed to reduce its voting interest in EVERTEC below 4.5%, whether through selling shares of EVERTEC common stock or a conversion of such shares into non-voting preferred stock. The Corporation expects to sell down its stake in EVERTEC below 4.5% following the closing and intends to return to shareholders, via common stock repurchases, the after-tax gains resulting from such sale, subject to the receipt of regulatory approvals.

Additionally, as part of the Closing, the Corporation and BPPR will also enter with EVERTEC into, among other commercial agreements, a Second Amended and Restated Master Services Agreement (the “Second A&R MSA”), pursuant to which EVERTEC Group will continue to provide various key information technology and various transaction processing services to the Corporation, BPPR and their respective subsidiaries, which services are provided under the currently effective MSA.

The Corporation recorded $0.6 million in dividends distributions during the quarter ended March 31, 2022 from its investments in EVERTEC (March 31, 2021 - $0.6 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)		March 31, 2022			December 31, 2021
Equity investment in EVERTEC	$	119,579		$	110,299

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

(In thousands)	March 31, 2022		December 31, 2021
Accounts receivable (Other assets)	$	5,640	$	5,668
Deposits		(157,209)		(150,737)
Accounts payable (Other liabilities)		(1,242)		(3,431)
Net total	$	(152,811)	$	(148,500)

The Corporation’s proportionate share of income 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 and changes in stockholders’ equity for the quarters ended March 31, 2022 and 2021.

		Quarters ended March 31,
(In thousands)		2022			2021
Share of income from investment in EVERTEC	$	6,318		$	5,734
Share of other changes in EVERTEC's stockholders' equity		1,787			178
Share of EVERTEC's changes in equity recognized in income	$	8,105		$	5,912

The following table presents 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 quarters ended March 31, 2022 and 2021. Items that represent expenses to the Corporation are presented with parenthesis.

	Quarters ended March 31,
(In thousands)	2022		2021		Category
Interest expense on deposits	$	(132)	$	(89)	Interest expense
ATH and credit cards interchange income from services to EVERTEC		6,683		6,454	Other service fees
Rental income charged to EVERTEC		1,681		1,547	Net occupancy
Processing fees on services provided by EVERTEC		(62,222)		(60,141)	Professional fees
Other services provided to EVERTEC		218		121	Other operating expenses
Total	$	(53,772)	$	(52,108)

Centro Financiero BHD León

At March 31, 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 quarter ended March 31, 2022, the Corporation recorded $7.4 million in earnings from its investment in BHD León (March 31, 2021 - $6.4 million), which had a carrying amount of $185.3 million at March 31, 2022 (December 31, 2021 - $160.1 million). There were no dividends distributions received by the Corporation from its investment in BHD León, during the quarter ended March 31, 2022 and 2021.

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 quarter ended March 31, 2022 administrative fees charged to these investment companies amounted to $0.7 million (March 31, 2021 - $1.2 million) and waived fees amounted to $0.3 million (March 31, 2021 - $0.5 million), for a net fee of $0.4 million (March 31, 2021 - $0.7 million).

The Corporation, through its subsidiary BPPR, had also entered into certain uncommitted credit facilities with those investment companies. The aggregate sum of all outstanding balances under all credit facilities that could be made available by BPPR, from time to time, to those investment companies for which PAM acted as investment advisor or co-investment advisor, could have never exceed the lesser of $200 million or 10% of BPPR’s capital. During the year ended December 31, 2021, these credit facilities expired.