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Related party transactions

9 Months Ended

Sep. 30, 2013

Note 23 – Related party transactions with affiliated company / joint venture

EVERTEC

On September 30, 2010, the Corporation completed the sale of a 51% majority interest in EVERTEC, Inc. (“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, the holding company of 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 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. Refer to Note 30 “Related party transactions” to the consolidated financial statements included in the Corporation's 2012 Annual Report for details on this sale to an unrelated third-party.

On April 12, 2013, EVERTEC completed an initial public offering (“IPO”) of 28.8 million shares of common stock, generating proceeds of approximately $575.8 million. In connection with the IPO, EVERTEC sold 6.3 million shares of newly issued common stock and Apollo Global Management LLC (“Apollo”) and Popular sold 13.7 million and 8.8 million shares of EVERTEC retaining stakes of 29.1% and 33.5%, respectively. As of June 30, 2013, Popular's stake in EVERTEC was reduced to 32.4% due to exercise by EVERTEC's management of certain stock options that became fully vested as a result of the IPO. A portion of the proceeds received by EVERTEC from the IPO was used to repay and refinance its outstanding debt. In connection with the refinancing, Popular received payment in full for its portion of the EVERTEC debt held by it at that time. As a result of these transactions, Popular recognized an after-tax gain of approximately $156.6 million during the second quarter of 2013.

On September 18, 2013, EVERTEC completed a secondary public offering (“SPO”) of 20.0 million shares of common stock to the public at $22.50 per share. Apollo sold 10,808,759 shares and Popular sold 9,057,000 shares of EVERTEC, retaining respective stakes after the sale of 14.9% and 21.3%. As a result of this transaction, Popular recognized an after-tax gain of approximately $167.8 million during the third quarter of 2013 and received proceeds of approximately $197 million.

The Corporation received $ 2.7 million in dividend distributions during the nine months ended September 30, 2013 from its investments in EVERTEC's holding company. During the nine months ended September 30, 2012, net capital distributions received from EVERTEC amounted to $ 131 million, which included $ 1.4 million in dividend distributions. 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)		September 30, 2013			December 31, 2012
Equity investment in EVERTEC	$	42,369		$	73,916

The Corporation had the following financial condition balances outstanding with EVERTEC at September 30, 2013 and December 31, 2012. Items that represent liabilities to the Corporation are presented with parenthesis.

(In thousands)	At September 30, 2013				At December 31, 2012
Investment securities	$	-	$	35,000
Loans		-		53,589
Accounts receivables (Other assets)		5,494		4,085
Deposits		(23,877)		(19,968)
Accounts payable (Other liabilities)		(16,242)		(16,582)
Net total	$	(34,625)	$	56,124

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 following table presents the Corporation's proportionate share of EVERTEC's income (loss) and changes in stockholders' equity for the quarters and nine months ended September 30, 2013 and 2012.

		Quarter ended		Nine months ended
		September 30,		September 30,
(In thousands)		2013		2013
Share of income (loss) from the investment in EVERTEC	$	2,726	$	(15,237)
Share of other changes in EVERTEC's stockholders' equity		157		36,642
Share of EVERTEC's changes in equity recognized in income	$	2,883	$	21,405

		Quarter ended		Nine months ended
		September 30,		September 30,
(In thousands)		2012		2012
Share of income from the investment in EVERTEC		29		1,863
Share of other changes in EVERTEC's stockholders' equity		-		(149)
Share of EVERTEC's changes in equity recognized in income	$	29	$	1,714

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 nine months ended September 30, 2013 and 2012. Items that represent expenses to the Corporation are presented with parenthesis.


		Quarter ended		Nine months ended
(In thousands)	September 30, 2013				September 30, 2013		Category
Interest income on loan to EVERTEC		$	-		$	2,491	Interest income
Interest income on investment securities issued by EVERTEC			-			1,269	Interest income
Interest expense on deposits			(29)			(86)	Interest expense
ATH and credit cards interchange income from services to EVERTEC			6,585			18,974	Other service fees
Debt prepayment penalty paid by EVERTEC			-			5,856	Net gain (loss) and valuation adjustments on investment securities
Consulting fee paid by EVERTEC			-			9,854	Other operating income
Rental income charged to EVERTEC			1,690			5,054	Net occupancy
Processing fees on services provided by EVERTEC			(38,335)			(114,610)	Professional fees
Other services provided to EVERTEC			204			634	Other operating expenses
Total		$	(29,885)		$	(70,564)


	Quarter ended		Nine months ended
(In thousands)	September 30, 2012		September 30, 2012			Category
Interest income on loan to EVERTEC	$	854		$	2,502	Interest income
Interest income on investment securities issued by EVERTEC		963			2,888	Interest income
Interest expense on deposits		(45)			(219)	Interest expense
ATH and credit cards interchange income from services to EVERTEC		6,240			18,513	Other service fees
Rental income charged to EVERTEC		1,636			4,991	Net occupancy
Processing fees on services provided by EVERTEC		(36,173)			(110,687)	Professional fees
Other services provided to EVERTEC		141			544	Other operating expenses
Total	$	(26,384)		$	(81,468)

At December 31, 2012, 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. EVERTEC's performance bonds guaranteed by the Corporation amounted to approximately $ 1.0 million at December 31, 2012 and expired during the quarter ended June 30, 2013. Also, EVERTEC has a letter of credit issued by BPPR, for an amount of $ 3.6 million at September 30, 2013 (December 31, 2012 - $ 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.

During the second quarter of 2013, the Corporation discontinued the elimination of its proportionate ownership share of intercompany transactions with EVERTEC from their respective revenue and expense categories to reflect them as an equity pick-up adjustment in other operating income. The consolidated statements of operations for all periods presented have been adjusted to reflect this change. This change had no impact on the Corporation's net income and did not have a material effect on its consolidated financial statements. The following tables present the impact of the change in the Corporation's results for all comparative prior period presented.

		Quarter ended		Nine months ended
		September 30,		September 30,
(In thousands)		2013		2013
Share of EVERTEC's changes in equity recognized in income	$	2,883	$	21,405
Intra-company eliminations considered in other operating income (detailed in next table)		(1,858)		(15,030)
Share of EVERTEC's changes in equity, net of eliminations	$	1,025	$	6,375

	Quarter ended							Nine months ended
		September 30, 2013						September 30, 2013
(In thousands)	As currently reported		Impact of eliminations [1]		Amounts net of eliminations		As currently reported		Impact of eliminations		Amounts net of eliminations		Category
Interest income on loan to EVERTEC	$	-	$	276	$	276		2,491	$	(531)	$	1,960	Interest income
Interest income on investment securities issued by EVERTEC		-		141		141		1,269		(270)		999	Interest income
Interest expense on deposits		(29)		-		(29)		(86)		18		(68)	Interest expense
ATH and credit cards interchange income from services to EVERTEC		6,585		(29)		6,556		18,974		(4,041)		14,933	Other service fees
Debt prepayment penalty paid by EVERTEC		-		649		649		5,856		(1,247)		4,609	Net gain (loss) and valuation adjustments on investment securities
Consulting fee paid by EVERTEC		-		1,091		1,091		9,854		(2,099)		7,755	Other operating income
Rental income charged to EVERTEC		1,690		12		1,702		5,054		(1,077)		3,977	Net occupancy
Processing fees on services provided by EVERTEC		(38,335)		(286)		(38,621)		(114,610)		24,412		(90,198)	Professional fees
Other services provided to EVERTEC		204		4		208		634		(135)		499	Other operating expenses
Total	$	(29,885)	$	1,858	$	(28,027)	$	(70,564)	$	15,030	$	(55,534)
[1] The impact of eliminations for the quarter ended September 30, 2013 includes the effect of the reduction in Popular’s stake in EVERTEC to 21.3% from 32.4% as of June 30, 2013.

		Quarter ended		Nine months ended
		September 30,		September 30,
(In thousands)		2012		2012
Share of EVERTEC's changes in equity recognized in income	$	29	$	1,714
Intra-company eliminations considered in other operating income (detailed in next table)		(12,793)		(39,067)
Share of EVERTEC's changes in equity, net of eliminations	$	(12,764)	$	(37,353)

	Quarter ended							Nine months ended
		September 30, 2012						September 30, 2012
(In thousands)	As currently reported		Impact of eliminations		Amounts net of eliminations, as previously reported		As currently reported		Impact of eliminations		Amounts net of eliminations, as previously reported		Category
Interest income on loan to EVERTEC	$	854	$	(414)	$	440	$	2,502	$	(1,198)	$	1,304	Interest income
Interest income on investment securities issued by EVERTEC		963		(467)		496		2,888		(1,384)		1,504	Interest income
Interest expense on deposits		(45)		22		(23)		(219)		104		(115)	Interest expense
ATH and credit cards interchange income from services to EVERTEC		6,240		(3,026)		3,214		18,513		(8,854)		9,659	Other service fees
Rental income charged to EVERTEC		1,636		(794)		842		4,991		(2,391)		2,600	Net occupancy
Processing fees on services provided by EVERTEC		(36,173)		17,540		(18,633)		(110,687)		53,048		(57,639)	Professional fees
Other services provided to EVERTEC		141		(68)		73		544		(258)		286	Other operating expenses
Total	$	(26,384)	$	12,793	$	(13,591)	$	(81,468)	$	39,067	$	(42,401)

PRLP 2011 Holdings LLC

As indicated in Note 22 to the consolidated financial statements, the Corporation holds a 24.9% equity interest in PRLP 2011 Holdings LLC and currently provides certain financing to the joint venture as well as holds certain deposits from the entity.

The Corporation's equity in PRLP 2011 Holdings, LLC is presented in the table which follows and is included as part of “other assets” in the consolidated statements of financial condition.

(In thousands)		September 30, 2013			December 31, 2012
Equity investment in PRLP 2011 Holdings, LLC	$	25,971		$	22,747

The Corporation had the following financial condition balances outstanding with PRLP 2011 Holdings, LLC at September 30, 2013 and 2012.

(In thousands)	At September 30, 2013				At December 31, 2012
Loans	$	25,766	$	60,040
Accrued interest receivable		70		163
Deposits (non-interest bearing)		(4,811)		(7,103)
Net total	$	21,025	$	53,100

The Corporation's proportionate share of income or loss from PRLP 2011 Holdings, LLC is included in other operating income in the consolidated statements of operations. The following table presents the Corporation's proportionate share of income (loss) from PRLP 2011 Holdings, LLC for the quarters and nine months ended September 30, 2013 and 2012.

		Quarter ended	Nine months ended
		September 30,		September 30,
(In thousands)		2013		2013
Share of (loss) income from the equity investment in PRLP 2011 Holdings, LLC	$	(9)	$	2,721


		Quarter ended	Nine months ended
		September 30,		September 30,
(In thousands)		2012		2012
Share of income from the equity investment in PRLP 2011 Holdings, LLC	$	1,770	$	7,118

The following table presents transactions between the Corporation and PRLP 2011 Holdings, LLC and their impact on the Corporation's results of operations for the quarters and nine months ended September 30, 2013 and 2012.

		Quarter ended	Nine months ended
(In thousands)	September 30, 2013		September 30, 2013		Category
Interest income on loan to PRLP 2011 Holdings, LLC	$	266	$	940	Interest income

		Quarter ended	Nine months ended
(In thousands)	September 30, 2012		September 30, 2012		Category
Interest income on loan to PRLP 2011 Holdings, LLC	$	619	$	2,130	Interest income

PR Asset Portfolio 2013-1 International, LLC

As indicated in Note 22 to the consolidated financial statements, effective March 2013 the Corporation holds a 24.9% equity interest in PR Asset Portfolio 2013-1 International, LLC and currently provides certain financing to the joint venture as well as holds certain deposits from the entity.

The Corporation's equity in PR Asset Portfolio 2013-1 International, LLC is presented in the table which follows and is included as part of “other assets” in the consolidated statements of financial condition.

(In thousands)		September 30, 2013
Equity investment in PR Asset Portfolio 2013-1 International, LLC	$	30,062

The Corporation had the following financial condition balances outstanding with PR Asset Portfolio 2013-1 International, LLC, at September 30, 2013.

(In thousands)	At September 30, 2013
Loans	$	174,199
Accrued interest receivable		468
Deposits (non-interest bearing)		(25,567)
Net total	$	149,100

The Corporation's proportionate share of income or loss from PR Asset Portfolio 2013-1 International, LLC is included in other operating income in the consolidated statements of operations. The following table presents the Corporation's proportionate share of income (loss) from PR Asset Portfolio 2013-1 International, LLC for the quarter and nine months ended September 30, 2013.

		Quarter ended		Nine months ended
		September 30,		September 30,
(In thousands)		2013		2013
Share of loss from the equity investment in PR Asset Portfolio 2013-1 International, LLC	$	(51)	$	(2,354)

The following table presents transactions between the Corporation and PR Asset Portfolio 2013-1 International, LLC and their impact on the Corporation's results of operations for the quarter and nine months ended September 30, 2013.

		Quarter ended	Nine months ended
(In thousands)		September 30, 2013	September 30, 2013		Category
Interest income on loan to PR Asset Portfolio 2013-1 International, LLC	$	1,478	$	1,594	Interest income
Servicing fee paid by PR Asset Portfolio 2013-1 International, LLC		105		150	Other service fees
Total	$	1,583	$	1,744

- Definition

The entire disclosure for related party transactions. Examples of related party transactions include transactions between (a) a parent company and its subsidiary; (b) subsidiaries of a common parent; (c) and entity and its principal owners; and (d) affiliates.

+ References

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