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Related party transactions

12 Months Ended

Dec. 31, 2019

Note 29 – Related party transactionsThe Corporation grants loans to its directors, executive officers, including certain related individuals or organizations, and affiliates in the ordinary course of business. The activity and balance of these loans were as follows:


(In thousands)
Balance at December 31, 2017	$	182,989
New loans		1,068
Payments		(12,040)
Other changes		(38,698)
Balance at December 31, 2018	$	133,319
New loans		1,491
Payments		(1,800)
Other changes, including existing loans to new related parties		44
Balance at December 31, 2019	$	133,054
New loans and payments include disbursements and collections from existing lines of credit.

In June 2006, family members of a director of the Corporation, obtained a $0.8 million mortgage loan from Popular Mortgage, Inc., now a division of BPPR, secured by a residential property. The director was not a director of the Corporation at the time the loan was made. In March, 2012 the loan was restructured under BPPR’s loss mitigation program. During 2017, the borrower defaulted on his payment obligations under the restructured loan and as of December 31, 2018 the loan was 670 days past due. On October 2019, the Corporation completed a short sale of this loan which resulted in a charge-off of $0.4 million. In 2010, as part of the Westernbank FDIC assisted transaction, BPPR acquired (i) four commercial loans made to entities that were wholly owned by one brother-in-law of a director of the Corporation and (ii) one commercial loan made to an entity that was owned by the same brother-in-law together with this director’s father-in-law and another brother-in-law. The loans were secured by real estate and personally guaranteed by the owners of each entity. The loans were originated by Westernbank between 2001 and 2005 and had an aggregate outstanding principal balance of approximately $33.5 million when they were acquired by BPPR in 2010. Between 2011 and 2014, the loans were restructured to consist of (i) five notes with an aggregate outstanding principal balance of $19.8 million with a 6% annual interest rate (“Notes A”) and (ii) five notes with an aggregate outstanding balance of $13.5 million with a 1% annual interest rate, to be paid upon maturity (“Notes B”). The restructured notes had a maturity of September 30, 2016 and, thereafter, various interim renewals were approved, with the last two renewals occurring in July and October 2019. The July and October 2019 renewals each included a three (3) month interim renewal from June 30, 2019 to September 30, 2019 and from September 30, 2019 to December 31, 2019, respectively, continuing under the same repayment schedule at a 4.5% fixed rate in Notes A and 1% fixed rate in Notes B. In February 2020, and pursuant to the terms of the Related Party Policy, the Audit Committee approved another renewal which includes a four (4) month interim renewal from December 31, 2019 to April 30, 2020 continuing at the same repayment schedule in Notes A and Notes B as the July and October 2019 renewals. After April 30, 2020, the approved renewal provides for a 24-month extension, from April 30, 2020 to April 30, 2022, with Notes A subject to an interest rate of 5%, and Notes B continuing at a 1% interest rate. The approved renewal also contemplates the modification and addition of certain covenants to Notes A. Also, the approved renewal provides for the entity owned by one brother-in-law together with a director’s father-in-law and another brother-in-law to purchase the participation of a director’s father-in-law and another brother-in-law, the consent for said entity and another related entity to incur in additional indebtedness, and the issuance by a third related entity of an unsecured term note in the amount of $49 thousand with a 5 year maturity at 7% interest rate. The aggregate outstanding balance on the loans as of December 31, 2019 was approximately $31.2 million.The brother of an executive officer of the Corporation and his wife have three outstanding loans, each secured by the borrowers’ principal residence, where BPPR acts as either lender or servicer. The aggregate original amount of these loans was of $0.7 million, comprised of one mortgage loan of approximately $0.5 million, which is owned by a third-party investor and in which BPPR is the servicer, one mortgage loan of $0.1 million secured by a second mortgage and another mortgage loan of $0.1 million secured by a third mortgage. As of December 31, 2019, the borrowers were in default with their respective obligations under all of these loanagreements. In February 2019, and pursuant to the terms of the Related Party Policy, the Audit Committee approved a series of transactions related to the aforementioned mortgages. With respect to the first mortgage, the parties will enter into a deed in lieu of foreclosure pursuant to which the property will be transferred to the investor free and clear of liens. In connection therewith, BPPR will also release the second and third mortgages over the residential property, subject to the following conditions. The borrowers will be required to make a cash contribution of $20 thousand to reduce the principal amount of the second mortgage loan and issue, for the benefit of BPPR, a promissory note in the amount of $82 thousand in order to grant BPPR the right to collect from borrowers the balance of such debt. With respect to the third mortgage loan, the borrowers will issue an unsecured promissory note that will benefit from a corporate guaranty from the entity under which the Corporation’s brother operates a property appraisal business. Borrowers will be required to make monthly payments of $500 until the maturity date of the promissory note, when the financial capacity of borrowers will be re-evaluated, and a new payment plan is expected to be entered into.In April 2010, in connection with the acquisition of the Westernbank assets from the FDIC, as receiver, BPPR acquired a term loan to a corporate borrower partially owned by an investment corporation in which the Corporation’s Chairman, at that time the Chief Executive Officer, as well as certain of his family members, are the owners. In addition, the Chairman’s sister and brother-in-law are owners of an entity that holds an ownership interest in the borrower. At the time the loan was acquired by BPPR, it had an unpaid principal balance of $40.2 million. In May 2017, this loan was sold by BPPR to Popular, Inc., holding company (“PIHC”). At the time of sale, the loan had an unpaid principal balance of $37.9 million. PIHC paid $37.9 million to BPPR for the loan, of which $6.0 million was recognized by BPPR as a capital contribution representing the difference between the fair value and the book value of the loan at the time of transfer. Immediately upon being acquired by PIHC, the loan’s maturity was extended by 90 days (under the same terms as originally contracted) to provide the PIHC additional time to evaluate a refinancing or long-term extension of the loan. In August 2017, the credit facility was refinanced with a stated maturity in February 2019. During 2017, the facility was subject to the loan payment moratorium offered as part of the hurricane relief efforts. As such, interest payments amounting to approximately $0.5 million were deferred and capitalized as part of the loan balance. In February 2019, the Audit Committee approved, under the Related Party Policy, a 36-month renewal of the loan at an interest rate of 5.75% and a 30-year amortization schedule. As of December 31, 2019, the unpaid principal balance amounted to $37.1 million.

In August 2018, BPPR acquired certain assets and assumed certain liabilities of Reliable Financial Services and Reliable Finance Holding Company, Puerto Rico-based subsidiaries of Wells Fargo & Company engaged in the auto finance business in Puerto Rico. Refer to Note 4 for additional information on this transaction. As part of the acquisition transaction, the Corporation entered into an agreement with Reliable Financial Services to sublease the space necessary to continue the acquired operations. Reliable Financial Services’ underlying lease agreement was with an entity in which the Chairman of the Corporation’s Board and his family members hold an ownership interest, described in the preceding paragraph as having a loan with the Corporation. This lease expired on April 30, 2019 pursuant to its terms. During 2019, the Corporation paid to Reliable Financial Services approximately $0.5 million under the sublease.

The Corporation has had loan transactions with the Corporation’s directors, executive officers, including certain related individuals or organizations, and affiliates, and proposes to continue such transactions in the ordinary course of its business, on substantially the same terms, including interest rates and collateral, as those prevailing for comparable loan transactions with third parties, except as disclosed above. Except as discussed above, the extensions of credit have not involved and do not currently involve more than normal risks of collection or present other unfavorable features.

At December 31, 2019, the Corporation’s banking subsidiaries held deposits from related parties, excluding EVERTEC, Inc. (“EVERTEC”) amounting to $576 million (2018 - $632 million).

From time to time, the Corporation, in the ordinary course of business, obtains services from related parties that have some association with the Corporation. Management believes the terms of such arrangements are consistent with arrangements entered into with independent third parties.

For the year ended December 31, 2019, the Corporation made contributions of approximately $1.1 million to Fundación Banco Popular and Popular Bank Foundation, which are not-for-profit corporations dedicated to philanthropic work (2018 - $2.1 million).

The Corporation also provided human and operational resources to support the activities of the Fundación Banco Popular which in 2019 amounted to approximately $1.4 million (2018- $1.3 million).

Related party transactions with EVERTEC, as an affiliate

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 December 31, 2019, the Corporation’s stake in EVERTEC was 16.19%.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.

The Corporation received $2.3 million in dividend distributions during the year ended December 31, 2019 from its investments in EVERTEC’s holding company (December 31, 2018 - $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 statement of financial condition.

(In thousands)		December 31, 2019		December 31, 2018
Equity investment in EVERTEC	$	73,534	$	60,591

The Corporation had the following financial condition balances outstanding with EVERTEC at December 31, 2019 and December 31, 2018. Items that represent liabilities to the Corporation are presented with parenthesis.

(In thousands)	December 31, 2019		December 31, 2018
Accounts receivable (Other assets)	$	7,779	$	6,829
Deposits		(63,850)		(28,606)
Accounts payable (Other liabilities)		(1,290)		(3,671)
Net total	$	(57,361)	$	(25,448)

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 years ended December 31, 2019 and 2018.

		Years ended December 31,
(In thousands)		2019		2018		2017
Share of income from investment in EVERTEC	$	16,749	$	13,892	$	8,924
Share of other changes in EVERTEC's stockholders' equity		516		1,659		2,659
Share of EVERTEC's changes in equity recognized in income	$	17,265	$	15,551	$	11,583

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 years ended December 31, 2019, 2018 and 2017. Items that represent expenses to the Corporation are presented with parenthesis.

	Years ended December 31,
(In thousands)	2019		2018		2017		Category
Interest expense on deposits	$	(106)	$	(79)	$	(44)	Interest expense
ATH and credit cards interchange income from services to EVERTEC		29,224		33,658		28,136	Other service fees
Rental income charged to EVERTEC		7,418		7,271		6,855	Net occupancy
Fees on services provided by EVERTEC		(219,992)		(174,048)		(176,971)	Professional fees
Other services provided to EVERTEC		1,118		1,059		1,236	Other operating expenses
Total	$	(182,338)	$	(132,139)	$	(140,788)

PRLP 2011 Holdings, LLC and PR Asset Portfolio 2013-1 International, LLC

As indicated in Note 27 to the Consolidated Financial Statements, the Corporation holds a24.9 % equity interest in PRLP 2011 Holdings, LLC and PR Asset Portfolio 2013-1 International, LLC.

The Corporation’s equity in PRLP 2011 Holdings, LLC and 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.

		PRLP 2011 Holdings, LLC				PR Asset Portfolio 2013-1 International, LLC
(In thousands)		December 31, 2019		December 31, 2018		December 31, 2019		December 31, 2018
Equity investment	$	6,306	$	6,469	$	3,333	$	5,794

The Corporation held deposits from these entities, as follows:

	PRLP 2011 Holdings, LLC				PR Asset Portfolio 2013-1 International, LLC
(In thousands)	December 31, 2019		December 31, 2018		December 31, 2019		December 31, 2018
Deposits (non-interest bearing)	$	(3)	$	(2,566)	$	(5,081)	$	(7,994)

The Corporation’s proportionate share of income or loss from these entities is presented in the following table and is included in other operating income in the Consolidated Statements of Operations.

		PRLP 2011 Holdings, LLC			PR Asset Portfolio 2013-1 International, LLC
		Years ended December 31,
(In thousands)		2019		2018		2019		2018
Share of (loss) income from the equity investment	$	(163)	$	(356)	$	231	$	(5,073)

During the year ended December 31, 2019, the Corporation received $2.7 million in capital distributions from its investment in PR Asset Portfolio 2013-1 International, LLC (December 31, 2018 - $ 2.0 million). No capital distributions was received from its investment in PRLP Holdings, LLC during the year ended December 31, 2019 (December 31, 2018 - $0.4 million).

Centro Financiero BHD León

At December 31, 2019, 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 year ended December 31, 2019, the Corporation recorded $26.6 million in earnings from its investment in BHD León (December 31, 2018 - $27.2 million), which had a carrying amount of $151.6 million at December 31, 2019 (December 31, 2018 - $143.5 million). On December 2017, BPPR extended a credit facility of $40 million to BHD León. This credit facility was repaid during the quarter ended March 31, 2018. The Corporation received $12.6 million in dividend distributions during the year ended December 31, 2019 from its investment in BHD León (December 31, 2018 - $12.6 million).

On June 30, 2017, BPPR extended an $8 million credit facility to Grupo Financiero Leon, S.A. Panamá (“GFL”), a shareholder of BHD León. The sources of repayment for this loan were the dividends to be received by GFL from its investment in BHD León. BPPR’s credit facility ranked pari passu with another $8 million credit facility extended to GFL by BHD International Panama, an affiliate of BHD León. This credit facility was repaid during the quarter ended June 30, 2018.

Investment Companies

The Corporation provides advisory services to several investment companies registered under the Puerto Rico Investment Companies Act in exchange for a fee. The Corporation 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 year ended December 31, 2019 administrative fees charged to these investment companies amounted to $6.4 million (December 31, 2018 - $6.7 million) and waived fees amounted to $2.2 million (December 31, 2018 - $2.1 million), for a net fee of $4.2 million (December 31, 2018 - $4.6 million).

The Corporation, through its subsidiary BPPR, has also entered into certain uncommitted credit facilities with those investment companies. As of December 31, 2019, the available lines of credit facilities amounted to $330 million (December 31, 2018 - $330 million). The aggregate sum of all outstanding balances under all credit facilities that may be made available by BPPR, from time to time, to those investment companies for which BPPR acts as investment advisor or co-investment advisor, shall never exceed the lesser of $200 million or 10% of BPPR’s capital. At December 31, 2019 there was no outstanding balance for these credit facilities.