Significant Events
Acquisition of Key Customer Channels and Amendments to Commercial Contracts with Evertec and Subsequent Sale of Remaining Ownership Stake in Evertec
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”), 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.
As consideration for the Business Acquisitions 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 Master Services Agreement (“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 for the quarter 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, Inc. (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.
Capital Actions
On July 12, 2022, the Corporation completed its previously announced accelerated share repurchase (“ASR”) program for the repurchase of an aggregate $400 million of Popular’s common stock, for which an initial 3,483,942 shares were delivered in March 2022 (the “March ASR Agreement”). Upon the final settlement of the March ASR Agreement, the Corporation received an additional 1,582,922 shares of common stock and recognized approximately $120 million as treasury stock with a corresponding increase in its capital surplus account. The Corporation repurchased a total of 5,066,864 shares at an average purchase price of $78.9443 under the March ASR Agreement.
On August 25, 2022, the Corporation announced that, on August 24, 2022, it entered into another ASR agreement to repurchase an aggregate of $231 million of Popular’s common stock (the “August ASR Agreement”). The $231 million in Popular’s common stock being repurchased pursuant to the August ASR Agreement is equal to the sum of the remaining $100 million in common stock repurchases contemplated as part of the Corporation’s 2022 capital actions, announced on January 12, 2022, and the after-tax gain recognized by the Corporation as a result of the sale of its remaining shares common stock of Evertec, announced on August 15, 2022. Under the terms of the August ASR agreement, on August 26, 2022, the Corporation made an initial payment of $231 million and received an initial delivery of 2,339,241 shares of Popular’s Common Stock (the “Initial Shares”). The transaction was accounted for as a treasury stock transaction. Furthermore, as a result of the receipt of the Initial Shares, the Corporation recognized in shareholders’ equity approximately $185 million in treasury stock and $46 million as a reduction of capital surplus. Upon the final settlement of the August ASR Agreement, the Corporation expects to further adjust its treasury stock and capital surplus accounts to reflect the final delivery or receipt of cash or shares, which will depend on the volume-weighted average price of the Corporation’s common stock during the term of the ASR agreement, less a discount. The final settlement of the August ASR agreement is expected to occur no later than the fourth quarter of 2022.
Hurricanes Fiona and Ian
On September 18, 2022, Hurricane Fiona made landfall in the southwest area of Puerto Rico as a Category 1 hurricane, bringing record rainfall and flooding throughout the island and affecting communities where BPPR does business. Hurricane Fiona’s rain and winds caused a complete blackout on the island and caused considerable damage to certain sectors in the southwest region. President Biden issued a disaster declaration for the island. While the impact to BPPR’s operation was not material, certain customers, highly concentrated in certain municipalities, were impacted by the disaster.
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