BUSINESS COMBINATION

12 Months Ended

Dec. 31, 2020

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

NOTE 2 – BUSINESS COMBINATION

Effective as of September 1, 2020, the Corporation completed its previously announced acquisition of BSPR pursuant to the Stock Purchase Agreement. The transaction was structured as an all-cash acquisition of all of the issued and outstanding common stock of Santander Bancorp, a financial holding company that offered a full range of financial services through its banking subsidiary BSPR, a corporation incorporated under the laws of the Commonwealth of Puerto Rico and the sole shareholder of Santander Insurance Agency, Inc. The preliminary consideration for the acquisition amounted to approximately (i) $387.8 million for 117.5% of BSPR’s core tangible common equity, comprised of a $57.8 million premium on $330 million of core tangible common equity, plus (ii) $892.2 million for BSPR’s excess capital (paid at par), which represents the estimated closing payment pursuant to the terms of the Stock Purchase Agreement.

As part of the conditions to close, Santander Holdings USA, Inc., Santander Bancorp’s parent, agreed to sell or otherwise transfer to Santander Holdings USA, Inc., any of its affiliates or any other third party (other than BSPR) (i) all non-performing assets (along with all collateral and rights to collection related thereto) of BSPR (the “Non-Performing Assets Transfer”), and (ii) Santander Asset Management, LLC, a limited liability company organized under the laws of the Commonwealth of Puerto Rico and a direct wholly-owned subsidiary of Santander Bancorp.

The acquisition of BSPR expands the Corporation’s presence in Puerto Rico, increases its operational scale and strengthens its competitiveness in consumer, commercial, business banking, and residential lending. The acquisition also allowed the Corporation to increase its deposit base at a lower cost, which enhances FirstBank’s funding and risk profile.

The Corporation accounted for the acquisition as a business combination in accordance with ASC 805. Accordingly, the Corporation recorded the assets and liabilities assumed, as of the date of the acquisition, at their respective fair values and allocated to goodwill the excess of the merger consideration over the fair value of the net assets acquired. The determination of fair value requires management to make estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. Fair value estimates related to the acquired assets and liabilities are subject to adjustment for up to one year after the closing date of the acquisition as additional information relative to the closing date fair values becomes available and such information is considered final, whichever is earlier. Since the acquisition, the Corporation has made a net adjustment to goodwill of approximately $4.2 million, primarily related to post-closing purchase price adjustments to account for differences between BSPR’s actual excess capital at closing date compared to the BSPR’s excess capital amount used for the preliminary closing statement at acquisition date, and may in the future make further adjustments to goodwill.

The following table summarizes the preliminary consideration and estimated fair values of assets acquired and liabilities assumed from BSPR as of September 1, 2020 under the acquisition method of accounting:

	Fair Value as Originally		Measurement Period		Fair Value as
(In thousands)	Recorded		Adjustments		Remeasured
Total purchase price consideration	$	1,277,626	$	2,798	$	1,280,424
Fair value of assets acquired:
Cash and cash equivalents	$	1,684,252	$	-	$	1,684,252
Investment securities		1,167,225		-		1,167,225
Residential mortgage loans		807,637		(216)		807,421
Commercial mortgage loans		740,919		-		740,919
Commercial and Industrial loans		752,154		-		752,154
Consumer loans		214,206		-		214,206
Loans, net		2,514,916		(216)		2,514,700
Premises and equipment, net		12,499		-		12,499
Intangible assets		39,232		-		39,232
Other assets		144,008		(352)		143,656
Total assets and identifiable
intangible assets acquired		5,562,132		(568)		5,561,564
Fair value of liabilities assumed:
Deposits	$	4,194,940	$	-	$	4,194,940
Other liabilities		95,869		865		96,734
Total liabilities assumed		4,290,809		865		4,291,674
Fair value of net assets and identifiable
intangible assets acquired		1,271,323		(1,433)		1,269,890
Goodwill	$	6,303	$	4,231	$	10,534

The application of the acquisition method of accounting resulted in goodwill of $10.5 million, a core deposit intangible of $35.4 million, and purchased credit card relationships of $3.8 million, which are included in the Corporation’s consolidated statement of financial condition. Goodwill recognized in this transaction is not deductible for income tax purposes. Refer to Note 14 – Goodwill, to the consolidated financial statements, for additional information about goodwill and other intangibles recognized as part of the transaction.

As of December 31, 2020, the purchase price remains subject to final adjustments as certain estimates related to the acquired loan portfolio, intangible assets, and certain other assets and liabilities are subject to continuing refinement. The Corporation continues to review information relating to events or circumstances existing as of the acquisition date and expects to finalize its analysis of the acquired assets and assumed liabilities over the next few months. Management anticipates that this review could result in adjustments to the acquisition date valuation amounts presented herein but does not anticipate that these adjustments, if any, would be material.

Fair Value of Identifiable Assets Acquired and Liabilities Assumed

The methods used to determine the fair values of the significant identifiable assets and liabilities assumed are described below:

Cash and cash equivalents - Cash and cash equivalents include cash and due from banks, and interest-earning deposits with banks and the Federal Reserve System. The Corporation determined that the fair values of financial instruments that are short-term or re-price frequently and that have little or no risk approximate the carrying values.

Investment securities available for sale and held to maturity - The fair values of securities available for sale were based on observable inputs obtained from market transactions in similar securities. The fair value of held to maturity securities acquired in the BSPR acquisition, consisting of Puerto Rico municipal bonds, was determined based on the discounted cash flow method used for the valuation of loans described below. These held to maturity securities were identified as PCD debt securities at acquisition and had a fair value of $55.5 million and a contractual balance of $67.1 million as of the acquisition date. The Corporation established an initial ACL for PCD debt securities of $1.3 million, which represents the discount embedded in the purchase price that is attributable to credit losses, through an adjustment to the acquired debt securities amortized cost and the ACL.

Loans – The Corporation calculated the fair value of loans acquired in the BSPR acquisition using an income approach. Under this approach, fair value is measured by the present value of the net economic benefits to be received over the life of the loan. The fair value was estimated based on a discounted cash flow method under which the present value of the contractual cash flows was calculated based on certain valuation assumptions such as default rates, loss severity, and prepayment rates, consistent with the Corporation’s CECL methodology, and discounted using a market rate of return that accounts for both the time value of money and investment risk factors. The discount rate utilized to analyze fair value considered the cost of funds rate, capital charge, servicing costs, and liquidity premium, mostly based on industry standards. The Corporation segmented the loan portfolio into two groups: non-PCD loans and PCD loans. Then loans within each group were pooled based on similar characteristics, such as loan type (i.e., residential mortgage, commercial and industrial, and consumer loans), credit scores, loan-to-value, fixed or adjustable interest rates, and credit risk ratings. The Corporation valued commercial mortgage loans at the loan level. Non-PCD loans and PCD loans had a fair value of $1.8 billion and $752.8 million, respectively, as of the acquisition date and a contractual balance of $1.8 billion and $786.0 million, respectively, as of the same date. In accordance with U.S. GAAP, there was no carryover of the ACL that had been previously recorded by BSPR. The Corporation recorded an initial ACL of $38.9 million for non-PCD loans (including unfunded commitments) through an increase to the provision for credit losses. The Corporation established an initial ACL for PCD loans of $28.7 million through an adjustment to the acquired loan balance and the ACL.

Core deposit intangible (“CDI”) - The Corporation determined the CDI on non-maturing deposits by evaluating the underlying characteristics of the deposit relationships, including customer attrition, deposit interest rates and maintenance costs, and costs of alternative funding using the discounted cash flow approach. Under this method, the value of the core deposit intangible was measured by the present value of the difference, or spread, between the ongoing cost of the acquired deposit base and the cost of the next best alternative source of funding, to be amortized using a straight-line method over a weighted average useful life of 5.7years.

Purchased credit card receivable intangible (“PCCR”) – PCCR is the value of credit card client relationships that were acquired in the business combination. The Corporation computed the fair value using a multi-period cash flow model, which it discounted using an appropriate risk-adjusted discount rate. This measure of fair value requires considerable judgments about future events, including customer retention and attrition estimates. The fair value is amortized using an accelerated method over a useful life of 3 years.

Deposits - The fair values used for non-maturity deposits such as demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date. In determining the fair value of certificates of deposit, the cash flows of the contractual interest payments during the specific period of the certificates of deposit and scheduled principal payout were discounted to present value at market-based interest rates. The fair value is amortized over a weighted average useful life of 1.2 years based on the maturity buckets for the time deposits established in the valuation determination.

Pro Forma Financial Information

The following table presents the unaudited combined pro forma results as if the acquisition of BSPR had been completed on January 1, 2019 and includes the impact of amortizing and accreting certain estimated purchase accounting adjustments, such as for intangible assets, as well as the impact of fair value adjustments to loans and deposits. In addition, the initial ACL for non-PCD loans acquired from BSPR of approximately $38.9 million recorded in the year ended December 31, 2020 was eliminated as a pro forma adjustment to the net income in 2020 given the pro forma assumes the acquisition occurred on January 1, 2019, where the recognition of the adjustment related to the adoption of CECL on January 1, 2020 would have been recorded as a cumulative effect adjustment to retained earnings rather-than in earnings for the year ended December 31, 2020. These estimates are subject to change under the one-year remeasurement period. The pro forma information does not necessarily indicate the financial results of the combined companies had the companies actually been combined at the beginning of the period presented or the results that may be achieved in the future. The unaudited pro forma information also does not consider any potential impacts of potential revenue enhancements, anticipated cost savings and expense efficiencies, or asset dispositions, among other factors.

	Unaudited Pro Forma Results
		Year Ended	Year Ended
		December 31,	December 31,
(In thousands)		2020	2019
Net interest income	$	722,556	$	789,938
Non-interest income		132,180		129,303
Net income		183,972		213,311

Pro-forma earnings for the year ended December 31, 2020 were adjusted to exclude the $26.5 million and $2.0 million of merger and restructuring costs incurred by the Corporation and BSPR, respectively, in 2020. Pro-forma earnings for the year ended December 31, 2019 were adjusted to include these costs.

Disclosure of the amount of revenue and net income of BSPR since the effective date of the acquisition included in the Corporation’s consolidated statements of income is impracticable due to the integration of operations and accounting for mergers and acquisitions.

Merger and Restructuring Costs

Upon completion of the acquisition, the Corporation began to integrate BSPR’s operations into FirstBank’s operations. Over the next several months, the Corporation expects to refine the integration process, which the Corporation expects to complete during the second and third quarters of 2021. Management is still in the process of assessing personnel, technology systems, service contracts and other key factors to determine the most beneficial structure for the combined company. Certain decisions arising from these assessments may involve changes in information systems, cancellations of existing contracts and other actions. To the extent there are costs associated with these actions, the costs will be recognized based on the nature and timing of these integration actions. Most acquisition and restructuring costs are expensed, as incurred. The Corporation recognized cumulative acquisition expenses of $37.9 million through December 31, 2020, of which $26.5 million and $11.4 million were incurred during the years ended December 31, 2020 and 2019, respectively. Acquisition expenses were included in merger and restructuring costs in the consolidated statements of income, and consisted primarily of legal fees, severance and personnel-related costs, valuation services, systems conversion, and other integration efforts.