Business Combinations

6 Months Ended

Jun. 30, 2020

Business Combinations

Business Combinations

Note 5 – Business Combinations

Acquisition of Owens Realty Mortgage, Inc.    

On November 7, 2018, the Company entered into an Agreement and Plan of Merger as amended, (the “Merger Agreement”) with ORM, a specialty finance company that focused on the origination, investment, and management of commercial real estate loans. Pursuant to the Merger Agreement, the Company acquired ORM in a stock-for-stock transaction with an aggregate purchase price equal to 99.0% of ORM’s book value. Upon the closing, each outstanding share of ORM’s common stock was converted into the right to receive 1.441 shares of the Company common stock, based on a fixed exchange ratio.  

On March 29, 2019, the Company completed the acquisition of ORM, through a merger of ORM with and into a wholly owned subsidiary of the Company, in exchange for approximately 12.2 million shares of the Company’s common stock. The total purchase price for the merger of $179.3 million consisted exclusively of the Company’s common stock issued in exchange for shares of ORM common stock and cash paid in lieu of fractional shares of the Company’s common stock, and was based on the $14.67 closing price of the Company’s common stock on March 29, 2019.

    The consideration transferred was allocated to the assets acquired and liabilities assumed based on their respective fair values. The methodologies used and key assumptions made to estimate the fair value of the assets acquired and liabilities assumed are primarily based on future cash flows and discount rates. The following table summarizes the fair value of assets acquired and liabilities assumed from the merger:

(In Thousands)	March 29, 2019
Assets
Cash and cash equivalents	$	10,822
Loans		130,449
Real estate, held for sale		67,973
Investment in unconsolidated joint ventures		8,619
Other assets
Deferred tax assets		4,660
Accrued interest		1,209
Other		379
Total assets acquired	$	224,111
Liabilities
Secured borrowings		12,713
Accounts payable and other accrued liabilities		1,000
Due to Manager		228
Deferred tax liabilities		123
Total liabilities assumed	$	14,064
Net assets acquired	$	210,047

For acquired loan receivables, the gross contractual unpaid principal acquired is $134.8 million and we expect to collect all contractual amounts.

The aggregate consideration transferred, net assets acquired, and the related bargain purchase gain was as follows:

Total consideration transferred (in thousands, except share and per share data)
FV of net assets acquired	$	210,047
ORM shares outstanding at March 29, 2019		8,482,880
Exchange ratio	x	1.441
Shares issued		12,223,830
Market price as of March 29, 2019	$	14.67
Total consideration transferred based on value of shares issued	$	179,324
Bargain purchase gain	$	30,728

Based on the calculation, the Company has determined the transaction resulted in a bargain purchase gain, which is predominantly the result of changes in the market price of the Company’s common stock between the determination date and the closing date of the transaction. This gain is reflected separately within the unaudited interim consolidated statements of income under gain on bargain purchase.

Acquisition-related costs directly attributable to the ORM Merger, including legal, accounting, valuation, and other professional or consulting fees, totaling $0.6 million and $6.0 million for the three and six months ended June 30, 2019, were expensed as incurred and are reflected separately within the unaudited interim consolidated statements of income.

The following pro-forma income and earnings (unaudited) of the combined company are presented for the three months ended March 31, 2019, as if the merger had occurred on January 1, 2019:

		For the three months ended
(In Thousands)		March 31, 2019
Selected Financial Data
Interest income	$	51,543
Interest expense		(36,323)
Provision for loan losses		(518)
Non-interest income		27,031
Non-interest expense		(37,721)
Income before provision for income taxes		4,012
Income tax benefit (provision)		2,996
Net income	$	7,008

Non-recurring pro-forma transaction costs directly attributable to the merger were $8.4 million for the three months ended March 31, 2019 and have been deducted from the non-interest expense amount above. These costs included legal, accounting, valuation, and other professional or consulting fees directly attributable to the merger. The Company excluded the bargain purchase gain of $30.7 million from the amount above.

Acquisition of Knight Capital

On October 25, 2019, the Company acquired Knight Capital. Knight Capital is a technology-driven platform that provides working capital to small and medium businesses across the U.S. Through its platform, Knight Capital supports business operations by offering a faster alternative to conventional bank funding. The total purchase price for the merger of $27.8 million consists of $17.5 million of cash and $10.3 million of Ready Capital common stock.

The purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values. The following table summarizes the fair value of assets acquired and liabilities assumed from the merger:

(In Thousands)	October 25, 2019
Assets
Cash and cash equivalents	$	1,673
Purchased future receivables,		39,540
Prepaid expenses and other		1,265
Intangible assets		5,880
Total assets acquired	$	48,358
Liabilities
Secured borrowings		30,600
Accounts payable and other accrued liabilities		1,173
Total liabilities assumed	$	31,773
Net assets acquired	$	16,585

The aggregate consideration transferred, net assets acquired, and the related goodwill was as follows:

Total Consideration Transferred (in thousands)
Cash consideration	$	17,500
Common stock consideration		10,290
Total consideration transferred	$	27,790
Net Tangible Assets	$	10,705
Identified Intangible Assets		5,880
FV of net assets acquired	$	16,585
Goodwill	$	11,205

The acquired intangible assets are definite-lived assets consisting of technology, brokers network and trade name. The estimated fair values of the technology and brokers network were determined using the cost replacement method, and the fair value of the trade name was determined using the relief from royalty method. The estimated fair values of the intangible assets are primarily based on cost assumptions such as replacement costs, which management believes are reasonable. The fair value of the intangible assets with definite lives is as follows):

(In Thousands)	Fair Value		Weighted Average Amortization Life
Internally developed software	$	3,800	6 years
Broker network		1,200	4.5 years
Trade name		880	6 years
Total Intangible Assets	$	5,880	6 years

Goodwill of $11.2 million was recognized in connection with the Company’s acquisition of Knight Capital as the consideration paid exceeded the fair value of the net assets acquired.

The following pro-forma income and earnings (unaudited) of the combined company are presented for the three and six months ended June 30, 2019, as if the merger had occurred on January 1, 2019:

		For the three months ended		For the six months ended
(In Thousands)		June 30, 2019		June 30, 2019
Selected Financial Data
Interest income	$	57,034	$	105,787
Interest expense		(35,753)		(71,528)
Provision for loan losses		(1,348)		(1,866)
Non-interest income		48,623		120,548
Non-interest expense		(55,764)		(113,364)
Income before provision for income taxes		12,792		39,577
Income tax benefit		2,956		5,959
Net income	$	15,748	$	45,536