XML 60 R9.htm IDEA: XBRL DOCUMENT v2.4.0.6
Business Combinations
 12 Months Ended
Dec. 31, 2012
Business Combination, Description  
Business Combination Disclosure [Text Block]

NOTE 2 – BUSINESS COMBINATIONS

 

BBVAPR Acquisition

 

On December 18, 2012, the Group purchased from BBVA, all of the outstanding common stock of each of BBVAPR Holding and BBVA Securities for an aggregate purchase price of $500 million. Immediately following the closing of the BBVAPR Acquisition, the Group merged BBVAPR Bank with and into Oriental Bank, with Oriental Bank continuing as the surviving entity. The audited consolidated financial statements contemplate the effect of the BBVAPR Acquisition.

 

The Group has determined that the BBVAPR Acquisition constitutes a business acquisition as defined by the FASB ASC Topic 805 (“Business Combinations”). Accordingly, the assets acquired and liabilities assumed as of December 18, 2012 are presented at their relative fair values in the table below as required by that Topic. In many cases, the determination of these fair values required management to make estimates about discount rates, expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. These fair value estimates may be subject to change for up to one year after the closing date of the BBVAPR Acquisition as additional information relative to closing date fair values becomes available. The amount that the Group realizes on these assets could differ materially from the carrying value included in the audited consolidated statements of financial condition primarily as a result of changes in the timing and amount of collections on the acquired loans in future periods. The application of the acquisition method of accounting resulted in a goodwill of $61.3 million.

The following table presents the goodwill recorded in connection with the BBVAPR Acquisition

 December 18, 2012
 (In thousands)
Cash consideration$ 500,000
BBVAPR stockholder's equity  650,617
BBVAPR legacy goodwill  (116,353)
BBVAPR legacy deferred tax asset  (35,327)
Adjustments to reflect assets acquired and liabilities assumed at fair value:  
Loans, net  (118,913)
Deferred tax asset, net  85,332
Foreclosed real estate  (8,896)
Premises and equipment, net  29,067
Core deposit and customer relationship intangibles  13,533
Other assets  (25,915)
Deposits  (21,489)
Repurchase agreements, subordinated capital notes and other borrowings  (14,414)
Accrued expenses and other liabilities  1,438
Fair value of net assets acquired  438,680
Goodwill resulting from the BBVAPR Acquisition$ 61,320

Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized. None of the goodwill resulting from the BBVAPR acquisition is expected to be deductible for income tax purposes.

 

 Book Value Fair Value Fair Value
 December 18, 2012 Adjustments, net December 18, 2012
 (In thousands)
Assets        
Cash and cash equivalents$ 394,638 $ - $ 394,638
Investments  561,623   -   561,623
Loans  3,678,979   (118,913)   3,560,066
Accrued interest receivable  19,133   (18,252)   881
Foreclosed real estate  44,853   (8,896)   35,957
Deferred tax asset, net  35,327   50,005   85,332
Premises and equipment  37,412   29,067   66,479
Legacy goodwill  116,353   (116,353)   -
Core deposit intangible  -   8,473   8,473
Customer relationship intangible  -   5,060   5,060
Other assets  119,286   (7,663)   111,623
Total assets acquired  5,007,604   (177,472)   4,830,132
Liabilities        
Deposits  3,472,951   21,489   3,494,440
Securities sold under agreements to repurchase  338,020   20,465   358,485
Other borrowings  348,624   1,108   349,732
Subordinated capital notes  117,000   (7,159)   109,841
Accrued expenses and other liabilities  80,392   (1,438)   78,954
Total liabilities assumed  4,356,987   34,465   4,391,452
         
Net assets acquired$ 650,617 $ (211,937) $ 438,680
         

Fair Value of Assets Acquired and Liabilities Assumed

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. In some cases, the estimation of fair values 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. The methods used to determine the fair values of the significant assets acquired 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 fair value of financial instruments that are short-term or re-price frequently and that have little or no risk were considered to have a fair value that approximates to carrying value.

 

Investment securities – The fair value of securities, including trading securities, were based on quoted market prices, when available, or market prices provided by recognized broker-dealers. If listed prices or quotes were not available, fair value was based upon externally developed models that use both observable and unobservable inputs depending on the market activity of the instrument.

 

Federal Home Loan Bank stock - The fair value of acquired FHLB stock was estimated to be its redemption value.

 

Loans – The fair values of loans acquired in the BBVAPR Acquisition were estimated by discounting the expected cash flows from the portfolio. In estimating such fair value and expected cash flows, management made several assumptions regarding prepayments, collateral cash flows, the timing of defaults, and the loss severity of defaults. Other factors expected by market participants were considered in determining the fair value of acquired loans, including loan pool level estimated cash flows, type of loan and related collateral, risk classification status (i.e., performing or nonperforming), term of loan, whether or not the loan was amortizing, and current discount rates.

 

The methods used to estimate fair value are extremely sensitive to the assumptions and estimates used. While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets. Accordingly, there can be no assurance that this information is useful for purposes of evaluating the financial condition and/or value of the Group in and of itself or in comparison with any other company.

 

Foreclosed real estate - Foreclosed real estate and other repossessed properties (primarily vehicles) are presented at their estimated fair value. The fair values were determined using their expected selling price, less selling and carrying costs, discounted to present value.

 

Deferred taxes - Deferred income taxes relate to the differences between the book and tax bases of assets acquired and liabilities assumed in this transaction. The deferred tax asset, net assumes a tax-free merger through a stock acquisition. In a tax-free merger, BBVAPR would not recognize taxable gain or loss on the BBVAPR Acquisition date. Therefore, the tax basis of assets acquired and liabilities assumed will carry over to Oriental without consideration of fair value adjustments. The Group's effective tax rate used in measuring deferred taxes resulting from the BBVAPR Acquisition is 30%.

Premises and equipment – The fair value of premises, including land, buildings and improvements, was determined based upon appraisals by licensed appraisers. These appraisals were based upon the best and highest use of the property with final values determined based upon an analysis of the cost, sales comparison, and income capitalization approaches for each property appraised. This fair value of owned real estate resulted in an estimated premium of $29.1 million, to be amortized over the weighted average remaining useful life of the properties, estimated to be 25 years.

 

Derivative assets and liabilities - Interest rate contracts, which include interest rate swaps and other option agreements are used to modify interest characteristics of various financial instruments and are traded in OTC active markets. The fair value is based on observable market parameters, which include discounting the instruments' cash flows using the U.S. dollar LIBOR-based discount rates, and also applying yield curves that account for the industry sector and the credit rating of the counterparty and/or the Group. The fair value is obtained from an independent nationally recognized third-party model.

 

Core deposit intangible (“CDI”) - CDI is a measure of the value of non-interest checking, savings, and NOW and money market deposits that are acquired in business combinations. The fair value of the CDI stemming from the business combination is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative source of funding.

 

Customer relationship intangible (“CRI”) - CRI is a measure of the value of broker-dealer and insurance client relationships that were acquired in the business combination. The fair value was computed using a multiperiod cash flow model, a form of the income approach and 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.

 

Deposit liabilities - The fair values used for demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date. The fair values for time deposits were estimated using a discounted cash flow method that applies interest rates currently being offered on time deposits to a schedule of aggregated contractual maturities of such time deposits.

 

Securities sold under agreements to repurchase– The value of these instruments was calculated based on their contractual cash flows and discounted to present value using a market participant rate of interest.

 

Other borrowings – The value of these instruments was calculated based on their contractual cash flows and discounted to present value using a market participant rate of interest.

 

Subordinated capital notes – The value of these instruments was calculated based on their contractual cash flows and discounted to present value using a rate of interest for comparable issues.

 

Other assets and other liabilities - Given the short-term nature of these financial instruments, the carrying amounts reflected in the statement of assets acquired and liabilities assumed approximated fair value.  In accordance with the Acquisition Agreement, the Group could not hold ownership of the core banking system assets recorded in the legacy BBVAPR balance sheet because it is a proprietary system from BBVA.  Accordingly, other assets were adjusted considering this contracted provision.  The Group however contracted separately the hosting of the core banking system and a monthly fee has been assessed for the usage of BBVA's proprietary core banking system.

 

 

Financial Information — BBVAPR Acquisition

 

The Group's consolidated results of operations for 2012 include $7.8 million of net interest income and $3.7 million of net income from the results of the BBVAPR Companies from the acquisition date. Expenses relating to the BBVAPR Acquisition amounted to $7.1 million and were included in the December 31, 2012 statement of operations.

 

The following summarizes the unaudited pro forma results of operations as if the Group had acquired BBVAPR on January 1, 2011.

 

 Year ended December 31,
 2012 2011
  (In thousands)
Net interest income$ 261,885 $ 243,765
Net income  76,211   32,568
Earnings per share:     
Basic  1.27   0.38
Diluted  1.32   0.46

Merger and Restructuring Charges

 

Merger and restructuring charges are recorded in the consolidated statement of operations and include incremental costs to integrate the operations of the Group and its most recent acquisition. These charges represent costs associated with these one-time activities and do not represent ongoing costs of the fully integrated combined organization.

 

The following table presents severance and employee-related charges, systems integrations and related charges, and other merger-related charges, related to the BBVAPR Acquisition, for 2012:

 

 Year ended December 31, 2012
 (In thousands)
Severance and employee-related charges$ 2,250
Systems integrations and related charges  1,186
Other  1,554
Total merger and restructuring charges$ 4,990

Restructuring Reserve

Restructuring reserves are established by a charge to merger and restructuring charges, and the restructuring charges are included in the merger and restructuring charges table.

The following table presents the changes in restructuring reserves for 2012:

 Year ended December 31, 2012
 (In thousands)
Balance at the beginning of the year$-
Merger and restructuring charges  4,990
Cash payments and other  (788)
Balance at the end of the year$ 4,202

Payments under merger and restructuring reserves associated with the BBVAPR Acquisition are expected to continue into 2013 and will be accounted under applicable accounting guidance to the cost being incurred.

Eurobank FDIC-Assisted Acquisition and FDIC Shared-Loss Indemnification Asset

 

On April 30, 2010, the Bank acquired certain assets and assumed certain deposits and other liabilities in the FDIC-assisted acquisition of Eurobank. As part of the Purchase and Assumption Agreement between the Bank and the FDIC (the “Purchase and Assumption Agreement”), the Bank and the FDIC entered into shared-loss agreements, whereby the FDIC covers a substantial portion of any losses on loans (and related unfunded loan commitments), foreclosed real estate and other repossessed properties.

 

The acquired loans, foreclosed real estate, and other repossessed property subject to the shared-loss agreements are collectively referred to as “covered assets.” Under the terms of the shared-loss agreements, the FDIC absorbs 80% of losses and shares in 80% of loss recoveries on covered assets. The term of the shared-loss agreement covering single family residential mortgage loans is ten years with respect to losses and loss recoveries, while the term of the shared-loss agreement covering commercial loans is five years with respect to losses and eight years with respect to loss recoveries, from the April 30, 2010 acquisition date. The shared-loss agreements also provide for certain costs directly related to the collection and preservation of covered assets to be reimbursed at an 80% level.

 

The assets acquired and liabilities assumed as of April 30, 2010 were presented at their fair value. In many cases, the determination of these fair values required management to make estimates about discount rates, expected cash flows, market conditions and other future events that are highly subjective in nature and were subject to change. The fair values initially assigned to the assets acquired and liabilities assumed were preliminary and subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values became available. The process was completed on April 29, 2011.

 

The Bank agreed to make a true-up payment, also known as clawback liability, to the FDIC on the date that is 45 days following the last day (such day, the “True-Up Measurement Date”) of the final shared-loss month, or upon the final disposition of all covered assets under the shared-loss agreements in the event losses thereunder fail to reach expected levels. Under the shared-loss agreements, the Bank will pay to the FDIC 50% of the excess, if any, of: (i) 20% of the Intrinsic Loss Estimate of $906.0 million (or $181.2 million) (as determined by the FDIC) less (ii) the sum of: (A) 25% of the asset discount (per bid) (or $227.5 million); plus (B) 25% of the cumulative shared-loss payments (defined as the aggregate of all of the payments made or payable to the Bank minus the aggregate of all of the payments made or payable to the FDIC); plus (C) the sum of the period servicing amounts for every consecutive twelve-month period prior to and ending on the True-Up Measurement Date in respect of each of the shared-loss agreements during which the shared-loss provisions of the applicable shared-loss agreement is in effect (defined as the product of the simple average of the principal amount of shared-loss loans and shared-loss assets at the beginning and end of such period times 1%). The true-up payment represents an estimated liability of $15.5 million and $13.3 million, net of discount, as of December 31, 2012 and 2011, respectively. This estimated liability is accounted for as a reduction of the indemnification asset. The indemnification asset represents the portion of estimated losses covered by the shared-loss agreements between the Bank and the FDIC.

 

The operating results of the Group for 2012, 2011 and 2010 include the operating results produced by the acquired assets and assumed liabilities in the FDIC-assisted acquisition.

 

 

The FDIC shared-loss indemnification asset activity for 2012, 2011 and 2010 is as follows:

 Year Ended December 31,
 2012 2011 2010
 (In thousands)
Balance at beginning of period$ 392,367 $ 473,629 $ 545,213
Shared-loss agreements reimbursements from the FDIC   (96,664)   (75,474)   (120,675)
Increase (decrease) in expected credit losses to be covered under shared-loss agreements, net  7,041   (10,643)   43,004
(Amortization) Accretion of FDIC shared-loss indemnification asset, net  (28,022)   (3,379)   4,330
Incurred expenses to be reimbursed under shared-loss agreements  12,077   8,234   1,757
Balance at end of period$ 286,799 $ 392,367 $ 473,629
         
FDIC-Assisted Acquisition and FDIC Shared-Loss Indemnification Asset [Abstract]  
FDIC-ASSISTED ACQUISITION AND FDIC SHARED-LOSS INDEMNIFICATION ASSET

NOTE 2 – BUSINESS COMBINATIONS

 

BBVAPR Acquisition

 

On December 18, 2012, the Group purchased from BBVA, all of the outstanding common stock of each of BBVAPR Holding and BBVA Securities for an aggregate purchase price of $500 million. Immediately following the closing of the BBVAPR Acquisition, the Group merged BBVAPR Bank with and into Oriental Bank, with Oriental Bank continuing as the surviving entity. The audited consolidated financial statements contemplate the effect of the BBVAPR Acquisition.

 

The Group has determined that the BBVAPR Acquisition constitutes a business acquisition as defined by the FASB ASC Topic 805 (“Business Combinations”). Accordingly, the assets acquired and liabilities assumed as of December 18, 2012 are presented at their relative fair values in the table below as required by that Topic. In many cases, the determination of these fair values required management to make estimates about discount rates, expected cash flows, market conditions and other future events that are highly subjective in nature and subject to change. These fair value estimates may be subject to change for up to one year after the closing date of the BBVAPR Acquisition as additional information relative to closing date fair values becomes available. The amount that the Group realizes on these assets could differ materially from the carrying value included in the audited consolidated statements of financial condition primarily as a result of changes in the timing and amount of collections on the acquired loans in future periods. The application of the acquisition method of accounting resulted in a goodwill of $61.3 million.

The following table presents the goodwill recorded in connection with the BBVAPR Acquisition

 December 18, 2012
 (In thousands)
Cash consideration$ 500,000
BBVAPR stockholder's equity  650,617
BBVAPR legacy goodwill  (116,353)
BBVAPR legacy deferred tax asset  (35,327)
Adjustments to reflect assets acquired and liabilities assumed at fair value:  
Loans, net  (118,913)
Deferred tax asset, net  85,332
Foreclosed real estate  (8,896)
Premises and equipment, net  29,067
Core deposit and customer relationship intangibles  13,533
Other assets  (25,915)
Deposits  (21,489)
Repurchase agreements, subordinated capital notes and other borrowings  (14,414)
Accrued expenses and other liabilities  1,438
Fair value of net assets acquired  438,680
Goodwill resulting from the BBVAPR Acquisition$ 61,320

Goodwill represents the future economic benefits arising from net assets acquired that are not individually identified and separately recognized. None of the goodwill resulting from the BBVAPR acquisition is expected to be deductible for income tax purposes.

 

 Book Value Fair Value Fair Value
 December 18, 2012 Adjustments, net December 18, 2012
 (In thousands)
Assets        
Cash and cash equivalents$ 394,638 $ - $ 394,638
Investments  561,623   -   561,623
Loans  3,678,979   (118,913)   3,560,066
Accrued interest receivable  19,133   (18,252)   881
Foreclosed real estate  44,853   (8,896)   35,957
Deferred tax asset, net  35,327   50,005   85,332
Premises and equipment  37,412   29,067   66,479
Legacy goodwill  116,353   (116,353)   -
Core deposit intangible  -   8,473   8,473
Customer relationship intangible  -   5,060   5,060
Other assets  119,286   (7,663)   111,623
Total assets acquired  5,007,604   (177,472)   4,830,132
Liabilities        
Deposits  3,472,951   21,489   3,494,440
Securities sold under agreements to repurchase  338,020   20,465   358,485
Other borrowings  348,624   1,108   349,732
Subordinated capital notes  117,000   (7,159)   109,841
Accrued expenses and other liabilities  80,392   (1,438)   78,954
Total liabilities assumed  4,356,987   34,465   4,391,452
         
Net assets acquired$ 650,617 $ (211,937) $ 438,680
         

Fair Value of Assets Acquired and Liabilities Assumed

 

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date reflecting assumptions that a market participant would use when pricing an asset or liability. In some cases, the estimation of fair values 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. The methods used to determine the fair values of the significant assets acquired 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 fair value of financial instruments that are short-term or re-price frequently and that have little or no risk were considered to have a fair value that approximates to carrying value.

 

Investment securities – The fair value of securities, including trading securities, were based on quoted market prices, when available, or market prices provided by recognized broker-dealers. If listed prices or quotes were not available, fair value was based upon externally developed models that use both observable and unobservable inputs depending on the market activity of the instrument.

 

Federal Home Loan Bank stock - The fair value of acquired FHLB stock was estimated to be its redemption value.

 

Loans – The fair values of loans acquired in the BBVAPR Acquisition were estimated by discounting the expected cash flows from the portfolio. In estimating such fair value and expected cash flows, management made several assumptions regarding prepayments, collateral cash flows, the timing of defaults, and the loss severity of defaults. Other factors expected by market participants were considered in determining the fair value of acquired loans, including loan pool level estimated cash flows, type of loan and related collateral, risk classification status (i.e., performing or nonperforming), term of loan, whether or not the loan was amortizing, and current discount rates.

 

The methods used to estimate fair value are extremely sensitive to the assumptions and estimates used. While management attempted to use assumptions and estimates that best reflected the acquired loan portfolios and current market conditions, a greater degree of subjectivity is inherent in these values than in those determined in active markets. Accordingly, there can be no assurance that this information is useful for purposes of evaluating the financial condition and/or value of the Group in and of itself or in comparison with any other company.

 

Foreclosed real estate - Foreclosed real estate and other repossessed properties (primarily vehicles) are presented at their estimated fair value. The fair values were determined using their expected selling price, less selling and carrying costs, discounted to present value.

 

Deferred taxes - Deferred income taxes relate to the differences between the book and tax bases of assets acquired and liabilities assumed in this transaction. The deferred tax asset, net assumes a tax-free merger through a stock acquisition. In a tax-free merger, BBVAPR would not recognize taxable gain or loss on the BBVAPR Acquisition date. Therefore, the tax basis of assets acquired and liabilities assumed will carry over to Oriental without consideration of fair value adjustments. The Group's effective tax rate used in measuring deferred taxes resulting from the BBVAPR Acquisition is 30%.

Premises and equipment – The fair value of premises, including land, buildings and improvements, was determined based upon appraisals by licensed appraisers. These appraisals were based upon the best and highest use of the property with final values determined based upon an analysis of the cost, sales comparison, and income capitalization approaches for each property appraised. This fair value of owned real estate resulted in an estimated premium of $29.1 million, to be amortized over the weighted average remaining useful life of the properties, estimated to be 25 years.

 

Derivative assets and liabilities - Interest rate contracts, which include interest rate swaps and other option agreements are used to modify interest characteristics of various financial instruments and are traded in OTC active markets. The fair value is based on observable market parameters, which include discounting the instruments' cash flows using the U.S. dollar LIBOR-based discount rates, and also applying yield curves that account for the industry sector and the credit rating of the counterparty and/or the Group. The fair value is obtained from an independent nationally recognized third-party model.

 

Core deposit intangible (“CDI”) - CDI is a measure of the value of non-interest checking, savings, and NOW and money market deposits that are acquired in business combinations. The fair value of the CDI stemming from the business combination is based on the present value of the expected cost savings attributable to the core deposit funding, relative to an alternative source of funding.

 

Customer relationship intangible (“CRI”) - CRI is a measure of the value of broker-dealer and insurance client relationships that were acquired in the business combination. The fair value was computed using a multiperiod cash flow model, a form of the income approach and 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.

 

Deposit liabilities - The fair values used for demand and savings deposits are, by definition, equal to the amount payable on demand at the reporting date. The fair values for time deposits were estimated using a discounted cash flow method that applies interest rates currently being offered on time deposits to a schedule of aggregated contractual maturities of such time deposits.

 

Securities sold under agreements to repurchase– The value of these instruments was calculated based on their contractual cash flows and discounted to present value using a market participant rate of interest.

 

Other borrowings – The value of these instruments was calculated based on their contractual cash flows and discounted to present value using a market participant rate of interest.

 

Subordinated capital notes – The value of these instruments was calculated based on their contractual cash flows and discounted to present value using a rate of interest for comparable issues.

 

Other assets and other liabilities - Given the short-term nature of these financial instruments, the carrying amounts reflected in the statement of assets acquired and liabilities assumed approximated fair value.  In accordance with the Acquisition Agreement, the Group could not hold ownership of the core banking system assets recorded in the legacy BBVAPR balance sheet because it is a proprietary system from BBVA.  Accordingly, other assets were adjusted considering this contracted provision.  The Group however contracted separately the hosting of the core banking system and a monthly fee has been assessed for the usage of BBVA's proprietary core banking system.

 

 

Financial Information — BBVAPR Acquisition

 

The Group's consolidated results of operations for 2012 include $7.8 million of net interest income and $3.7 million of net income from the results of the BBVAPR Companies from the acquisition date. Expenses relating to the BBVAPR Acquisition amounted to $7.1 million and were included in the December 31, 2012 statement of operations.

 

The following summarizes the unaudited pro forma results of operations as if the Group had acquired BBVAPR on January 1, 2011.

 

 Year ended December 31,
 2012 2011
  (In thousands)
Net interest income$ 261,885 $ 243,765
Net income  76,211   32,568
Earnings per share:     
Basic  1.27   0.38
Diluted  1.32   0.46

Merger and Restructuring Charges

 

Merger and restructuring charges are recorded in the consolidated statement of operations and include incremental costs to integrate the operations of the Group and its most recent acquisition. These charges represent costs associated with these one-time activities and do not represent ongoing costs of the fully integrated combined organization.

 

The following table presents severance and employee-related charges, systems integrations and related charges, and other merger-related charges, related to the BBVAPR Acquisition, for 2012:

 

 Year ended December 31, 2012
 (In thousands)
Severance and employee-related charges$ 2,250
Systems integrations and related charges  1,186
Other  1,554
Total merger and restructuring charges$ 4,990

Restructuring Reserve

Restructuring reserves are established by a charge to merger and restructuring charges, and the restructuring charges are included in the merger and restructuring charges table.

The following table presents the changes in restructuring reserves for 2012:

 Year ended December 31, 2012
 (In thousands)
Balance at the beginning of the year$-
Merger and restructuring charges  4,990
Cash payments and other  (788)
Balance at the end of the year$ 4,202

Payments under merger and restructuring reserves associated with the BBVAPR Acquisition are expected to continue into 2013 and will be accounted under applicable accounting guidance to the cost being incurred.

Eurobank FDIC-Assisted Acquisition and FDIC Shared-Loss Indemnification Asset

 

On April 30, 2010, the Bank acquired certain assets and assumed certain deposits and other liabilities in the FDIC-assisted acquisition of Eurobank. As part of the Purchase and Assumption Agreement between the Bank and the FDIC (the “Purchase and Assumption Agreement”), the Bank and the FDIC entered into shared-loss agreements, whereby the FDIC covers a substantial portion of any losses on loans (and related unfunded loan commitments), foreclosed real estate and other repossessed properties.

 

The acquired loans, foreclosed real estate, and other repossessed property subject to the shared-loss agreements are collectively referred to as “covered assets.” Under the terms of the shared-loss agreements, the FDIC absorbs 80% of losses and shares in 80% of loss recoveries on covered assets. The term of the shared-loss agreement covering single family residential mortgage loans is ten years with respect to losses and loss recoveries, while the term of the shared-loss agreement covering commercial loans is five years with respect to losses and eight years with respect to loss recoveries, from the April 30, 2010 acquisition date. The shared-loss agreements also provide for certain costs directly related to the collection and preservation of covered assets to be reimbursed at an 80% level.

 

The assets acquired and liabilities assumed as of April 30, 2010 were presented at their fair value. In many cases, the determination of these fair values required management to make estimates about discount rates, expected cash flows, market conditions and other future events that are highly subjective in nature and were subject to change. The fair values initially assigned to the assets acquired and liabilities assumed were preliminary and subject to refinement for up to one year after the closing date of the acquisition as new information relative to closing date fair values became available. The process was completed on April 29, 2011.

 

The Bank agreed to make a true-up payment, also known as clawback liability, to the FDIC on the date that is 45 days following the last day (such day, the “True-Up Measurement Date”) of the final shared-loss month, or upon the final disposition of all covered assets under the shared-loss agreements in the event losses thereunder fail to reach expected levels. Under the shared-loss agreements, the Bank will pay to the FDIC 50% of the excess, if any, of: (i) 20% of the Intrinsic Loss Estimate of $906.0 million (or $181.2 million) (as determined by the FDIC) less (ii) the sum of: (A) 25% of the asset discount (per bid) (or $227.5 million); plus (B) 25% of the cumulative shared-loss payments (defined as the aggregate of all of the payments made or payable to the Bank minus the aggregate of all of the payments made or payable to the FDIC); plus (C) the sum of the period servicing amounts for every consecutive twelve-month period prior to and ending on the True-Up Measurement Date in respect of each of the shared-loss agreements during which the shared-loss provisions of the applicable shared-loss agreement is in effect (defined as the product of the simple average of the principal amount of shared-loss loans and shared-loss assets at the beginning and end of such period times 1%). The true-up payment represents an estimated liability of $15.5 million and $13.3 million, net of discount, as of December 31, 2012 and 2011, respectively. This estimated liability is accounted for as a reduction of the indemnification asset. The indemnification asset represents the portion of estimated losses covered by the shared-loss agreements between the Bank and the FDIC.

 

The operating results of the Group for 2012, 2011 and 2010 include the operating results produced by the acquired assets and assumed liabilities in the FDIC-assisted acquisition.

 

 

The FDIC shared-loss indemnification asset activity for 2012, 2011 and 2010 is as follows:

 Year Ended December 31,
 2012 2011 2010
 (In thousands)
Balance at beginning of period$ 392,367 $ 473,629 $ 545,213
Shared-loss agreements reimbursements from the FDIC   (96,664)   (75,474)   (120,675)
Increase (decrease) in expected credit losses to be covered under shared-loss agreements, net  7,041   (10,643)   43,004
(Amortization) Accretion of FDIC shared-loss indemnification asset, net  (28,022)   (3,379)   4,330
Incurred expenses to be reimbursed under shared-loss agreements  12,077   8,234   1,757
Balance at end of period$ 286,799 $ 392,367 $ 473,629