BUSINESS COMBINATION

12 Months Ended

Dec. 31, 2021

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

NOTE 2 – BUSINESS COMBINATION

Effective as of

September 1, 2020

, the Corporation completed the acquisition of

BSPR

. 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 purchase price consideration over the fair value of the net assets acquired. The determination of fair value

required management to make estimates about discount rates, future expected cash flows, market conditions at the time of the

acquisition, and other future events that are highly subjective in nature and subject to change. Fair value estimates related to the

acquired assets and liabilities were 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 adjusted the original fair value estimates and goodwill by approximately $

4.2

 million.

Substantially all of the $

4.2

 million were recorded in the fourth quarter of 2020. The adjustments were 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 the acquisition date. During August 2021, the Corporation

finalized its fair value analysis of the acquired assets and assumed liabilities associated with this acquisition.

The following table summarizes the purchase price 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

$

3,382

$

1,281,008

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

540

808,177

 Commercial mortgage loans

740,919

122

741,041

 Commercial and Industrial ("C&I") loans

752,154

(390)

751,764

 Consumer loans

214,206

(488)

213,718

 Loans, net

2,514,916

(216)

2,514,700

Premises and equipment, net

12,499

-

12,499

Intangible assets

39,232

448

39,680

Other assets

144,008

(195)

143,813

Total assets and identifiable

 intangible assets acquired

5,562,132

37

5,562,169

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

(828)

1,270,495

Goodwill

$

6,303

$

4,210

$

10,513

The application of the acquisition method of accounting resulted in goodwill of $

10.5

 million, a core deposit intangible of

$

35.9

. 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.

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

5.7

years. 

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.

Merger and Restructuring Costs

Upon completion of the acquisition, the Corporation began to integrate BSPR’s operations into FirstBank’s operations. As of

December 31, 2021, the Corporation has completed all systems integration efforts and finalized personnel and functions integrations.

Acquisition and restructuring costs are expensed as incurred. To the extent there are additional costs associated with the integration,

the costs will be recognized based on the nature and timing of these integration actions. The Corporation recognized cumulative

acquisition expenses of $

64.3

 million through December 31, 2021, of which $

26.4

 million, $

26.5

 million, and $

11.4

 million were

incurred during the years ended December 31, 2021, 2020 and 2019, respectively. Acquisition, integration, and restructuring 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, service contracts cancellation penalties, valuation services, systems conversion, and other

integration efforts, as well as accelerated depreciation charges related to planned closures and consolidation of branches in accordance

with the Corporation’s integration and restructuring plan.