FG Bancorp (NYSE: OFG) and Scotiabank (NYSE: BNS) have announced the signing of a definitive agreement for OFG’s subsidiary, Oriental Bank, to acquire Scotiabank’s Puerto Rico operation for $550 million USD in cash and Scotiabank’s US Virgin Island (USVI) branch operation for a $10 million deposit premium subject to customary regulatory approvals.. Scotiabank’s Puerto Rico and USVI operations will be merged into Oriental Bank and its related businesses.
Upon consummation of the acquisition, Oriental Bank will significantly increase the number of clients served as well as its core deposit funding. The resulting loan portfolio will be approximately a third each in commercial loans, residential mortgages, and consumer loans and leases.
In recent years, Scotiabank has improved the credit quality of its portfolios in Puerto Rico and USVI. Total non-performing assets declined by 62% from 2016 to first quarter 2019, and total direct PR government exposure is no longer significant.
“The acquisition provides the combined companies with greater prospects for growth, profitability and employee engagement,” said José Rafael Fernández, President, CEO and Vice Chairman of the Board of OFG and Oriental Bank. “It is also an excellent opportunity to deploy OFG’s excess capital to accelerate the implementation of our differentiation strategy, enhance financial performance, and increase shareholder value. We are combining two excellent banks to create a strongly capitalized, market leading institution focused on the needs of consumers and businesses in Puerto Rico and the US Virgin Islands.”
As of March 31, 2019, Scotiabank’s Puerto Rico and USVI operations had $2.5 billion in net loans, $3.2 billion in deposits, 21 branches, 225 ATMs, and approximately 1,000 employees. This adds to OFG’s $4.4 billion in net loans, $4.9 billion in deposits, 37 branches, 206 ATMs and Interactive Teller Machines, and 1,394 employees.
Added Fernandez: “Ganesh Kumar, our Senior Executive Vice President and Chief Operating Officer, will lead the integration team. Following its 2012 acquisition, Dr. Kumar supervised the very successful incorporation of BBVA PR’s $3.7 billion in loans and $3.3 billion in deposits.”
The acquisition price of $550 million takes into account Scotiabank Puerto Rico’s plan to upstream a $500 million dividend to its parent. Prior to closing, Scotiabank Puerto Rico may elect to pay additional dividends to its parent of up to $125 million. If that happens, the purchase price will be adjusted downward by the amount of the additional dividends.
- The acquisition has been unanimously approved by OFG’s and Oriental Bank’s Boards of Directors.
The transaction is subject to approval by the Board of Governors of the Federal Reserve System, the FDIC, the Commissioner of Financial Institutions of Puerto Rico, and USVI banking authorities, as well as other customary closing conditions.
Keefe, Bruyette & Woods, Inc. served as financial advisor for OFG, and Skadden, Arps, Slate, Meagher & Flom LLP served as its legal advisor.
The transaction is expected to be highly positive for OFG:
Based on current estimates, the acquisition is expected to be approximately 40% accretive to earnings per share in 2020 on a pro forma basis. Projected annual cost savings are anticipated at about 25% of Scotiabank PR’s non-interest expenses. Approximately 75% of the savings are expected to be realized in 2020. Savings are expected to result from more efficient back office operations and vendor consolidation and efficiencies.
OFG expects to incur certain one-time restructuring charges of approximately $45 million in connection with the transaction. Tangible book value per share is expected to be diluted by approximately 15% at close of the transaction, with an expected earnback in less than three years based on the crossover method.