XML 35 R9.htm IDEA: XBRL DOCUMENT
v3.19.3.a.u2

Business Combinations and Intangible Assets | 12 Months Ended
--- | ---
Dec. 31, 2019
Business Combinations and Intangible Assets [Abstract] |
Business Combination and Intangible Assets | NOTE 2 – BUSINESS COMBINATIONS AND INTANGIBLE ASSETS On December 31, 2019, Oriental purchased from the Bank of Nova Scotia (“BNS”) all outstanding common stock of Scotiabank de Puerto Rico for an aggregate purchase price of $55 0.0 million, subject to settlement amounts as described herein. Immediately following the closing, Oriental merged Scotiabank de Puerto Rico with and into Oriental Bank, with Oriental Bank continuing as the surviving entity. As part of this transaction, Or iental Bank also acquired the U.S. Virgin Islands banking operations of BNS through an acquisition of certain assets (including loans, ATMs and physical branch locations) and an assumption of certain liabilities (including deposits) for their net book valu e plus a $1 0.0 million premium on deposits which were settled as part of the final consideration from the acquisition. In addition, Oriental acquired certain loans and assumed certain liabilities, from BNS’s Puerto Rico branch for their net book value whic h were settled as part of the final consideration from the acquisition. As a result of the acquisition, Oriental added $2.2 billion net loans and $3.0 billion dollars in core low-cost deposits and resulted in a bargain purchase gain of $315 thousand, inclu ded as “Bargain purchase from Scotiabank PR & USVI acquisition” in the Consolidated Sta tement of Operations. The reason for the bargain purchase gain is likely due to the pricing strategy on the deal and the value of acquired tax benefits which are conside red realizable based on the combined results. The audited consolidated financial statements contemplate the effect of the Scotiabank PR & USVI Acquisition. Oriental entered into the S cotiabank PR & USVI Acquisition as part of its growth strategy to increase its market share and improve its core deposit base and competitive positioning.
Cash consideration (in thousands): |  |
SBPR purchase price | $ | 550,000
Premium on USVI deposits |  | 10,000
BNS USVI net liabilities assumed |  | (182,244)
BNS PR net assets acquired |  | 52,681
Total cash consideration |  | 430,437
Cash consideration paid on December 31, 2019 |  | 425,242
Cash consideration payable | $ | 5,195
The following amounts represent the preliminary determination of the fair value of identifiable assets acquired and liabilities assumed from the Scotiabank PR & USVI Acquisition. The final determination of the fair value of certain assets and liabilities will be completed up to a one-year measurement period from the date of acquisition as required by the FASB ASC Topic 805, “Business Combinations”. As of December 31, 2019, we continued to analyze the assumptions and related valuation results a ssociated with the acquired loans. Due to the complexity in valuing the loans and the significant amount of data inputs required, the valuation of the loans, including unfunded lending-related commitments, is not yet final. The table below reflects provisi onal adjustments recorded as of December 31, 2019. Any additional potential adjustment could be material in relation to the preliminary values presented below:
| December 31, 2019
|  |  |  | Fair Value |  |  |
| Book Value |  | Adjustments, net |  | Fair Value
| (In thousands)
Cash and cash equivalents | $ | 492,512 |  | $ | - |  | $ | 492,512
Investments |  | 576,319 |  |  | (102) |  |  | 576,217
Loans |  | 2,237,337 |  |  | (21,134) |  |  | 2,216,203
Accrued interest receivable |  | 7,722 |  |  | (2,952) |  |  | 4,770
Foreclosed real estate |  | 8,636 |  |  | (352) |  |  | 8,284
Deferred tax asset, net |  | 37,606 |  |  | 22,335 |  |  | 59,941
Premises and equipment |  | 10,866 |  |  | (1,068) |  |  | 9,798
Servicing asset |  | 40,258 |  |  | 206 |  |  | 40,464
Core deposit intangible |  | - |  |  | 41,507 |  |  | 41,507
Customer relationship intangible |  | - |  |  | 12,693 |  |  | 12,693
Other intangible |  | - |  |  | 567 |  |  | 567
Operating lease right-of-use assets |  | 15,452 |  |  | 4,011 |  |  | 19,463
Other assets |  | 86,016 |  |  | (6,507) |  |  | 79,509
Total identifiable assets acquired |  | 3,512,724 |  |  | 49,204 |  |  | 3,561,928
Deposits |  | 3,028,066 |  |  | (2,607) |  |  | 3,025,459
Operating lease liability |  | 16,317 |  |  | 2,091 |  |  | 18,408
Accrued expenses and other liabilities |  | 87,309 |  |  | - |  |  | 87,309
Total liabilities assumed |  | 3,131,692 |  |  | (516) |  |  | 3,131,176
Total identifiable net assets |  |  |  |  |  |  | $ | 430,752
Bargain purchase gain |  |  |  |  |  |  |  | 315
Total consideration |  |  |  |  |  |  | $ | 430,437
Fair Value of Identifiable Assets Acquired and Liabilities Assumed In order to allocate the consideration transferred for Scotiabank PR & USVI, the fair value of all identifiable assets and liabilities were established. For accounting and financial reporting purposes, fair value is defined under FASB ASC Topic 820, “Fair Value Measurements and Disclosures” as the practice that would be received upon the sale of an asset or the amount paid to transfer a liability in an orderly transaction between market participants at the measurement date. Market participants are assumed t o be buyers and sellers in the principal (most advantageous) market for the asset or liability. Additionally, fair value measurements for an asset assume the highest and best use of that asset by market participants. Use of the different estimates and judgments could yield different results. In determining the fair value of identifiable assets and liabilities assumed, a review was conducted for any significant contingent asset or liabilities existing as of the acquisition date. The preliminary assessment did not identify any significant contingencies related to existing legal or government action. The methods used to determine the fair values of the significant identifiable 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 co nsidered to have a fair value that approximates to carrying value. Investment securities – The fair value of securities were based on quoted market prices. Federal Home Loan Bank stock - The fair value of acquired FHLB stock was estimated to be its re demption value. Loans – The fair values of loans acquired in the Scotiabank PR & USVI Acquisition was based on a discounted cash flow methodology that used projections of interest and principal payments based on certain valuation assumptions such as defa ult rates, loss severity, discount rates and prepayment rates. 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 collatera l, 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. Whi le 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, t here can be no assurance that this information is useful for purposes of evaluating the financial condition and/or value of Oriental in and of itself or in comparison with any other company. Foreclosed real estate - Foreclosed real estate and other reposs essed properties (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 pursuant to ASC 740, Income Taxes. The deferred tax asset, net assumes non-taxable transaction through a stock acquisition. Therefore, the tax basis of assets acquired and liabilities assumed will carry over to Oriental without consideration of fair value adjustments. Oriental used the enacted tax rate of 37.5%, and the 20% preferential tax rate where applicable, in measuring deferred taxes resulting f rom the Scotiabank PR & USVI Acquisition. 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 highe st 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 $2.1 million, to be amortized over the weighted average remaining useful life of the properties, estimated to be nine years. Servicing asset - The fair value of servicing asset wa s estimated by using a cash flow valuation model which calculates the present va lue of estimated future net servicing cash flows, taking into consideration actual and expected loan prepayment rates, discount rates, servicing costs, and other economic factors, which are determined based on current market conditions. 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 pr ojecting net cash flow benefits, including assumptions related to customer attrition rates, discount rate, and alternative costs of funds, to be amortized using an accelerated method over a useful life of ten years. Customer relationship intangible (“CRI”) - CRI is a measure of the value of i nsurance 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-adj usted discount rate. This measure of fair value requires considerable judgments about future events, including customer retention and attrition estimates, to be amortized using an accelerated method over a useful life of ten years. Other intangible s – O ther intangibles represents the non-competition and non-solicitation covenants by BNS for a period of t hree and two years, respectively. The fair value was computed using a “with-and-without method” cas h 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, to be amortized using an accelerated method over a useful li fe of t hree years. Operating l ease r ight-of-use a sset – The fair value of the operating lease right-of-use asset was determined by comparing with market terms of leases of the same or similar terms at the acquisition date, if terms were favorable Orienta l recognized an intangible asset, if terms were unfavorable Oriental recognized an intangible liability. Th is fair value of o perating lease right-of-use assets resulted in an estimated premium of $1.1 million, to be amortized over the lease term. 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 in terest rates currently being offered on time deposits to a schedule of aggregated contractual maturities of such time deposits, to be amortized using a straight-line method over a useful life of one year. Other assets and other liabilities - Given the sho rt-term nature of these financial instruments, the carrying amounts reflected in the statement of assets acquired and liabilities assumed approximated fair value. Financial Information — Scotiabank PR & USVI Acquisition Oriental’s consolidated results of operations for 2019 do not include any operations from Scotiabank PR & USVI acquisition since the acquisition date was December 31, 2019. Expenses relating to the Scotiabank PR & USVI Acquisition amounted to $24.1 million and were included in the December 31, 2019 consolidated statement of operations. The following summarizes the unaudited pro forma results of operations as if Oriental had acquired Scotiabank de Puerto Rico (“SBPR”) on January 1, 20 1 8. Oriental be lieves that given the nature of assets and liabilities assumed and the significant amount of fair value adjustments, historical results of BNS USVI and BNS Puerto Rico branches are not meaningful to Oriental’s results, and thus no t included in the pro-form a information presented. The pro-forma results were calculated by combining the results of Oriental with the stand-alone results of SBPR for the pre-acquisition periods, which were adjusted to account for certain costs that would have been incurred during this pre-acquisition period:
| Year Ended December 31,
| 2019 |  | 2018
| (In thousands)
Net interest income | $ | 478,293 |  | $ | 488,791
Net income |  | 147,848 |  |  | 161,555
Earnings per share: |  |  |  |  |
Basic |  | 3.01 |  |  | 3.55
Diluted |  | 2.99 |  |  | 3.25
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 Oriental and its most recent acquisition, including the costs of transition services provided by t he Bank of Nova Scotia. These charges represent costs associated with these one-time ac tivities and do not represent ongoing costs of the fully integrated combined organization. These costs were recorded in merger and restructuring charges within the consolidated statement of operations. Payments under merger and restructuring associated wit h the Scotiabank PR & USVI Acquisition are expected to continue into 2020 and will be under applicable accounting guidance to the cost being incurred.

X
- Definition The entire disclosure for a business combination (or series of individually immaterial business combinations) completed during the period, including background, timing, and recognized assets and liabilities. The disclosure may include leverage buyout transactions (as applicable). + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 805 -URI http://asc.fasb.org/topic&trid=2303972 + Details
Name: | us-gaap_BusinessCombinationDisclosureTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration

X
- References No definition available. + Details
Name: | us-gaap_BusinessCombinationsAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration