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Business Combinations

9 Months Ended

Sep. 30, 2020

NOTE 2 – BUSINESS COMBINATIONS

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 $550.0 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, Oriental 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 value plus a $10.0 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 which were settled as part of the final consideration from the acquisition.

The assets acquired and liabilities assumed as of December 31, 2019 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 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. During the nine-month period ended September 30, 2020, Oriental recorded remeasurement adjustments to the preliminary estimated fair values of certain accrued interest receivables that have not been received, the deferred tax asset and accounts receivables to reflect new information obtained during the measurement period (as defined by ASC Topic 805), about facts and circumstances that existed as of the acquisition date that, if known, would have affected the acquisition-date fair value measurements. As detailed in the table below, the adjustment occurred in accrued interest receivable, deferred tax asset, and other assets acquired. The adjustment resulted from the fair value determination of certain accrued interest receivable of loans accounted for under ASC 310-30 and from the receipt of funds from BNS for certain intercompany transactions.

	December 31, 2019						Measurement		Fair Value
			Fair Value				Period		as
	Book Value		Adjustments, net		Fair Value		Adjustments		Remeasured
	(In thousands)

Cash and cash equivalents	$	492,512	$	-	$	492,512	$	-	$	492,512
Investments		576,319		(102)		576,217		-		576,217
Loans		2,237,337		(21,134)		2,216,203		-		2,216,203
Accrued interest receivable		7,722		(2,952)		4,770		5,540		10,310
Foreclosed real estate		8,636		(352)		8,284		-		8,284
Deferred tax asset, net		37,606		22,335		59,941		1,386		61,327
Premises and equipment		10,866		(1,068)		9,798		-		9,798
Servicing asset		40,258		206		40,464		-		40,464
Core deposit intangible		-		41,507		41,507		-		41,507
Customer relationship intangible		-		12,693		12,693		-		12,693
Other intangible		-		567		567		-		567
Operating lease right-of-use assets		15,452		4,011		19,463		-		19,463
Other assets		86,016		(6,507)		79,509		410		79,919
Total identifiable assets acquired		3,512,724		49,204		3,561,928		7,336		3,569,264

Deposits		3,028,066		(2,607)		3,025,459		-		3,025,459
Operating lease liability		16,317		2,091		18,408		-		18,408
Accrued expenses and other liabilities		87,309		-		87,309		-		87,309
Total liabilities assumed		3,131,692		(516)		3,131,176		-		3,131,176
Total identifiable net assets					$	430,752	$	7,336	$	438,088
Bargain purchase gain						315		7,336		7,651
Total consideration					$	430,437	$	-	$	430,437

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. These charges represent costs associated with these one-time activities 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.

The following table presents severance and employee charges, systems integrations charges, and other merger and restructuring charges, related to the Scotiabank PR & USVI Acquisition, for the quarter and nine-month period ended September 30, 2020:

	Quarter Ended September 30,		Nine-Month Period Ended September 30,
	2020		2020
	(In thousands)		(In thousands)
Severance and employee-related charges	$	-	$	33
Systems integrations and related charges		2,282		5,424
Other		399		534
Total merger and restructuring charges	$	2,681	$	5,991

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 the quarter and nine-month period ended September 30, 2020:

	Quarter Ended September 30,		Nine-Month Period Ended September 30,
	2020		2020
	(In thousands)		(In thousands)
Balance at the beginning of the period	$	16,388	$	17,491
Merger and restructuring charges		2,681		5,991
Cash payments		(7,164)		(11,577)
Balance at the end of the period	$	11,905	$	11,905

Payments under merger and restructuring reserves associated with the Scotiabank PR & USVI Acquisition are expected to continue into 2020 and will be under applicable accounting guidance to the cost being incurred.