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Goodwill and other intangible assets | 9 Months Ended
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Sep. 30, 2018
Goodwill and Intangible Assets Disclosure |
Goodwill And Other Intangible Assets | Note 15 – Goodwill and other intangible assets Goodwill The changes in the carrying amount of goodwill for the nine months ended September 30, 2018, allocated by reportable segments, were as follows (refer to Note 34 for the definition of the Corporation’s reportable segments):
2018
|  |  |  |  | Purchase |  |  |
| Balance at | Goodwill on | accounting | Goodwill | Balance at
(In thousands) | January 1, 2018 | acquisition | adjustments |  | impairment | September 30,2018
Banco Popular de Puerto Rico | $ | 276,420 | $ | 60,242 | $ | - | $ | - | $ | 336,662
Popular U.S. |  | 350,874 |  | - |  | - |  | - |  | 350,874
Total Popular, Inc. | $ | 627,294 | $ | 60,242 | $ | - | $ | - | $ | 687,536
The goodwill recognized during the quarter ended September 30, 2018 in the reportable segment of Banco Popular de Puerto Rico of $60.2 million was related to the Reliable Transaction. Refer to Note 4, Business c ombination, for additional information. There were no changes in the carrying amount of goodwill for the nine months ended September 30, 2017. Other Intangible Assets At September 30, 2018 and December 31, 2017, the Corporation had $6.1 million of identifiable intangible assets with indefinite useful lives, mostly associated with the E-LOAN trademark. The following table reflects the components of other intangible assets subject to amortization:
|  | Gross |  | Net
|  | Carrying | Accumulated | Carrying
(In thousands) | Amount | Amortization | Value
September 30, 2018 |  |  |  |  |  |
| Core deposits | $ | 37,224 | $ | 25,139 | $ | 12,085
| Other customer relationships |  | 35,632 |  | 25,182 |  | 10,450
| Trademark |  | 488 |  | 17 |  | 471
Total other intangible assets | $ | 73,344 | $ | 50,338 | $ | 23,006
December 31, 2017 |  |  |  |  |  |
| Core deposits | $ | 37,224 | $ | 22,347 | $ | 14,877
| Other customer relationships |  | 35,683 |  | 21,051 |  | 14,632
Total other intangible assets | $ | 72,907 | $ | 43,398 | $ | 29,509
The trademark recognized during the quarter ended September 30, 2018 of $0.5 million was related to the Reliable Transaction. Refer to Note 4, Business c ombination, for additional information. During the quarter ended September 30, 2018, the Corporation recognized $2.3 million in amortization expense related to other intangible assets with definite useful lives (September 30, 2017 - $2.3 million). During the nine months ended September 30, 2018, the Corporation recognized $7.0 million in amortization related to other intangible assets with definite useful lives (September 30, 2017 - $7.0 million). The following table presents the estimated amortization of the intangible assets with definite useful lives for each of the following periods:
(In thousands) |  |
Remaining 2018 | $ | 2,337
Year 2019 |  | 9,140
Year 2020 |  | 5,065
Year 2021 |  | 2,254
Year 2022 |  | 1,378
Year 2023 |  | 1,338
Later years |  | 1,494
Results of the Annual Goodwill Impairment Test The Corporation’s goodwill and other identifiable intangible assets having an indefinite useful life are tested for impairment, at least annually and on a more frequent basis if events or circumstances indicate impairment could have taken place. Such events could include, among others, a significant adverse change in the business climate, an adverse action by a regulator, an unanticipated change in the competitive environment and a decision to change the operations or dispose of a reporting unit. Under applicable accounting standards, goodwill impairment analysis is a two-step test. The first step of the goodwill impairment test involves comparing the fair value of the reporting unit with its carrying amount, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired; however, if the carrying amount of the report ing unit exceeds its fair value, the second step must be performed. The second step involves calculating an implied fair value of goodwill for each reporting unit for which the first step indicated possible impairment. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination, which is the excess of the fair value of the reporting unit, as determined in the first step, over the aggregate fair values of the individual assets, liabilitie s and identifiable intangibles (including any unrecognized intangible assets, such as unrecognized core deposits and trademark) as if the reporting unit was being acquired in a business combination and the fair value of the reporting unit was the price pai d to acquire the reporting unit. The Corporation estimates the fair values of the assets and liabilities of a reporting unit, consistent with the requirements of the fair value measurements accounting standard, which defines fair value as the price that wo uld be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value of the assets and liabilities reflects market conditions, thus volatility in prices could have a material impact on the determination of the implied fair value of the reporting unit goodwill at the impairment test date. The adjustments to measure the assets, liabilities and intangibles at fair value are for the purpose of measuring the implied fair va lue of goodwill and such adjustments are not reflected in the consolidated statement of condition. If the implied fair value of goodwill exceeds the goodwill assigned to the reporting unit, there is no impairment. If the goodwill assigned to a reporting un it exceeds the implied fair value of the goodwill, an impairment charge is recorded for the excess. An impairment loss recognized cannot exceed the amount of goodwill assigned to a reporting unit, and the loss establishes a new basis in the goodwill. Subse quent reversal of goodwill impairment losses is not permitted under applicable accounting standards. The Corporation performed the annual goodwill impairment evaluation for the entire organization during the third quarter of 2018 using July 31, 2018 as the annual evaluation date. The reporting units utilized for this evaluation were those that are one level below the business segments, which are the legal entities within the reportable segment. The Corporation follows push-down accounting, as such all goodw ill is assigned to the reporting units when carrying out a business combination. In determining the fair value of a reporting unit, the Corporation generally uses a combination of methods, including market price multiples of comparable companies and transa ctions, as well as discounted cash flow analysis. Management evaluates the particular circumstances of each reporting unit in order to determine the most appropriate valuation methodology. The Corporation evaluates the results obtained under each valuation methodology to identify and understand the key value drivers in order to ascertain that the results obtained are reasonable and appropriate under the circumstances. Elements considered include current market and economic conditions, developments in specif ic lines of business, and any particular features in the individual reporting units. The computations require management to make estimates and assumptions. Critical assumptions that are used as part of these evaluations include: a selection of comparable p ublicly traded companies, based on nature of business, location and size; a selection of comparable acquisition and capital raising transactions; the discount rate applied to future earnings, based on an estimate of the cost of equity; the potential future earnings of the reporting unit; and the market growth and new business assumptions. For purposes of the market comparable approach, valuations were determined by calculating average price multiples of relevant value drivers from a group of companies that are comparable to the reporting unit being analyzed and applying those price multiples to the value drivers of the reporting unit. Multiples used are minority based multiples and thus, no control premium adjustment is made to the comparable companies mark et multiples. While the market price multiple is not an assumption, a presumption that it provides an indicator of the value of the reporting unit is inherent in the valuation. The determination of the market comparables also involves a degree of judgment. For purposes of the discounted cash flows (“DCF”) approach, the valuation is based on estimated future cash flows. The financial projections used in the DCF valuation analysis for each reporting unit are based on the most recent (as of the valuation date) financial projections presented to the Corporation’s Asset / Liability Management Committee (“ALCO”). The growth assumptions included in these projections are based on management’s expectations for each reporting unit’s financial prospects considering ec onomic and industry conditions as well as particular plans of each entity (i.e. restructuring plans, de-leveraging, etc.). The cost of equity used to discount the cash flows was calculated using the Ibbotson Build-Up Method and ranged from 11.42% t o 13.93% for the 201 8 analysis. The Ibbotson Build-Up Method builds up a cost of equity starting with the rate of return of a “risk-free” asset (2 0-year U.S. Treasury note) and adds to it additional risk elements such as equity risk premium, size p remium and industry risk premium. The resulting discount rates were analyzed in terms of reasonability given the current market conditions and adjustments were made when necessary. BPPR passed Step 1 in the annual test as of July 31, 201 8. The results indi cated that the average estimated fair value calculated in Step 1 using all valuation methodologies exceeded BPPR’s equity value by approximately $2.4 b illion or 77%. Accordingly, there was no indication of impairment on the goodwill record ed in BPPR at July 31, 201 8 and there was no need for a Step 2 analysis. PB passed Step 1 in the annual test as of July 31, 2018. The results indicated that the average estimated fair value calculated in Step 1 using all valuation methodologies exceeded P B’s equity value by approximately $407 million or 28%. Accordingly, there was no indication of impairment on the goodwill recorded in PB at July 31, 2018 and there was no need for a Step 2 analysis. The goodwill balance of BPPR and PB, as legal entities, represented approximately 98% of the Corporation’s total goodwill balance as of the July 31, 201 8 valuation date. Furthermore, as part of the analyses, management performed a reconciliation of the aggregate fair values determined for the reporting units to the market capitalization of the Corporation concluding that the fair value results determined for the reporting units in the July 31, 201 8 annual assessment were reasonable. The goodwill impairment evaluation process requires the Corporation to make estimates and assumptions with regard to the fair value of the reporting units. Actual values may differ significantly from these estimates. Such differences could result in future impairment o f goodwill that would, in turn, negatively impact the Corporation’s results of operations and the reporting units where the goodwill is recorded. Declines in the Corporation’s market capitalization could increase the risk of goodwill impairment in the futu re. Management monitors events or changes in circumstances between annual tests to determine if these events or changes in circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. The following tables pr esent the gross amount of goodwill and accumulated impairment losses by reportable segments.
September 30, 2018
| Balance at |  |  | Balance at | Balance at |  |  | Balance at
| January 1, | Accumulated | January 1, | September 30, | Accumulated | September 30,
| 2018 | impairment | 2018 | 2018 | impairment | 2018
(In thousands) | (gross amounts) | losses | (net amounts) | (gross amounts) | losses | (net amounts)
Banco Popular de Puerto Rico | $ | 280,221 | $ | 3,801 | $ | 276,420 | $ | 340,463 | $ | 3,801 | $ | 336,662
Popular U.S. |  | 515,285 |  | 164,411 |  | 350,874 |  | 515,285 |  | 164,411 |  | 350,874
Total Popular, Inc. | $ | 795,506 | $ | 168,212 | $ | 627,294 | $ | 855,748 | $ | 168,212 | $ | 687,536
December 31, 2017
| Balance at |  |  | Balance at | Balance at |  |  | Balance at
| January 1, | Accumulated | January 1, | December 31, | Accumulated | December 31,
| 2017 | impairment | 2017 | 2017 | impairment | 2017
(In thousands) | (gross amounts) | losses | (net amounts) | (gross amounts) | losses | (net amounts)
Banco Popular de Puerto Rico | $ | 280,221 | $ | 3,801 | $ | 276,420 | $ | 280,221 | $ | 3,801 | $ | 276,420
Popular U.S. |  | 515,285 |  | 164,411 |  | 350,874 |  | 515,285 |  | 164,411 |  | 350,874
Total Popular, Inc. | $ | 795,506 | $ | 168,212 | $ | 627,294 | $ | 795,506 | $ | 168,212 | $ | 627,294

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- Definition The entire disclosure for the aggregate amount of goodwill and a description of intangible assets, which may include (a) for amortizable intangible assets (also referred to as finite-lived intangible assets), the carrying amount, the amount of any significant residual value, and the weighted-average amortization period, (b) for intangible assets not subject to amortization (also referred to as indefinite-lived intangible assets), the carrying amount, and (c) the amount of research and development assets acquired and written off in the period, including the line item in the income statement in which the amounts written off are aggregated, if not readily apparent from the income statement. Also discloses (a) for amortizable intangibles assets in total and by major class, the gross carrying amount and accumulated amortization, the total amortization expense for the period, and the estimated aggregate amortization expense for each of the five succeeding fiscal years, (b) for intangible assets not subject to amortization the carrying amount in total and by major class, and (c) for goodwill, in total and for each reportable segment, the changes in the carrying amount of goodwill during the period (including the aggregate amount of goodwill acquired, the aggregate amount of impairment losses recognized, and the amount of goodwill included in the gain (loss) on disposal of a reporting unit). If any part of goodwill has not been allocated to a reportable segment, discloses the unallocated amount and the reasons for not allocating. For each impairment loss recognized related to an intangible asset (excluding goodwill), discloses: (a) a description of the impaired intangible asset and the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method for determining fair value, (c) the caption in the income statement or the statement of activities in which the impairment loss is aggregated, and (d) the segment in which the impaired intangible asset is reported. For each goodwill impairment loss recognized, discloses: (a) a description of the facts and circumstances leading to the impairment, (b) the amount of the impairment loss and the method of determining the fair value of the associated reporting unit, and (c) if a recognized impairment loss is an estimate not finalized and the reasons why the estimate is not final. May also disclose the nature and amount of any significant adjustments made to a previous estimate of an impairment loss. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 350 -URI http://asc.fasb.org/topic&trid=2144416 + Details
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